I.

General Principles

A. Definition and Concept of Taxation

As a process, it is a means by which the sovereign, through its

law-making body, raises revenue to defray the necessary expenses of
the government. It is merely a way of apportioning the costs of
government among those who in some measures are privileged to
enjoy its benefits and must bear its burdens.

As a power, taxation refers to the inherent power of the state to

demand enforced contributions for public purpose or purposes.

Taxation is a symbiotic relationship, whereby in exchange for

the protection that the citizens get from the government, taxes are
paid.1

B. Nature of Taxation

1. It is an inherent attribute of sovereignty

2. It is legislative in character

C. Characteristics of Taxation

1. The power of taxation is an incident of sovereignty as it is

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

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

Commissioner of Internal Revenue vs Allegre, Inc., et al., L-28896, Feb. 17, 1988

Churchill and Tait v. Concepcion, 34 Phil 969

1
 The Congress may by law authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it
may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework of
the national development program of the Government.

Each local government unit shall have the power to create its
own sources of revenues and to levy taxes, fees, and charges subject
to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees,
and charges shall accrue exclusively to the local governments.4

3. It is subject to Constitutional and inherent limitations; hence,

it is not an absolute power that can be exercised by the legislature
anyway it pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power
2. Power of Eminent Domain

Taxation Police Eminent

Power Domain

Purpose
- levied for - exercised - taking of
the to promote property for
purpose of public public use
raising welfare
revenue thru
regulations

Amount of
exaction
- no limit - limited to - no exaction,

Art. VI, Sec, 28 (2); Art. X, Sec. 5].Art. VI, Sec. 28. par. 2.

Art. X, Sec. 5

2
 the cost of compensation
regulations paid by the
, issuance government
of the
license or
surveillanc
e

Benefits
received
- no - no direct - direct
special or benefits benefit results
direct but a in the form of
benefits healthy just
received economic compensation
but the standard of
enjoyment society or
of the damnum
privileges absque
of living in injuria is
an attained
organized
society
No
n-
impairment
of contracts
- the - contract - contracts
impairme may be may be
nt rule impaired impaired
subsist

Transfer of
property
rights
- taxes - no - property is
paid transfer taken by the
become but only govt upon
part of restraint payment of
public on the just
funds exercise of compensation
property
right exists

Scope
- affects - affects all - affects only
all persons, the particular
persons, property, property
property privileges, comprehende
and excise and even d

3
 rights

Basis
- public - public -public
necessity necessity necessity,
and the private
right of the property is
state and taken for
the public public use
to self-
protection
and self-
preservatio
n
Auth
ority which
exercises
the power
- only by - only by - may be
the the granted to
governme governmen public service,
nt or its t or its companies, or
political political public utilities
subdivisio subdivision
ns s

E. Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the

general welfare and protection of its citizens.

2. Non-revenue/special or regulatory

a. Promotion of General Welfare Taxation may be used as an

implement of police power in order to promote the general welfare of
the people.5

b. Regulation As in the case of taxes levied on excises and

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

see Lutz vs Araneta, 98 Phil 148 and Osmea vs Orbos, G.R. No. 99886, Mar. 31, 1993

4
 c. Reduction of Social Inequality this is made possible through
the progressive system of taxation where the objective is to prevent
the under-concentration of wealth in the hands of few individuals.

d. Encourage Economic Growth in the realm of tax exemptions

and tax reliefs, for instance, the purpose is to grant incentives or
exemptions in order to encourage investments and thereby promote
the countrys economic growth.

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

in the case of foreign importations, taxes sometimes provide
protection to local industries like protective tariffs and customs.
F. Principles of Sound Tax System

1. Fiscal Adequacy

The sources of tax revenue should coincide with, and

approximate the needs of government expenditure. Neither an excess
nor a deficiency of revenue vis--vis the needs of government would
be in keeping with the principle.

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective

administration

3. Theoretical Justice

The tax burden should be in proportion to the taxpayers ability

to pay . The 1987 Constitution requires taxation to be equitable and
7

uniform.

G. Theory and Basis of Taxation

In the case of Caltex Phils. Inc. vs COA (G.R. No. 92585, May 8, 1992), it was held that
taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and
stabilization of a threatened industry which is affected with public industry like the oil industry.

ability-to-pay principle

5
 1. Lifeblood Theory

Taxes are the lifeblood of the government, being such, their

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

2. Necessity Theory

Taxes proceed upon the theory that the existence of the

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

3. Benefits-Protection Theory10

The basis of taxation is the reciprocal duty of protection

between the state and its inhabitants. In return for the contributions,
the taxpayer receives the general advantages and protection which
the government affords the taxpayer and his property.

4. Jurisdiction over subject and objects

Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 1965

In a case, the Supreme Court held that:

Taxation is a power emanating from necessity. It is a necessary burden to preserve the

States sovereignty and a means to give the citizenry an army to resist aggression, a navy to
defend its shores from invasion, a corps of civil servants to serve, public improvements designed
for the enjoyment of the citizenry and those which come with the States territory and facilities,
and protection which a government is supposed to provide (Phil. Guaranty Co., Inc. vs
Commissioner of Internal Revenue, 13 SCRA 775)

10

Symbiotic Relationship

6
 Rules:

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

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

H. Doctrines in Taxation

1. Prospectivity of tax laws

General Rule:

Taxes must only be imposed prospectively.

Exception:

The language of the statute clearly demands or express

that it shall have a retroactive effect.

2. Imprescriptibility

General Rule:

Taxes are imprescriptible.

Exception:

When provided otherwise by the tax law itself.11

3. Double taxation
11

Example: NIRC provides for statutes of limitation in the assessment and collection of
taxes therein imposed.

The law on prescription, being a remedial measure, should be liberally construed to

afford protection as a corollary, the exceptions to the law on prescription be strictly construed.
(CIR vs CA. G.R. No. 104171, Feb. 24, 1999)

7
 a. Strict sense

Referred to as direct duplicate taxation, double taxation

means:

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

b. Broad sense

Referred to as indirect double taxation, double taxation is

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

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does

not prohibit double taxation.

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

Such taxation should, whenever possible, be avoided and prevented.

In addition, where there is direct double taxation, there may be

a violation of the constitutional precepts of equal protection and
uniformity in taxation.

The argument against double taxation may not be invoked

where one tax is imposed by the State and the other is imposed by the
city, it being widely recognized that there is nothing inherently
obnoxious in the requirement that license fees or taxes be exacted
with respect to the same occupation, calling, or activity by both the
State and a political subdivision thereof. And where the statute or
ordinance in question, there is no infringement of the rule on
equality.12

d. Modes of eliminating double taxation

12

City of Baguio v. De Leon, 25 SCRA 938.

8
 To eliminate double taxation, a tax treaty resorts to several
methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain
classes of income or capital. In some cases, an exclusive right
to tax is conferred on one of the contracting states; however,
for other items of income or capital, both states are given the
right to tax, although the amount of tax that may be imposed by the
state of source is limited. The second method for the elimination of
double taxation applies whenever the state of source is given a full
or limited right to tax together with the state of residence. In
this case, the treaties make it incumbent upon the state of residence
to allow relief on order to avoid double taxation.

There are two methods of relief

1. In the exemption method, the income or capital which is

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

2. In the credit method, although the income or capital which is

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

4. Escape from taxation

a. Shifting of tax burden13

1) Ways of shifting the tax burden

13

The transfer of the burden of a tax by the original payer or the one on whom the tax
was assessed or imposed to someone else.

Process by which such tax burden is transferred from statutory taxpayer to another
without violating the law.

What is transferred is not the payment of the tax, but the burden of the tax

9
 a. Forward shifting

When the burden of the tax is transferred from a factor of

production through the factors of distribution until it finally settles on
the ultimate purchaser or consumer.14

b. Backward shifting

When the burden of the tax is transferred from the consumer or

purchaser through the factors of distribution to the factors of
production.15

c. Onward shifting

When the tax is shifted two or more times either forward or

backward.16

2) Taxes that can be shifted

14

Example:

Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to
the retailer, who also shifts it to the final purchaser or consumer

15

Example:

Consumer or purchaser may shift tax imposed on him to retailer by purchasing only
after the price is reduced, and from the latter to the wholesaler, or finally to the manufacturer or
producer

16

Example:

Thus, a transfer from the seller to the purchaser involves one shift; from the producer
to the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the
purchaser by the retailer, we have three shifts in all.

10
 Only indirect taxes may be shifted;17 direct taxes18 cannot be
shifted.
3) Meaning of impact and incidence of
taxation

Impact of taxation is the point on which a tax is originally

imposed. In so far as the law is concerned, the taxpayer is the person
who must pay the tax to the government. He is also termed as the
statutory taxpayer-the one on whom the tax is formally assessed. He is
the subject of the tax.

Incidence of taxation is that point on which the tax burden

finally rests or settle down. It takes place when shifting has been
effected from the statutory taxpayer to another.

b. Tax avoidance19

The exploitation of the taxpayer of legally permissible

alternative tax rates or methods of assessing taxable property or
income in order to avoid or reduce tax liability.

c. Tax evasion20

17

e.g. VAT

18

e.g. Income tax

19

also known as tax minimization; it is not punished by law

20

also known as tax dodging; it is punishable by law

Elements of tax evasion:

1) The end to be achieved, i.e. payment of less than that known by the taxpayer to be
legally due, or paying no tax when it is shown that tax is due

11
 The use by the taxpayer of illegal or fraudulent means to defeat
or lessen the payment of tax.

5. Exemption from taxation

a. Meaning of exemption from taxation

It is the grant of immunity to particular persons or corporations

or to persons or corporations of a particular class from a tax which
persons and corporations generally within the same state or taxing
district are obliged to pay. It is an immunity or privilege; it is freedom
from a financial charge or burden to which others are subjected.21

b. Nature of tax exemption

2) An accompanying state of mind which is described as being evil, in bad faith,

willful, or deliberate and not accidental

3) A course of action (or failure of action) which is unlawful

Indicia of fraud in tax evasion:

1) Failure to declare for taxation purposes true and actual income derived from business
for two (2) consecutive years; or

2) Substantial under declaration of income tax returns of the taxpayer for four (4)
consecutive years coupled with unintentional overstatement of deductions

Evidence to prove tax evasion:

Since fraud is a state of mind, it need not be proved by direct evidence but may be
proved from the circumstances of the case.

Failure of the taxpayer to declare for taxation purposes his true and actual income
derived from his business for two (2) consecutive years is an indication of his fraudulent intent to
cheat the government of its due taxes. (Republic vs. Gonzales, 13 SCRA 638)

21

Exemption is allowed only if there is a clear provision there for.

12
 1) It is a mere personal privilege of the grantee.

2) It is generally revocable by the government unless the

exemption is founded on a contract which is contract which is
protected from impairment.

3) It implies a waiver on the part of the government of its right

to collect what otherwise would be due to it, and so is prejudicial
thereto.

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

has a reasonable foundation or rational basis.

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

c. Kinds of tax exemption

1) Express22

When certain persons, property or transactions are, by express

provision, exempted from all certain taxes, either entirely or in part.

2) Implied23

When a tax is levied on certain classes of persons, properties, or

transactions without mentioning the other classes.

It is not necessarily discriminatory as long as there is a reasonable foundation or

rational basis.

Exemptions are not presumed, but when public property is involved, exemption is the
rule and taxation is the exemption.

22

or affirmative exemption

23

or exemption by omission

No tax exemption by implication

It must be expressed in clear and unmistakable language

13
 Every tax statute makes exemptions because of omissions.

3) Contractual

Agreed to by the taxing authority in contracts lawfully entered

into by them under enabling laws.

d. Rationale/grounds for exemption

Rationale for granting tax exemptions:

Its avowed purpose is some public benefit or interests which the

lawmaking body considers sufficient to offset the monetary loss
entailed in the grant of the exemption.

The theory behind the grant of tax exemptions is that such act
will benefit the body of the people. It is not based on the idea of
lessening the burden of the individual owners of property.

Grounds for granting tax exemptions:

1) May be based on contract. In such a case, the public, which is

represented by the government is supposed to receive a full
equivalent therefor, i.e. charter of a corporation.

2) May be based on some ground of public policy, i.e., to

encourage new industries or to foster charitable institutions. Here,
the government need not receive any consideration in return for the
tax exemption.

3) May be based on grounds of reciprocity or to lessen the

rigors of international double or multiple taxation.24

e. Revocation of tax exemption

It is an act of liberality which could be taken back by the

government unless there are restrictions. Since taxation is the rule

24

Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear
provision therefor.

14
and taxation therefrom is the exception, the exemption may be
withdrawn by the taxing authority.25

6. Compensation and Set-off26

General Rule:

Taxes are not subject to set-off or legal compensation. The

government and the taxpayer are not creditors and debtors or each
other. Obligations in the nature of debts are due to the government in
its corporate capacity, while taxes are due to the government in its
sovereign capacity.27

Exception:

Where both the claims of the government and the taxpayer

against each other have already become due and demandable as well
as fully liquated.28

25

Mactan Cebu International Airport Authority vs, Marcos, 261 SCRA 667.

26

Requisites of Compensation in taxation (Domingo v. Garlitos)

1. That the tax assessed and the claim against the government be fully liquidated.

2. That the tax assessed and the claim against the government is due and demandable,
and3. That the government had already appropriated funds for the payment of the claim

27

Philex Mining Corp. vs CIR, 294 SCRA 687; Republic vs Mambulao Lumber Co., 6 SCRA 622

28

see Domingo vs Garlitos, L-18904, June 29, 1963

15
 7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid

litigation or put an end to one already commenced.29

8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its

authority to impose penalties on persons otherwise guilty of evasion
or violation of a revenue to collect what otherwise would be due it
and, in this sense, prejudicial thereto.30

29

Art. 2028, New Civil Code

Requisites:

1. Taxpayer must have a tax liability.

2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer.

3. There must be acceptance of the offer in settlement of the original claim.

When taxes may be compromised:

1.A reasonable doubt as to the validity if the claim against the taxpayer exists;

2 .The financial position of the taxpayer demonstrates a clear inability to pay the
assessed tax.

3 .Criminal violations, except:

a. Those already filed in court

b. Those involving fraud.

30

Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by
statute must be construed strictly against the taxpayer, who must show compliance with the law.

The government is not estopped from questioning the tax liability even if amnesty tax
payments were already received

16
 b. Distinguished from tax exemption

A tax amnesty, being a general pardon or intentional

overlooking by the Statute of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax
law, partakes of an absolute forgiveness or waiver by the Government
of its right to collect what otherwise would be due it and, in this
sense, prejudicial thereto, particularly to tax evaders who wish to
relent and are willing to reform are given a chance to do so and
therefore become a part of the society with a clean slate.

Like a tax exemption, a tax amnesty is never favored nor

presumed in law, and is granted by statute. The terms of the amnesty
must be strictly construed against the taxpayer and literally in favor of
the government. Unlike a tax exemption, however, a tax amnesty has
limited applicability as to cover a particular taxing period or
transaction only.

Tax exemption, on the other hand, is the grant of immunity to

particular persons or corporations of a particular class from a tax of
which persons and corporations generally within the same state or
taxing district are obliged to pay. Tax exemptions are not favored and
are construed strictissimi juris against the taxpayer.

Tax amnesty Tax exemption

Immunity from all criminal, Immunity from civil liability

civil and administrative only
liabilities arising from non-
payment of taxes

Applies only to past tax Prospective application

periods, hence retroactive
application

9. Construction and Interpretation of:

a. Tax laws

Erroneous application and enforcement of the law by public officers do not block
subsequent correct application of the statute. The government is never estopped by mistakes or
errors by its agents.

17
 1) General Rule

Tax laws are liberally interpreted in favor of the taxpayer and

strictly against the government.

2) Exception

Liberal interpretation does not apply to tax exemptions which

should be construed in strictissimi juris against the taxpayer.31

b. Tax exemption and exclusion

1) General Rule

In the construction of tax statutes, exemptions are not favored

and are construed strictissimi juris against the taxpayer.32 The
fundamental theory is that all taxable property should bear its share
in the cost and expense of the government.

Taxation is the rule and exemption. He who claims exemption

must be able to justify his claim or right thereto by a grant express in
terms too plain to be mistaken and too categorical to be
misinterpreted. If not expressly mentioned in the law, it must be at
least within its purview by clear legislative intent.

2) Exceptions

1. When the law itself expressly provides for a liberal

construction thereof.

31

Reason: Lifeblood doctrine

32

Strict interpretation does not apply to the government and its agencies

Petitioner cannot invoke the rule of strictissimi juris with respect to the interpretation
of statutes granting tax exemptions to the NPC. The rule on strict interpretation does not apply
in the case of exemptions in favor of a political subdivision or instrumentality of the government
[Maceda v. Macaraig]

18
 2. In cases of exemptions granted to religious, charitable and
educational institutions or to the government or its agencies or to
public property because the general rule is that they are exempted
from tax.

c. Tax rules and regulations

1) General rule only

They shall not be given retroactive application if the revocation,

modification or reversal will be prejudicial to the taxpayers.33

d. Penal provisions of tax laws

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

The purpose of tax laws in imposing penalties for delinquencies

is to compel the timely payment of taxes or to punish evasion or
neglect of duty in respect thereof.

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly

declared or is clearly the legislative intent. But a tax law should not be
given retroactive application when it would be harsh and oppressive.

I. Scope and Limitation of Taxation

33

Sec. 246

19
 1. Inherent Limitations

a. Public Purpose34

The tax must be used:

1) for the support of the state or

2) for some recognized objects of governments or
3) directly to promote the welfare of the community35

b. Inherently Legislative

1) General Rule

34

Test in determining Public Purposes in tax:

a. Duty Test whether the thing to be threatened by the appropriation of public

revenue is something which is the duty of the State, as a government.

b. Promotion of General Welfare Test whether the law providing the tax directly
promotes the welfare of the community in equal measure.

35

taxation as an implement of police power

The term public purpose is synonymous with governmental purpose; a purpose

affecting the inhabitants of the state or taxing district as a community and not merely as
individuals.

A tax levied for a private purpose constitutes a taking of property without due process
of law.

The purposes to be accomplished by taxation need not be exclusively public. Although

private individuals are directly benefited, the tax would still be valid provided such benefit is only
incidental.

The test is not as to who receives the money, but the character of the purpose for
which it is expended; not the immediate result of the expenditure but rather the ultimate.

In the imposition of taxes, public purpose is presumed.

20
 Taxation is purely legislative, Congress cannot delegate the
power to others. This limitation arises from the doctrine of separation
of powers among the three branches of government.
2) Exceptions

a) Delegation to local
governments 36

The power of local government units to impose taxes and fees is

always subject to the limitations which the Congress may provide, the
former having no inherent power to tax.37

Municipal corporations are mere creations of Congress which

has the power to create and abolish municipal corporations. Congress
therefore, has the power of control over local government units. If
Congress can grant to a municipal corporation the power to tax
certain matters, it can also provide for exemptions or even to take
back the power.

The power to tax is primarily vested in the Congress, however,

in our jurisdiction, it may be exercised by local legislative bodies, no
longer merely by virtue of a valid delegation but pursuant to direct
authority conferred by Section 5, Article X of the1987 Constitution,
subject to guidelines and limitations which Congress may provide
which must be consistent with the basic policy of local autonomy.38

b) Delegation to the President39

36

Art. X. Sec. 5, 1987 Constitution

37

Basco v. PAGCOR

38

MCIAA v. Marcos, 261 SCRA 667

39

21
 The power granted to Congress under this constitutional
provision to authorize the President to fix within specified limits and
subject to such limitations and restrictions as it may impose, tariff
rates and other duties and imposts include tariffs rates even for
revenue purposes only. Customs duties which are assessed at the
prescribed tariff rates are very much like taxes which are frequently
imposed for both revenue-raising and regulatory purposes.40

c) Delegation to administrative
agencies

With respect to aspects of taxation not legislative in character.41

For the delegation to be constitutionally valid, the law must be

complete in itself and must set forth sufficient standards.

c. Territorial

1) Situs of Taxation42

Art.VI, Sec. 28(2), 1987 Constitution

40

Garcia vs Executive Secretary, et. al., G.R. No. 101273, July 3, 1992

41

example: assessment and collection

Certain aspects of the taxing process that are not really legislative in nature are vested in
administrative agencies. In these cases, there really is no delegation, to wit:
a) power to value property
b) power to assess and collect taxes
c) power to perform details of computation, appraisement or adjustments.

42

It is an inherent mandate that taxation shall only be exercised on persons, properties,

and excise within the territory of the taxing power because:

1) Tax laws do not operate beyond a countrys territorial limit.

2) Property which is wholly and exclusively within the jurisdiction of another state
receives none of the protection for which a tax is supposed to be compensation.

22
 a) Meaning

Literally means the place of taxation.

State where the subject to be taxed has a situs may rightfully

levy and collect the tax

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

The place that gives protection is the place that has the right to
demand that it be supported in the form of taxes so it could
continually give protection.

b) Situs of Income Tax43

However, the fundamental basis of the right to tax is the capacity of the government
to provide benefits and protection to the object of the tax. A person may be taxed, even if he is
outside the taxing state, where there is between him and the taxing state, a privity of
relationship justifying the levy.

43

Sec. 42

Theories:

A) domicillary theory

- the location where the income earner resides is the situs of taxation

B) nationality theory

- the country where the income earner is a citizen is the situs of taxation

C) source rule

- the country which is the source of the income or where the activity that produced the
income took place is the situs of taxation.

23
 1)From sources within the
Philippines

i. Interests derived from sources within the Philippines, and interest

on bonds, notes or other interest-bearing obligations of residents, corporate
or otherwise

ii. Dividends

iii. Compensation for labor or personal services performed in the

Philippines

iv. Rentals and royalties from property located in the Philippines or

from any interest in such property, including rentals or royalties for:

(a) The use of or the right or privilege to use in the Philippines

any copyright, patent, design or model, plan, secret formula or
process,
goodwill, trademark, trade brand or other like property or right;

(b) The use of, or the right to use in the Philippines any
industrial, commercial or scientific equipment;

(c) The supply of scientific, technical, industrial or

commercial knowledge or
information;

(d) The supply of any assistance that is ancillary and subsidiary

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

(e) The supply of services by a nonresident person or his

employee in connection with the use of property or rights belonging
to, or the installation or operation of any brand,
machinery or other apparatus purchased from such nonresident
person;

(f) Technical advice, assistance or services rendered in

connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project or
scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

(ii) Films or video tapes for use in connection with
television; and

24
 (iii) Tapes for use in connection with radio broadcasting.

(h) Gains, profits and income from the sale of real property
located in the Philippines

(i) Gains, profits and income from the sale of personal

property

2) From sources without the

Philippines

(1) Interests other than those derived from sources within the
Philippines as provided in 1) (i).
(2) Dividends other than those derived from sources within the
Philippines as provided in 1) (ii).

(3) Compensation for labor or personal services performed without

the Philippines;

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

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

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

3) Income partly within and

partly without the
Philippines

Allocated or apportioned to sources within or without the Philippines,

under the rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.

For the purpose of computing the taxable income therefrom, where

items of gross income are separately allocated to sources within the
Philippines, there shall be deducted:

(a) the expenses, losses and other deductions properly apportioned or

allocated thereto, and

(b) a ratable part of other expenses, losses or other deductions which

cannot definitely be allocated to some items or classes of gross income. The
remainder, if any, shall be included in full as taxable income from sources
within the Philippines.

25
 c) Situs of Property Taxes

(1) Taxes on Real Property

The place where the property is located because it is that place

that gives protection. The applicable concept is lex situs or lex rei
sitae.44

(2) Taxes on Personal

Property

- Mobilia sequntur personam45

Rules:

1) Tangible personal property

- Where located, usually the owners domicile

2) Intangiblle personal property

General Rule Domicile of the owner

Exception: The situs location not domicile46

44

We can only impose property tax on the properties of a person whose residence is in
the Philippines.

45

movables follow the owner

movables follow the domicile of the owner

46

Where the intangible personal property has acquired a business situs in another
jurisdiction

The principle of Mobilia Sequntur Personam is only for purposes of convenience. It

must yield to the actual situs of such property.

26
 d) Situs of Excise Tax

The place where the privilege is exercised because it is that

place that gives protection.47
(1) Estate Tax

Determined by the nationality and residence of the taxpayer and

the place where the property is located.

(2) Donors Tax48

Personal intangible properties which acquires business situs here in the Philippines

1) Franchise which is exercised within the Philippines

2) Shares, obligations, bonds issued by a domestic corporation

3) Shares, obligations, bonds issued by a foreign corporation, 85% of its business is

conducted in the Philippines

4) Shares, obligations, bonds issued by a foreign corporation which shares of stock or

bonds acquire situs here

5) Rights, interest in a partnership, business or industry established in the Philippines

These intangible properties acquire business situs here in the Philippines, you cannot
apply the principle of Mobilia Sequntur Personam because the properties have acquired situs
here.

47

where the transaction performed.

The power to levy an excise upon the performance of an act or the engaging in an
occupation does not depend upon the domicile of the person subject to the exercise, nor upon
the physical location of the property or in connection with the act or occupation taxed, but
depends upon the place on which the act is performed or occupation engaged in.

Thus, the gauge of taxability does not depend on the location of the office, but
attaches upon the place where the respective transaction is perfected and consummated
(Hopewell vs. Com. of Customs)

48

27
 e) Situs of Business Tax

(1) Sale of Real Property

The tax situs is the place or location of the real property.49

(2) Sale of Personal Property

In determining the tax situs, one should consider the place of

sale.

(3) VAT

The tax situs is where the sale, barter, exchange or lease of

goods or properties and services in the Philippines and on importation
of goods into the Philippines was performed.

d. International Comity

The property of a foreign state or government may not be taxed

by another.50

ibid

49

So, if the property sold is situated within the Phils., the income derived from such sale is
considered as income within.

50

The grounds for the above are:

1) sovereign equality among states

2) usage among states that when one enter into the territory of another, there is an
implied understanding that the power does not intend to degrade its dignity by placing itself
under the jurisdiction of the latter

3) foreign government may not be sued without its consent so that it is useless to
assess the tax since it cannot be collected

4) reciprocity among states

28
 e. Exemption of Government Entities,
Agencies, and Instrumentalities

Agencies performing governmental functions

- tax exempt51

Agencies performing proprietary functions

- subject to tax

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation52

1) Prohibition against imprisonment for non-

payment of poll tax

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

tax.53

2) Uniformity and equality of taxation

51

The exemption applies only to governmental entities through which the government
immediately and directly exercises its sovereign powers.

Tax exemption of property owned by the Republic of the Philippines refers to the
property owned by the government and its agencies which do not have separate and distinct
personality (NDC vs. Cebu City)

Those created by special charter (incorporated agencies) are not covered by the
exemption

52

under the 1987 constitution

53

Sec. 20, Art. III

29
 The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.54

3) Grant by Congress of authority to the

President to impose tariff rates

x x x The Congress may, by law, authorize the President to fix

within specified limits, and subject to such limitations and restrictions
as it may impose, tariff rates, import and export quotas, tonnage and

The only penalty for delinquency in payment is the payment of surcharge in the form
of interest at the rate of 24% per annum which shall be added to the unpaid amount from due
date until it is paid. (Sec. 161, LGC)

The prohibition is against imprisonment for non-payment of poll tax. Thus, a

person is subject to imprisonment for violation of the community tax law other than for non-
payment of the tax and for non-payment of other taxes as prescribed by law.

The non-imprisonment rule applies to non-payment of poll tax which is punishable

only by a surcharge, but not to other violations like falsification of community tax certificate or
non-payment of other taxes.

54

Sec. 28(1), Art. VI

Uniformity (equality or equal protection of the laws) means all taxable articles or kinds
or property of the same class shall be taxed at the same rate. A tax is uniform when the same
force and effect in every place where the subject of it is found.

Equitable means fair, just, reasonable and proportionate to ones ability to pay.

Progressive system of Taxation places stress on direct rather than indirect taxes, or on
the taxpayers ability to pay

Inequality which results in singling out one particular class for taxation or exemption
infringes no constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27)

The rule of uniformity does not call for perfect uniformity or perfect equality, because
this is hardly attainable.

30
wharfage dues, and other duties or imposts within the framework of
the national development program of the government.55
4) Prohibition against taxation of religious,
charitable entities, and educational entities

Subject to the conditions prescribed by law, all grants,

endowments, donations or contributions used actually, directly and
exclusively for educational purposes shall be exempt from tax.56

5) Prohibition against taxation of non-stock,

non-profit institutions

55

Requisites for exemption:

1) It must be a private educational institution

2) It must be non-stock and non-profit

3) Its assets (property) and revenues (income) must be used actually, directly and
exclusively for educational purposes

Rules:

1) If the first requisite is absent (meaning, its a government educational institution), it

is nonetheless exempt from income tax

2) If the second requirement is absent (meaning, it is stock and profit) as long as the
third requirement is present, it is nonetheless exempt from real estate tax

3) If the third requirement is absent, as long as it is non-stock and non-profit, it is

nonetheless exempt from income tax

4) If the third requirement is absent, but it is private and non-profit, it is subject to

income tax, but at the preferential rate of ten percent (10%)

Under the present tax code, for a private educational institution to be exempt from
the payment of income tax, all it has to be is non-stock and non-profit. However, a governmental
educational institution is exempt from income tax without any condition

Exemption does not extend to:

1) Income derived by these educational institutions from their property, real or

personal, and

2) From activities conducted by them for profit regardless of the disposition made on
such income

31
 All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties.57
6) Majority vote of Congress for grant of tax
exemption

No law granting any tax exemption shall be passed without the

concurrence of a majority of all the members of the Congress.58

56

Sec. 4(4), Art. XIV.

The exemption granted to non-stock, non-profit educational institution covers income,

property, and donors taxes, and custom duties.

To be exempt from tax or duty, the revenue, assets, property or donation must be
used actually, directly and exclusively for educational purpose.

In the case or religious and charitable entities and non-profit cemeteries, the
exemption is limited to property tax.

The said constitutional provision granting tax exemption to non-stock, non-profit

educational institution is self-executing.

Tax exemptions, however, of proprietary (for profit) educational institutions require

prior legislative implementation. Their tax exemption is not self-executing.

Lands, Buildings, and improvements actually, directly, and exclusively used for
educational purposed are exempt from property tax, whether the educational institution is
proprietary or non-profit

57

Sec. 4 (3), Art. XIV

Proceeds of the sale of real property by the Roman Catholic church is exempt from
income tax because the transaction was an isolated one (Manila Polo Club vs. CTA)

Income derived from the hospital pharmacy, dormitory and canteen was exempt from
income tax because the operation of those entities was merely incidental to the primary purpose
of the exempt corporation (St. Paul Hospital of Iloilo vs. CIR)

32
 7) Prohibition on use of tax levied for special
purpose

All money collected or any tax levied for a special purpose shall
be treated as a special fund and paid out for such purpose only. If the
purpose for which a special fund was created has been fulfilled or
abandoned the balance, if any, shall be transferred to the general
funds of the government.59

8) Presidents veto power on appropriation,

revenue, tariff bills

The President shall have the power to veto any particular item
or items in an Appropriation, Revenue or Tariff bill but the veto shall
not affect the item or items to which he does not object.60

Where the educational institution is private and non-profit (but a stock corporation),
it is subject to income tax but at the preferential rate of ten percent (10%)

58

Sec. 28(4), Art. VI

The provision requires the concurrence of a majority not of attendees constituting a

quorum but of all members of the Congress.

59

Sec. 29(3), Art. VI

An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the
prices of imported crude oil. In a decide case, it was held that where under an executive order of
the President, this special fund is transferred from the general fund to a trust liability account,
the constitutional mandate is not violated. The OPSF, according to the court, remains as a special
fund subject to COA audit (Osmea vs Orbos, et al., G.R. No. 99886, Mar. 31, 1993)

60

Sec. 27(2), Art. VI

33
 9) Non-impairment of jurisdiction of the
Supreme Court

The Congress shall have the power to define, prescribe, and

apportion the jurisdiction of the various courts but may not deprive
the Supreme Court of its jurisdiction over cases enumerated in Sec. 5
hereof.61

The Supreme Court shall have the following powers: x x x (2)

Review, revise, modify or affirm on appeal or certiorari x x x final
judgments and orders of lower courts in x x x all cases involving the
legality of any tax, impost, assessment, or toll or any penalty imposed
in relation thereto.62
10) Grant of power to the local government
units to create its own sources of revenue

Each local government unit has the power to create its own
revenue and to levy taxes, fees and charges subject to such guidelines
and limitations as the Congress may provide.63

61

Sec. 5 (2), Art. VIII

62

Sec. 5 (2b), id.

Congress cannot take away from the Supreme Court the power given to it by the Constitution
as the final arbiter of tax cases.

63

Sec 5, Art. X

Local government units have no power to further delegate said constitutional grant to
raise revenue, because what is delegated is not the enactment or the imposition of a tax, it is the
administrative implementation.

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

Municipal corporations are mere creatures of Congress which has the power to
create and abolish municipal corporations. Congress therefore has the power to control over
local government units. If Congress can grant to a municipal corporation the power to tax certain

34
 11) Flexible tariff clause

In the interest of national economy, general welfare and/or

national security, the President upon the recommendation of the
National Economic and Development Authority is empowered:

1) To increase, reduce or remove existing protective rates of

import duty, provided that the increase should not be higher
than 100% ad valorem
2) To establish import quota or to ban imports of any commodity
3) To impose additional duty on all imports not exceeding 10% ad
valorem.64

12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents

appurtenant thereto, mosques, non-profit cemeteries, and all lands,
building, and improvements actually, directly and exclusively used for
religious, charitable or educational purposes shall be exempt from
taxation.65

matters, it can also provide for exemptions or even take back the power (Basco vs. PAGCOR)

64

Sec. 401, TCC

65

Sec. 28(3), Art. VI

Lest of the tax exemption: the use and not ownership of the property

To be tax-exempt, the property must be actually, directly and exclusively used for the
purposes mentioned.

The word exclusively means primarily.

The exemption is not limited to property actually indispensable but extends to

facilities which are incidental to and reasonably necessary for the accomplishment of said
purposes.

The constitutional exemption applies only to property tax.

35
 13) No appropriation or use of public money
for religious purposes

No public money or property shall be appropriated, applied,

paid or employed, directly or indirectly for the use, benefit, support of
any sect, church, denomination, sectarian institution, or system of
religion or of any priest, preacher, minister, or other religious teacher
or dignitary as such except when such priest, preacher, minister or
dignitary is assigned to the armed forces or to any penal institution,
or government orphanage or leprosarium.66

b. Provisions Indirectly Affecting Taxation

1) Due process

No person shall be deprived of life, liberty or property without

due process of law67 x x x.

2) Equal protection

However, it would seem that under existing law, gifts made in favor or religious
charitable and educational organizations would nevertheless qualify for donors gift tax
exemption. (Sec. 101(9)(3), NIRC)

The constitutional tax exemptions refer only to real property that are actually, directly and
exclusively used for religious, charitable or educational purposes, and that the only constitutionally
recognized exemption from taxation of revenues are those earned by non-profit, non-stock educational
institutions which are actually, directly and exclusively used for educational purposes. (Commissioner of
Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)

66

Sec. 29(2), Art. VI

Public property may be leased to a religious group provided that the lease will be
totally under the same conditions as that to private persons (amount of rent).

Congress is without power to appropriate funds for a private purpose.

67

Sec. 1, Art. III

36
 xxx Nor shall any person be denied the equal protection of the
laws.68

3) Religious freedom

No law shall be made respecting an establishment of religion or

prohibiting the free exercise thereof. The free exercise and enjoyment
of religious profession and worship, without discrimination or
preference, shall be forever allowed. 69 x x x

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed.70

J. Stages of Taxation

1. Levy

68

Ibid.

69

Sec. 5 Art. III

License fees/taxes would constitute a restraint on the freedom of worship as they are
actually in the nature of a condition or permit of the exercise of the right.

However, the Constitution or the Free Exercise of Religion clause does not prohibit
imposing a generally applicable sales and use tax on the sale of religious materials by a religious
organization. (see Tolentino vs Secretary of Finance, 235 SCRA 630)

70

Sec. 10, Art. III

A law which changes the terms of the contract by making new conditions, or changing
those in the contract, or dispenses with those expressed, impairs the obligation.

The non-impairment rule, however, does not apply to public utility franchise since a
franchise is subject to amendment, alteration or repeal by the Congress when the public interest
so requires.

37
 Determination of the persons, property or excises to be taxed,
the sum or sums to be raised, the due date thereof and the time and
manner of levying and collecting taxes (strictly speaking, such refers
to taxation)

2. Assessment and Collection

Consists of the manner of enforcement of the obligation on the

part of those who are taxed.71

The two processes together constitute the taxation system.

3. Payment

The act of the taxpayer in settling his obligations.

4. Refund

The actual reimbursement of tax to the taxpayer by the

government.

K. Definition, Nature, and Characteristics of Taxes

Definition

Taxes are the enforced proportional contributions from persons

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

Nature

They are not arbitrary exactions but contributions levied by

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

Essential Characteristic of Taxes

1)It is levied by the law-making body of the State.72

71

this includes payment by the taxpayer and is referred to as tax administration

38
 2)It is an enforced contribution.73
3)It is generally payable in money.74
4)It is proportionate in character.75
5)It is levied on persons or property.76
6)It is levied for public purpose or purposes.77
7)It is levied by the State which has jurisdiction over the
persons or property.78

L. Requisites of a valid tax

1) It should be for a public purpose

72

The power to tax is a legislative power which under the Constitution only Congress can
exercise through the enactment of laws. Accordingly, the obligation to pay taxes is a statutory
liability.

73

A tax is not a voluntary payment or donation. It is not dependent on the will or

contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive
acts of the government.

74

Tax is a pecuniary burden an exaction to be discharged alone in the form of money

which must be in legal tender, unless qualified by law, such as RA 304 which allows backpay
certificates as payment of taxes.

75

It is ordinarily based on the taxpayers ability to pay.

76

A tax may also be imposed on acts, transactions, rights or privileges.

77

39
 2) The rule of taxation should be uniform
3) That either the person or property taxed be within the
jurisdiction of the taxing authority
4) That the assessment and collection be in consonance with the
due process clause
5) The tax must not infringe on the inherent and constitutional
limitations of the power of taxation.79

M. Tax as distinguished from other forms of exactions

1. Tariff

It may be used in 3 senses:

a. As a book of rates drawn usually in alphabetical order

containing the names of several kinds of merchandise with the
corresponding duties to be paid for the same.
b. As duties payable on goods imported or exported.80
c. As the system or principle of imposing duties on the
importation/exportation of goods.

2. Toll

Taxation involves, and a tax constitutes, a burden to provide income for public purposes.

78

The persons, property or service to be taxed must be subject to the jurisdiction of the
taxing state.

79

Taxes are the lifeblood of the government and should be collected without unnecessary
hindrance. But their collection should not be tainted with arbitrariness

80

PD No. 230

40
 Sum of money for the use of something, generally applied to the
consideration which is paid for the use of a road, bridge of the like, of
a public nature.

Tax
vs Toll
1. demand of 1. demand of
sovereignty proprietorship
2. paid for the 2. paid for the use of
support of the anothers property
government
3. generally, no limit 3. amount depends
as to amount on the cost of
imposed construction or
maintenance of the
public improvement
used
4. imposed only by 4. imposed by the
the government government or
private individuals or
entities

3. License fee

A charge imposed under the police power for the purposes of

regulation.81

81

Three kinds of licenses are recognized in the law:

1. Licenses for the regulation of useful occupations.

2. Licenses for the regulation or restriction of non-useful occupations or enterprises

41
 Tax
vs
License/Permit Fee
1. enforced 1. legal
contribution compensation or
assessed by reward of an officer
sovereign authority for specific purposes
to defray public
expenses

3. Licenses for revenue only

Importance of the distinctions between tax and license fee:

1. Some limitations apply only to one and not to the other, and that exemption from
taxes may not include exemption from license fees.

2. The power to regulate as an exercise of police power does not include the power to
impose fees for revenue purposes. (see American Mail Line vs City of Butuan, L-12647, May 31,
1967 and related cases)

3. An extraction, however, maybe considered both a tax and a license fee.

4. But a tax may have only a regulatory purpose.

5. The general rule is that the imposition is a tax if its primary purpose is to generate
revenue and regulation is merely incidental; but if regulation is the primary purpose, the fact
that incidentally revenue is also obtained does not make the imposition of a tax. (see
Progressive Development Corp. vs Quezon City, 172 SCRA 629)

42
 2. for revenue 2. for regulation
purposes purposes
3. an exercise of the3. an exercise of the
taxing power police power
4. generally no limit4. amount is limited
in the amount of tax to the necessary
to be paid expenses of
inspection and
regulation
5. imposed also on 5. imposed on the
persons and property right to exercise
privilege
6. non-payment does 6. non-payment
not necessarily make makes the act or
the act or business business illegal
illegal

4. Special assessment

An enforced proportional contribution from owners of lands

especially or peculiarly benefited by public improvements.82

Tax
vs Special
Assessment
1. imposed on 1. levied only on land
persons, property
and excise
2. personal liability 2. not a personal
of the person liability of the person
assessed assessed, i.e. his

82

Since special assessments are not taxes within the constitutional or statutory provisions
on tax exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution
does not apply to special assessments.

However, in view of the exempting proviso in Sec. 234 of the Local Government Code,
properties which are actually, directly and exclusively used for religious, charitable and
educational purposes are not exactly exempt from real property taxes but are exempt from the
imposition of special assessments as well. (see Aban)

The general rule is that an exemption from taxation does not include exemption from
special assessment.

43
 liability is limited
only to the land
involved
3. based on necessity 3. based wholly on
as well as on benefits benefits
received
4. general 4. exceptional both
application (see as time and place
Apostolic Prefect vs
Treas. Of Baguio, 71
Phil 547)

5. Debt

Debt is based upon juridical tie, created by law, contracts,

delicts or quasi-delicts between parties for their private interest or
resulting from their own acts or omissions.

Tax
vs Debt
1. based on law 1. based on
contracts, express or
implied
2. generally, cannot 2. assignable
be assigned
3. generally payable 3. may be paid in
in money kind
4. generally not 4. may be subject to
subject to set-off or set-off or
compensation compensation
5. imprisonment is a 5. no imprisonment
sanction for non- for non-payment of
payment of tax debt
except poll tax
6. governed by 6. governed by the
special prescriptive ordinary periods of
periods provided for prescriptions
in the Tax Code
7. does not draw 7. draws interest
interest except only when so stipulated,
when delinquent or in case of default

N. Kinds of Taxes

1. As to object

44
 a. Personal, capitation, or poll tax

Tax of a fixed amount imposed on persons residing within a

specified territory, whether citizens or not, without regard to their
property or the occupation or business in which they may be
engaged.83

b. Property tax

Tax imposed on property, real or personal, in proportion to its

value or in accordance with some other reasonable method of
apportionment.

c. Privilege tax

A charge imposed upon the performance of an act, the

enjoyment of privilege, or the engaging in an occupation.

2. As to burden or incidence

a. Direct

A direct tax is demanded from the person who also shoulders

the burden of the tax. It is a tax which the taxpayer is directly or
primarily liable and which he or she cannot shift to another.

b. Indirect

An indirect tax is demanded from a person in the expectation

and intention that he or she shall indemnify himself or herself at the
expense of another, falling finally upon the ultimate purchaser or
consumer. A tax which the taxpayer can shift to another.

3. As to tax rates

a. Specific

The computation of the tax or the rates of the tax is already

provided for by law.

b. Ad valorem

Tax upon the value of the article or thing subject to taxation; the
intervention of another party is needed for the computation of the tax.
83

i.e. community tax.

45
 c. Mixed

Tax rates are partly progressive and partly regressive.

4. As to purposes

a. General or fiscal

Imposed for the purpose of raising public funds for the service
of the government.

b. Special, regulatory, or sumptuary

Imposed primarily for the regulation of useful or non-useful

occupation or enterprises and secondarily only for the purpose of
raising public funds.

5. As to scope or authority to impose

a. National internal revenue taxes

Imposed by the National Government

b. Local real property tax, municipal tax

Imposed by the municipal corporations or local government

units

6. As to graduation

a. Progressive

Rate or amount of tax increases as the amount of the income or

earning to be taxed increases.

b. Regressive

Tax rate decreases as the amount of income to be taxed

increases.

b. Proportionate

Tax based on a fixed percentage of the amount of the property

receipts or other basis to be taxed.84
84

46
II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

1. Income Tax Systems

a. Global Tax System

One where the tax treatment views indifferently the tax base
and generally treats in common all categories of taxable income of the
taxpayer

b. Schedular Tax System

One where the income tax treatment varies and is made to

depend on the kind or category of taxable income of the taxpayer.85

c. Semi-schedular or semi-global tax system86

Example: real estate tax.

85

Schedular system and Global system

1. Under the schedular treatment, there are different tax rates, while under the global
treatment, there is a single tax rate

2. Under the schedular system, there are different categories of taxable income, while
under the global system, there is no need for classification as all taxpayers are subjected to a
single tax rate.

3. The scheduler treatment is usually used in the income taxation of individuals while
the global treatment is usually applied to corporations.

86

Approach used in the Philippines

47
 Partly schedular, and partly global. The schedular approach is
used in taxation of individuals, while the global approach is used in
the taxation of corporations.

2. Features of the Philippine Income Tax Law

a. Direct tax

One assessed upon the property, person, business income, etc.

of those who pay them.
b. Progressive

The tax rates increase as the tax base increases. In certain

cases, however, final taxes are imposed on passive income.87

c. Comprehensive

The Philippine Income tax law adopted the so-called

comprehensive tax situs Comprehensive in the sense that it
practically applies all possible rules of tax situs.

d. Semi-schedular or semi-global tax system88

3. Criteria in Imposing Philippine Income Tax

a. Citizenship Principle

A citizen of the Philippines is subject to Philippine income tax

(a) on his worldwide income, if he resides in the Philippines, or

(b) only on his income from sources within the Philippines, if he
qualifies as nonresident citizen.

b. Residence Principle

87

The individual income tax system, in the main, is progressive in nature

88

supra

48
 Resident alien is liable to pay income tax on his income from
sources within the Philippines but exempt from tax on his income
from sources outside the Philippines.

c. Source Principle

An alien is subject to Philippine income tax because he derives

income from sources within the Philippines. Thus, a nonresident alien
is liable to pay Philippine income tax on his income from sources
within the Philippines such as dividend, interest, rent, or royalty,
despite the fact that he has not set foot in the Philippines.

4. Types of Philippine Income Tax

a) Net income tax

b) Gross income tax
c) Final income tax
d) Minimum corporate income tax of 2% of the gross income
e) Improperly Accumulated Earnings tax of 10% on improperly
accumulated earnings
f) Optional Corporate Income Tax of 15% on Gross Income.

5. Taxable Period

a. Calendar Period

This covers the period of 12 months commencing from January 1

and ending December 31.
b. Fiscal Period

An accounting period of 12 months ending on the last day of any

month other than December.89

c. Short Period

A period of less than twelve (12) months.

6. Kinds of Taxpayers

a. Individual Taxpayers

89

ex. Feb 1 to Jan 31

49
 1) Citizens

a) Resident citizens90

Those residing in the Philippines unless he qualifies as a non-

resident under Sec. 22 (E) of the NIRC.91

b) Non-resident citizens92

Those not residing in the Philippines.

A non-resident citizens means

1. One who establishes to the satisfaction of the Commissioner of

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

2. A citizen of the Phils. who leaves the country during the

taxable year to reside abroad, either as immigrant or for
employment or on permanent basis.

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

4. A citizen who has been previously considered as non-resident

citizen and who arrives in the Phils. at any time during the
taxable year to reside permanently in the country.93

90

taxable for income derived from all sources based on taxable (i.e., net) income

91

infra

92

taxable for income derived within the Philippines based on taxable (i.e., net) income

93

50
 5. A citizen who shall have stayed outside the Phils. for 183 days
or more by the end of the year.94
2) Aliens95

a) Resident aliens

Those residing in the Philippines though not a citizen thereof.

He shall be considered a NRC for the taxable year in which he arrives in the Phils. with
respect to his income derived from sources abroad until the date of his arrival in the Phils.

94

Sec. 22 (E)
The continuity of residence abroad is not essential. If physical presence is established,
such physical presence for the calendar year is not interrupted by reasons of travels to the Phils.
(Rev. Regs. No. 9-73, November 26, 1973)
An overseas contract worker is taxable only on income from sources within the
Philippines. (Sec. 23 (c).
A seaman who is a Filipino citizen and who receives compensation for services
rendered abroad as member of the complement of a vessel engaged exclusively in international
trade is treated as an overseas contract worker.

Length of stay is indicative of intention. A citizen of the Philippines who shall have
stayed outside the Philippines for 183 days or more by the end of the year is a non-resident
citizen. His presence abroad, however, need not be continuous. [RR1-79]

95

What makes an alien a resident or non-resident alien is his intention with regard to
the length and nature of his stay. Thus:

a. One who comes to the Philippines for a definite purpose which in its very
nature may

be promptly accomplished is not a resident citizen.

b. One who comes to the Philippines for a definite purpose which in its very
nature would require an extended stay, and to that end, makes his home temporarily in the
Philippines, becomes a resident, though it may be his intention at all times to return to his

51
 Those who are actually present in the Phils. and who are not
mere transients or sojourners.96

b) Non-resident aliens97

Those not residing in the Phils. and who is not a citizen thereof.

(1) Engaged in trade or business

domicile abroad when the purpose for which he came has been consummated or abandoned.
(Sec. 5, RR 2)

Length of stay is indicative of intention.

An alien who shall have stayed in the Philippines for more than one year by the
end of the taxable year is a resident alien

An alien who shall come to the Philippines and stay for an aggregate period of more
than one hundred eighty days during a calendar year shall be considered a non-resident alien in
business, or in the practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays
in the Philippines for 180 days or less during the calendar year, he shall be deemed a non-
resident alien not doing business in the Philippines, regardless of whether he owns

1. Stock in trade of the taxpayer, or other property of a kind which would properly be
included in an inventory of a taxpayer if on hand at the end of the taxable year (example: Raw
Materials Inventory, Work in Process Inventory, Office Supplies Inventory)

2. Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business (example: Merchandise Inventory)

3. Property used in the trade or business which is subject to the allowance for
depreciation (example: Office Equipment) actually engages in trade or business therein.
(Mamalateo)

96

A mere floating intention, indefinite as to time, to return to another country is not

sufficient to constitute him a transient.

For tax purposes a resident alien is;

1) An alien who lives in the Phils. with no definite intention to stay as a resident.

52
 Taxable for income derived within the Philippines based on
taxable98 income.

(2) Not engaged in trade or business

Taxable for income derived within the Philippines based on

gross income.

(3) Special Class of Individual

Employees

a) Minimum wage earner

Refers to a worker in the private sector paid the statutory

minimum wage, or to an employee in the public sector with
compensation income of not more than the statutory minimum wage
in the non-agricultural sector where he/she is assigned.99

By virtue of the passage of R.A. 9504, minimum wage earners

are exempted from the payment of the net income tax,100 thus: xxx,
That minimum wage earners shall be exempt from the payment of
2) One who comes in the Phils. for definite purposes which in its very nature would
require an extended stay and to that end, makes his home temporarily in the Phils.

3) An alien who stay within the Phils. for more than 12 months from the date of his
arrival in the Phils.

97

A non-resident alien individual who came to the Phils. and stayed therein for an aggregate
period of more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.

98

i.e., net

99

Sec. 22 (HH), as amended by R.A. 9504

100

53
income tax on their taxable income: Provided, further, that the holiday
pay, overtime pay, night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be exempt from income
tax.

b) Corporations101

1) Domestic corporations

Those created or organized in the Phils. or under its laws.

2) Foreign corporations

Those created, organized or existing under any laws other than

those of the Phils.

(1)Resident

Those foreign corporation engaged in trade or business 102 within

the Phils.

(2) Non-resident

They are not required to file an income tax return

101

The term shall include partnership, no matter how created or organized, joint stock companies,
joint accounts, or insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to operating or consortium agreement
under a service contract with the government. (Sec. 24(b))

102

The term implies a continuity of commercial dealings and arrangements and

contemplates to that extent, the performance of acts or works or the exercise of some of the
functions normally insistent to and in the progressive prosecution of commercial gain or for the
purpose and the object of the business organization (Comm. vs. British Overseas Airways
Corporation BOAC case 149 S 395)

54
 Those foreign corporation not engaged in trade or business
within the Phils.

c. Partnerships103

Partnership is a contract whereby two or more persons bind

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

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their

common profession, no part of the income of which is derived from
engaging in any trade & business.104

e. Estates and Trusts

Estate is the mass of property, rights and obligations left behind

by the decedent upon his death.105

103

An ordinary business partnership is considered as a corporation and is thus subject to

tax as such.
Partners are considered stockholders and, therefore, profits distributed to them by the
partnership are considered as dividends.

104

What are taxable unregistered partnerships?

The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered
partnerships and even associations or joint accounts which have no legal personalities apart
from their individual members. Accordingly, a pool of individual real property owners dealing in
real estate business was considered a corporation for tax purposes [Afisco Insurance Corporation
v. CA, 302 SCRA 1]

Sec. 22 (b)

e. g. Law firm

105

Estates may be classified as follows:

55
 Trust is an arrangement created by will or co-agreement under
which title to property is passed to another for conservation or
investment with the income therefrom and ultimately the corpus
(principal) to be distributed in accordance with the directions of the
creator as expressed in the governing instrument.106

f. Co-ownerships107

It is created whenever the ownership of an undivided thing or

right belongs to different persons.

1. Estates not under judicial settlement - are subject to income tax generally as mere
co-ownership.

- The tax liability on income of the co-ownership levied directly on the co-owners.
Thus, the heirs shall include in their respective returns their distributive shares of the net income
of the estate.

2. Estates under judicial settlement - are subject to income tax in the same manner as
individual.

- Income received during the settlement of the estate is taxable to the fiduciary
(guardian, executor, trustee, and administrator).

- The return should be filed by executor or administrator of the trust.

106

2 Kinds of Trust :

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

2. Revocable Trust - is one where at anytime the power to revest the title to any part
of the corpus of the trust is vested:

(a) in the grantor (creator of the trust) either alone or in conjunction with any person
not having a substantial adverse interest in the disposition of such part of the corpus or the
income therefrom; or

(b) in any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom.

The tax shall be imposed on taxable income of the grantor.

56
 7. Income Taxation

a. Definition

A tax on all yearly profits arising from property, professions,

trades or offices.
A tax on the net income or the entire income realized in one
taxable year.

b. Nature

Direct tax the tax burden is borne by the income recipient

upon whom the tax is imposed.
Progressive tax the tax base increases as the tax rate
increases.
107

General rule: Co-ownership is exempt from income tax because the activities of the co-
owners are usually limited to the preservation of the properties owned in common and the
collection of the income therefrom.

Exceptions: (When co-ownership is subject to tax).

(1) When the income of the co-ownership is invested by the co-owners in other
income-producing properties or income-producing activities, and

(2) When there is no attempt to divide inherited property for more than ten (10)
years and the said property was not under any administration proceedings nor held in trust, an
unregistered partnership is deemed to exist.

Tax liability of co-owners:

The co-owners in exempt co-ownership shall be liable for income tax only in their
separate and individual capacity.

Filing of return:

The owners shall report and include in their respective personal income tax returns
their shares of the net income of the co-ownership.

Test to determine whether co-ownership is a taxable unregistered partnership:

Find out whether the heirs have made substantial improvements on the inherited
property. If so, the implication is that they will engage in business for profit (Evangelista
Doctrine). If that happens, the co-ownership will be taxed as an unregistered partnership.

57
 Excise tax108 a tax on the right to earn income
c. General principles

1. A citizen of the Philippines residing therein is taxable on all

income derived from sources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from

sources within the Philippines.

3. An individual citizen of the Philippines, who is working and

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

4. An alien individual, whether or not a resident of the

Philippines, is taxable only on income derived from sources within the
Philippines.

5. A domestic corporation is taxable on all income derived from

sources within and without the Philippines.

6. A foreign corporation, whether engaged or not in trade or

business in the Philippines, is taxable only on income derived from
sources within the Philippines.

8. Income

a. Definition

It denotes the amount of money or property received by a

person or corporation within a specified time, whether as payment for
services, interests, or profits from investments.109

108

privilege tax

109

Fisher vs. Trinidad, 43 Phil 973

58
 Income is not merely increase in value of property; but a gain, a
profit in excess of capital as a result of exchange transactions.

b. Nature

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

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

a specified time, whether as payment for services, interest or profit
from investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the fruits of
one's labor.110

Income includes earnings, lawfully or unlawfully acquired,

without consensual
recognition, express or implied, of an obligation to repay and without
restriction as their disposition.

c. When income is taxable

1) Existence of income

There must be gain there must be a value received in the form

of cash or its equivalent as a result of rendition of service or earnings
in excess of capital invested.111
110

Conwi v. Court of Tax Appeals

111

A mere expectation of profits is not an income

A transaction where- by nothing of exchangeable value comes to or is received by the

taxpayer does not give rise to or create taxable income.

Items or amounts received which do not add to the taxpayers net worth or redound
to his benefits such as amounts merely deposited or entrusted to him are not considered as
gains (CIR vs. Tours specialist, 183 SCRA 402).

Gain need not be necessarily in cash. It may be in form of payment, reduction or

cancellation of Ts indebtedness, or gain from exchange of property.

59
 2) Realization of income

a) Tests of Realization

General rule:

A mere increase in the value of property without actual

realization, either through sale or other disposition, is not taxable.
The increase in value is a mere unrealized increase in capital.

Exception:

That even without the sale or other disposition if by reason of

appraisal, the cost basis is used as the new tax base for purposes of
computing the allowable depreciation expense, the net difference
between the original cost basis and new basis due to appraisal is
taxable.112

b) Actual vis--vis Constructive

receipt

The gain must actually be or constructively realized or

received.113

An income is constructively received by a person when - it is

credited to the amount of or segregated in his favor and which may be
drawn by him at any time without any limitations, e. g.:

112

Economic benefit principle (BIR Ruling No. 029 98, March 19, 1998)

113

Income which is credited to the account of or set apart for a taxpayer and which may be
drawn upon by him at anytime is subject to tax for the year during which so credited or set
apart, although not then actually reduced to possession. The income must be credited to the
taxpayer without any substantial limitation or restriction as to the time or manner of payment or
condition upon which payment is to be made.

60
 Interest credited on savings bank deposits
Dividends applied by the corporation against the indebted- ness of
stockholder
Share in the profit of a partner in General Professional Partnership.

3) Recognition of income

a. there is income, gain or profit

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

4) Methods of accounting

a) Cash method vis--vis Accrual

method

Cash method - recognition of income and expense dependent on

inflow or outflow of cash (meaning, you recognize the income when
you actually receive the cash payment for the sale, and you recognize
the expense when you actually pay cash for the expense)

Accrual method - method under which income, gains and profits

are included in gross income when earned whether received or not,
and expenses are allowed as deductions when incurred, although not
yet paid. It is the right to receive and not the actual receipt that
determines the inclusion of the amount in gross income

b) Installment payment vis--vis

Deferred payment vis-vis
Percentage completion 114

1. Sales of dealers in personal property

Under Rules and Regulations (R&R) prescribed by the Sec. of

Finance, upon recommendation of the Commissioner: a person who
regularly sells or otherwise disposes of personal property on the
installment plan may return as income therefrom in any taxable year
that proportion of the installment payments actually received in that

114

in long term contracts

61
year, which the gross profit realized or to be realized when payment is
completed, bears to the contract price.115
2. Sales of realty and casual sales of personalty

a) in cases of:

(i) casual sale or other casual disposition of personal

property (other than inventory on hand of the taxpayer at the
close of the taxable year) for a price > P1,000, or

(ii) sale or other disposition of real property, if in either

case the initial payments do not exceed 25% of the selling price

b) how may income be returned: same as in sales of dealer in

personal property above

3. Sales of real property considered as capital asset by

individuals

a) individual who sells of disposes of real property, considered

as capital asset & is otherwise qualified to report the gain under (2)
above may pay the capital gains tax in installments under R&R to be
promulgated by the Sec. of Finance, upon recommendation of the
Commissioner

115

Example: Sale in 1997 payable in 2 equal annual installments. How to compute for
income:

Contract Price/ Installments

Receivable P100,000

Cost 75,000

(GP) P 25,000

* installments payable in 2 equal annual installments

GP/Contract Price ratio = 25T/100T = 25%

Collections in 1997 = P50T

Income for 1997 = P50T x 25% = P12,500

62
 b) capital asset: property held by the taxpayer (whether or not
connected with his trade or business) but does not include:

(1) stock in trade of taxpayer

(2) property which would properly be included in inventory, if on
hand
(3) merchandise inventory
(4) depreciable assets used in the trade/business
(5) real property used in trade/business

d. Tests in determining whether income is

earned for tax purposes

1) Realization test

No taxable income until there is a separation from capital

of something of exchangeable value, thereby supplying the realization
or transmutation which would result in the receipt of income.

2) Claim of right doctrine or Doctrine of

ownership, command, or control

The power to dispose of income is the equivalent of ownership

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

3) Economic benefit test, Doctrine of

proprietary interest

Any economic benefit to the employee that increases his net

worth is taxable.

4) Severance test

There is no taxable income until there is a separation from

capital of something which is of exchangeable value 116 thereby
supplying the realization or transmutation which would result in the

116

Eisner vs. Macomer, 252 US 189

63
receipt of income. Thus, income is not taxable unless separated or
severed from the capital or labor that bore it.

9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from

whatever source, whether legal or illegal, including 117 the following
items:

1. Gross income derived from the conduct of trade or business or the

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

b. Concept of income from whatever source

derived

The term derived from whatever source implies the inclusion

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

It includes illegal gains arising from gambling, betting,

lotteries extortion and fraud.

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

Taxable Income118

117

but not limited to

118

See definition of gross income, supra

64
 d. Classification of Income as to Source

1) Gross income and taxable income

from sources within the Philippines

1) Interests:

a) Interests derived from sources within the Phils.

b) Interests on bonds, notes or other interest-bearing obligations of
residents, corporate or otherwise.119

2) Dividends:

a.) From a domestic corporation, and

b.) From a foreign corporation 50% or more of the
gross income of which for the 3-year period ending with the close
of the taxable year preceding the declaration of such dividends (or
for such part of such period as the corporation within the Phils.120
has been in existence) was derived from sources. It must be only in
an amount which bears the same ratio to such dividends as the
gross income of the corporation for such period derived from
sources within the Philippines bears to its gross income from all
sources.

3) Compensation for labor or personal services performed in the

Phils.121

4) Rentals and Royalties from property located in the Phils. or

from any interest in such property, including rentals or royalties
for

119

Sec. 42, (A)( 1)

120

Id. (A)(2)

121

Id. (A)(3)

65
 a.) The use of, or the right or privilege to use in the
Phils. any copyright, patent, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other
like property or night;
b.) The use of, or the right to use in the Phils. any
industrial, commercial or scientific equipment;
c.) The supply of scientific, technical, industrial or
commercial knowledge or information;
d.) The supply of any assistance that is ancillary and
subsidiary to, and is furnished as a means of enabling the
application or enjoyment of, any such property or right as is
mentioned in paragraph (a), any such equipment as is
mentioned in paragraph (b) or any such knowledge or
information as is mentioned in paragraph (c);
e.) The supply of services by a nonresident person or
his employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such nonresident
person;
f.) Technical advice, assistance or services rendered
in connection with technical management or administration of
any scientific, industrial or commercial undertaking, venture,
project or scheme; and
g.) The use of, or the right to use:

1. Motion picture films;

2. films or video tapes for use in connection
with television; and
3. tapes for use in connection with radio
broadcasting

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

6) Gains, profits, and income from sale of personal property,

treated as derived entirely from the country where it is sold.122

122

Exception to the rule: gain from the sale of shares of stock in a domestic corporation
which is treated as derived entirely from sources within the Phils. regardless of where the shares
are sold.

Passage of title test: it is the prevailing view that in ascertaining the place of sale, the
determination of where and when the title to the goods passes from the seller to the buyer is
decisive.

Enumeration in Section 42 not all-inclusive.

66
 2) Gross income and taxable income
from sources without the Philippines

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

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

a. Dividends from foreign corporations in general; and

b. Dividends derived from foreign corporations, 50% or
more of the gross income of which for the 3-year period
preceding the declaration of dividends (or for such part of such
period as the corporation has been in existence was derived
from foreign sources)
3) Compensation for labor or personal services performed outside the
Phils.

4) Rentals or royalties from property located outside the Phils. or from

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

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

6) Gains, profits and income from the sale of personal property

located outside the Phils., and

7) Income derived from the purchase of personal property within and

its sale outside the Phils.123
In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149
SCRA 395], the Supreme Court held:

xxx Section 37 (now Section 42) by its language, does not intend the enumeration to
be exclusive. It merely directs that the types of income listed therein be treated as income from
sources within the Phils. a cursory reading of the section will show that it does not state that it is
an all-inclusive enumeration, and that no other kind of income may be so considered xxx

The Supreme Court further held:

xxxThe absence of flight operations to and from the Phils. is not determination of
the source of income on the situs of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the source, and the
source of an income is that activity xxx which produced the income. Unquestionably the passage
documentations in these cases were sold in the Phils. and the revenue therefrom was derived
from a business activity regularly pursued within the Phils. xxx

123

67
 3) Income partly within or partly without
the Philippines

1) Income from transportation such as foreign steamship companies

whose vessel touch the Phil. ports 124 and other services rendered partly
within and partly outside the Phils. such as foreign corporations carrying on
the business of transmission of telegraph and cable messages between
points outside the Phils.125

2) Income from the sale of personal property produced in whole or in

part by the taxpayer within and sold outside the Phils. or produced, in whole
or in part, by the taxpayer outside and sold within the Phils.

e. Sources of income subject to tax

1) Compensation Income126

All income payments, in money or in kind, arising from

personal services under an employer - employee relationship.

The gain derived from labor especially employment such as

salaries and commission.

Sec. 42

124

Sec. 163, Regulations

125

Sec. 164, id.

126

Forms of Compensation
a. money
b. in kind
Compensation paid to an employee of a corporation in its stock is to be treated as if the
corporation sold the stock for its market value and paid to the employee in cash.
Living quarters furnished to the employee in addition to cash salary. The rental value should
be reported as income.
Meals given to employee, the value thereof substitutes income.

68
 All remuneration for services performed by an employee for his
employer, including the cash value of all remuneration paid in any
medium other than cash.127

2) Fringe Benefits128

a) Special treatment of fringe

benefits

127

Sec. 78(A)
It includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances

5. Bonuses

6. Fringe Benefits of rank and file employees

It does not include remuneration paid:

For agricultural labor paid entirely in products of the farm where the labor is
performed, or

For domestic service in a private home, or

For casual labor not in the course of the employer's trade or business, or

For services by a citizen or resident of the Philippines for a foreign govt or an intl
organization.

128

Sec. 33

The fringe benefit covered refers to those enjoyed by managerial and supervisory
employees

69
 The special treatment of fringe benefits shall be applied to
fringe benefits given or furnished to managerial or supervising
employees and not to the rank and file.129

b) Definition

Any good, service or other benefit furnished or granted in cash

or in kind by an employer to an individual employee, except rank and
file employee.

c) Taxable and non-taxable fringe

benefits

Taxable fringe benefits:

1) Housing Privileges

(a) Lease of residential property for the use of the employee as his
usual place of residence.
(b) Residential Property owned by employer and assigned to employee
as his usual place of residence.
(c) Residential property purchased by employer on installment basis
for the use of employer as his usual place of residence.
(d) Residential property purchased by ER and ownership is
transferred to EE as his usual place of residence.
(e) Residential property transferred to employee at less than
employers acquisition cost.130

129

Pursuant to Revenue Regulations No. 3 98 (dated May 21, 1998) implementing section
33 of the Tax Code.

130

Non taxable Housing Fringe Benefits

(a) Housing privilege of military officials of AFP

(b) Housing unit, which is situated inside or adjacent to the premise of a business or
factory. A housing unit is considered adjacent if it is located within the maximum 50 meters from
the perimeter of the business premises.

(c) Housing benefit granted to employees on a temporary basis not exceeding three
(3) months

70
 2) Household Expenses refer to expenses of the
employee paid by the employer for household personnel or other
personal expenses, which shall include:

(a) salaries of household helper

(b) personal driver of the employee
(c) Payment for homeowner assoc., etc.

3) Interest on loan at less than market rate131

4) Expenses for Foreign Travel

General rule:

Expenses for foreign travel insured by the employee and/or

family members of the employee borne by the employer shall be
treated as taxable fringe benefits of the employee.

Except:

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

a) Inland travel expenses except lodging cost in hotel averaging US$

300 or less per day;132 and

131

If the employer lends money to his employee:

Free of interest or at a rate lower than 12% (or prevailing market rate) the interest
foregone by the employer or the difference of the interest assumed by the employer and the
12% rate shall be treated as taxable fringe benefit.

Applicable to installment payment or loan with interest rate lower than 12% starting
January 1, 1998.

132

Travel expenses should be supported by documents proving the actual occurrences of the
meetings or conventions. Likewise, documents and evidence showing the business purpose of the
employees travel must be presented otherwise, the entire cost will be considered taxable fringe benefit.

71
 b) Cost of economy or business class airline ticket. 133

5) Membership fees, dues and other expenses borne by

the employer for his employee, in social or athletic clubs or
other similar organizations.134

6) Life or Health Insurance -

General rule:

The cost of life or health insurance and other non life

insurance premiums or similar amounts in excess of what the law
allows borne by the employer for his employees shall be treated as
taxable fringe benefits.

Except:

a) Contribution of the employer for the benefits of the employee

pursuant to existing laws.135
b) The cost of premium borne by the employer for the group
insurance of his employees.

7) Holidays and Vacation Expense

8) Motor Vehicle

a) Motor vehicle purchased by employer in name of employee.

b) cash for the purchased provided by the employer, the ownership is
placed in the name of the employee

133

However, if the ticket is a first class one, 30% of the cost of the ticket shall be subject to
a fringe benefit tax.

134

These are treated as taxable Fringe Benefits of the employee in full.

135

such as RA 8287 (SSS) or RA 8291 (GSIS).

72
 c) Purchase on Installment basis, the ownership is placed in the
name of the employee
d) Portion of purchased price shouldered by employer
e) Fleet of motor vehicle leased by the employer
f) Fleet of Motor vehicles owned and maintained by employer .136

9) Expense Account

a) Expenses incurred by the employee but paid by his employer.

b) Expenses paid by the employee but reimbursed by his employer.137

136
In case of letters a, b, c and d, regardless of whether the motor vehicle is used for the
personal purpose of the employee and partly for the benefit of his employer, the monetary value
shall be the entire value of the benefit.
Under letters e and f, the fleet of motor vehicles is for the use of the business and the
employees. The value of the benefit shall be the rental payments (e) or the acquisition cost (f) of
all motor vehicles not normally used for sales, freight, delivery service and non-personal use.

The use of yacht whether owned and maintained or leased by the employer shall be
treated as taxable fringe benefit the value of the benefit shall be measured based on the
depreciation of the Yacht at an estimated useful life of 20 yrs.

The use of aircraft (including helicopters) owned and maintained by the employer
shall be treated as business use and not subject to FBT.

137

Expense account not subject to FBT.

a) expenses duly receipted for in the name of the employer and

b) The expenditures do not partake the nature of personal expenses attributable to

the employee.

Personal expenses of the employee(like groceries) paid for or reimbursed by the

employer are taxable fringe benefits, whether or not duly receipted for in the name of the EE.

Representation and Transportation Allowances (RATA) refers to fixed amounts which

are regularly received by the employees as part of their monthly compensation income. They are
not treated as Taxable Fringe Benefits but the same are treated as Taxable Compensation
Income.

73
 10) Educational Assistance

General Rule: The cost of the educational assistance to the

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

Exception:

a) Education granted to employee138

b) Educational Assistance granted to the dependents of
the employee in the nature of educational assistance to the
dependents of the employee through a competitive scheme
under a scholarship program of the company.
Non-taxable fringe benefits:

1) Contributions of employer for the benefits of employee to

retirement, insurance, and hospitalization benefits plans.
2) Benefits given to rank- and -file employees whether granted under
CBA or not.
3) Fringe Benefits which are exempted from income tax under the tax
code or other special laws.
4) Fringe Benefits which are required by the nature of, or necessary to
the trade, business or profession of the employer.
5) Fringe Benefits granted for the convenience or advantage of the
employer.
6) De minimis benefits139 as may be defined by the Secretary of
Finance.

3) Professional Income

138

Requisites:

(1) Educational grant whereby the study is directly connected with the trade, business
or profession of the ER.

(2) And there is a written contract obligating the EE to remain under the employment
for a certain period.

139

infra

74
 Any other income that is not derived from personal services or
not related to an employer employee relationship and is generally
subject to tax on net income basis.

The value derived from an exercise of profession, business or

utilization of capital assets.140
4) Income from Business

Gains or profits derived from rendering services, selling

merchandise, manufacturing products, farming and long- term
construction contracts.

5) Income from Dealings in Property

a) Types of Properties

(1) Ordinary assets

Refer to properties held by the taxpayer in the pursuit of his

profession, trade or business, they are:

i. Stock in Trade;
ii. Property of a kind which would properly be included in
the inventory if on hand at the close of the taxable year;
iii. Property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business;
iv. Property used in trade or business which in subject to the
allowance for depreciation; and
v. Real property used in trade or business .141

(2) Capital assets142

140
e.g. income derived from sale of assets used in trade or business

141

Sec. 39, [A], NIRC

142

Specific Examples of Properties classified as capital assets

75
 Property held by the taxpayer143 but does not include:

i. Stock in trade;
ii. Property of a kind which would properly be included in the
inventory if on hand at the close of the taxable year;
iii. Property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business;
iv. Property used in trade or business which in subject to the
allowance for depreciation; and
v. Real property used in trade or business.144

b) Types of Gains from dealings in

property

(1) Ordinary income vis--vis

Capital gain

Includes any gain from the sale or exchange of property which is

not a capital asset.145
(2) Actual gain vis--vis
Presumed gain

Capital assets include personal property (not used in trade or business) such as
movables in ones residence, personal vehicles, appliances and furniture for personal use,
jewelries etc. as well as real property (not used in trade or business) such as residential land, idle
land not used in business operations and residential house.

143

whether or not connected with his trade or business

144

Sec. 39, [A], NIRC

This is an enumeration by exclusion, all others not enumerated are capital assets.

145

Sec. 22, [Z]

76
 (3) Long term capital gain
vis--vis Short term capital
gain

(4) Net capital gain, Net

capital loss

Net Capital gain is the excess of the gains from sales or

exchange of capital assets over the losses from such sales or
exchanges.146

Net capital Loss is the excess of the losses from sales or

exchanges of capital assets over the gains from such sales or
exchanges.147

(5) Computation of the

amount of gain or loss

The gain from the sale or other disposition of property shall be

the excess of the amount realized therefrom over the basis or adjusted
basis for determining gain, and the loss shall be the excess of the
basis or adjusted basis for determining loss over the amount realized.
The amount realized from the sale or other disposition of property
shall be the sum of money received plus the fair market value of the
property148 received.149

146

Sec. 39, [A, 2], id.

147

Sec. 39, [A, 3], id.

148

other than money

149

77
 (a) Cost or basis of the
property sold

The basis of property shall be -

(1) If such was acquired by purchase, it is the cost of the

property.

(2) If the property sold was acquired by inheritance; the fair

market price or value as of the date of acquisition.

(3) If the property sold was acquired by gift, the basis shall be
the same as if it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift.

(4) If the property was acquired for less than an adequate

consideration in money or money's worth, the basis of such property
is the amount paid by the transferee for the property.150

(b) Cost or basis of the

property exchanged in
corporate
readjustment

[1] Merger
[2] Consolidation

A merger or consolidation has income tax consequences to the

corporation which is a party to the merger or consolidation, to its
stockholders, and to its security holders. To the corporation, or to its
stockholders, or to its security holders, loss is not recognized from the
merger or consolidation.151

Sec. 40 (A)

150

Id., (B)

151

Id., (C)

78
 Gain will be recognized only if, on the exchange under the
merger or consolidation, the taxpayer received cash or property. The
gain to be recognized should not exceed the sum of money and the
fair market value of the property received.
[3] Transfer to a
controlled
corporation152

When a taxpayer transfers property to a corporation, in

consideration of stock received for the transfer, as a result of which
transfer, the taxpayer153 gains control of the corporation, no loss is
recognized on the transfer of property.154

(c) Recognition of gain

or loss in exchange of
property

[1] General rule

152

tax-free exchanges

153

alone or together with others not exceeding four [or a total of five]

154

Id., (C)(2)(c), last par.

Suppose the transfer resulted in a gain to the transferor, will the gain be recognized?
Gain will be recognized only if on the transfer, the taxpayer received cash or property in addition
to the shares received. The gain to be recognized shall not exceed the sum of money and fair
market value of the property received.

If before the transfer to the corporation, the transferor already had control over the
corporation, the gain or loss on the transfer will be recognized

79
 Upon the sale or exchange or property, the entire amount of the
gain or loss, as the case may be, shall be recognized.155
[a] Where
no gain or
loss shall
be
recognized

a) Exchange solely in kind156 in legitimate mergers or

consolidations.

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

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

2) A corporation which is a party to a merger or

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

3) A shareholder exchanges stock in a corporation which

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

b) Transfer or exchange of property for stock resulting in

acquisition of corporate control.157

155
Id., (C) (1)

156

exchange of property solely for stocks

157

A person exchanges his property for stock or unit of participation in a corporation of

which as a result of such exchange said person, alone or together with others, not exceeding
four persons, gains control of said corporation

80
 [2] Exceptions

[a]
Meaning of
merger,
consolidati
on, control
securities

"Merger" or "consolidation shall be understood to mean:

(i) the ordinary merger or consolidation, or

(ii) the acquisition by one corporation of all or substantially all
the properties of another corporation solely for stock: Provided, That
for a transaction to be regarded as a merger or consolidation within
the purview of this Section, it must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the
burden of taxation: Provided, further, That in determining whether a
bona fide business purpose exists, each and every step of the
transaction shall be considered and the whole transaction or series of
transaction shall be treated as a single unit: Provided, finally, That in
determining whether the property transferred constitutes a
substantial portion of the property of the transferor, the term
'property' shall be taken to include the cash assets of the transferor.

The term "control shall mean ownership of stocks in a

corporation possessing at least fifty-one percent (51%) of the total
voting power of all classes of stocks entitled to vote.158

[b]
Transfer of
a
controlled

Control means ownership of stocks in a corporation possessing at least 51% of the

total voting power of all classes of stock entitled to vote.

The items enumerated above are also called tax-exempt exchanges.

158

Id., (C)(6)

81
 corporatio
n159

(6) Income tax treatment of

capital loss
(a) Capital loss
limitation rule160

Provides that capital losses are deductible only to the extent of

capital gains.
(b) Net loss carry-over
rule161

Net Capital Loss Carry Over (NCLCO) means that:

i. If any taxpayer, other than a corporation, sustains in any

taxable year a net capital loss;
ii. Such net capital loss cannot be deducted from ordinary
income due to the loss limitation rule;
iii. Such loss could be carried over to the next taxable
year162 as a deduction against net capital gain in an
amount not in excess of the taxable income 163 in the year
the loss was sustained; and

159

See (5)(b)(3), supra

160

applicable to both corporations and individuals

161

applicable only to individuals

162

not thereafter

163

i.e. net income before exemptions

82
 iv. Such loss shall be treated as a loss from the sale or
exchange of capital assets held for not more than twelve
(12) months.164

(7) Dealings in real property

situated in the Philippines165

On sale, exchange, or other disposition of real property in the

Philippines, held as a
capital asset - on the gross selling price, or the current fair market
value at the time of the sale, whichever is higher, a final tax of 6%.166

(8) Dealings in shares of

stock of Philippine
corporations

(a) Shares listed and

traded in the stock
exchange

164

Sec. 39 [D]

165

The real property involved must be considered capital asset. A capital asset is property
held by the taxpayer whether or not connected in his trade or business except:

1. Stock in trade or other property of any kind which would be included in the
inventory of the taxpayer if on hand at the end of the taxable year.

2. Property primarily held for sale to customers in the ordinary course of trade or
business.

3. Property used in trade or business subject to depreciation.

4. Real property used in trade or business.

166

Sec. 24 (D)

83
 This is not subject to income tax but subject to percentage tax of
of 1% of the gross selling price.

(b) Shares not listed

and traded in the stock
exchange

The provisions of Section 39(B) 167 notwithstanding, a final tax at

the rates prescribed below is hereby imposed upon the net capital
gains realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation,
except shares sold, or disposed of through the stock exchange.

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

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

(9) Sale of principal

residence168

Not liable for capital gains tax when:

167

In the case of a taxpayer, other than a corporation, only the following percentages of the
gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in
computing net capital gain, net capital loss, and net income:

(1) One hundred percent (100%) if the capital asset has been held for not more than
twelve (12) months; and

(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12)
months

168

Conditions for tax exemption of gain from the sale or exchange of principal residence:

1. Proceeds are fully utilized in acquiring or constructing a new principal residence

within18 months from the date of sale or disposition;

84
 a. There is a sale or disposition of their principal residence by
natural persons.
b. The proceeds of the sale are fully utilized in acquiring or
constructing a new principal residence within 18 calendar months
from the date of sale or disposition.

c. The Commissioner shall have been duly notified by the

taxpayer within 30 days from the date of sale or disposition through a
prescribed return of his intention to avail of the tax exemption.

d. A deposit is made of the 6% capital gain tax otherwise due, in

cash or managers check, in an interest-bearing account with an
Authorized Agent Bank (AAB), under an Escrow Agreement between
the taxpayer and the Bureau of Internal Revenue that the same shall
be released to the taxpayer when the proceeds of the sale shall have
been utilized as intended.

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

If there is no full utilization of the proceeds of sale or

disposition, the portion of the gain presumed to have been realized
from the sale or disposition shall be subject to capital gains tax (CGT).
The GSP or FMV at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears to the
gross selling price in order to determine the taxable portion..169

6) Passive Investment Income

a) Interest Income

2. Historical cost or adjusted basis or the real property sold or disposed shall be
carried over to the new principal residence built or acquired;

3. Notice to the Commissioner of Internal Revenue shall be given within thirty (30)
days from the date of sale or disposition; and

4. If the proceeds of the sale were not fully utilized, the portion of the gain presumed
to have been realized from the sale or disposition shall be subject to capital gains tax

169

Sec. 24 (D)(2)

85
 An earning derived from depositing or lending of money, goods
or credits.170

b) Dividend Income171

(1) Cash dividend

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

received.

(2) Stock dividend

Involves the transfer of a portion of retained earnings to capital

stock by action of stockholders. it simply means the capitalization of
retained earnings.172

170
General rule: Interest received by a taxpayer, whether usurious or not, is subject to
income tax.

Except: When interest income is exempted by law from income tax.

171

Dividends means any distributions made by a stock corporation to its stockholders (SHs)) out of
its earnings or profits and payable to its SHs in money or other property.

172

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

86
 (3) Property dividend

A dividend paid in property of a corporation such as stock

investment, bands or securities held by the corporation and to the
extent of the FMV of the property received at the time of the
distribution.
(4) Liquidating dividend

A dividend distributed to the shareholders upon dissolution of

the corporation.

c) Royalty Income

These are the compensations or payments for the use of

property and are paid to the owner of a right.

d) Rental Income173

Refers to earning derived from leasing real estate as well as

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

(1) Lease of personal

property
(2) Lease of real property

(3) Tax treatment of

(a) Leasehold
improvements by
lessee

The lease can be drawn up to grant a credit to the renter toward

any amounts he might spend in leasehold improvements. This would
benefit the landlord in that the taxable income for rent will be

c) A change in the stockholders equity results by virtue of the stock dividend issuance.

173

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

87
reduced. The amounts spent for these improvements can be deducted
from any capital gains on the future sale of the leased building.174

(b) VAT added to

rental/paid by the
lessee

If VAT registered, the lessee is able to treat the full amount of

the VAT charged on the rentals as input tax and to claim a credit in
the normal way. However, non-registered lessees (including most
small enterprises), and those classified as exempt cannot claim a VAT
refund and hence have to bear the cost.175
(c) Advance rental/long
term lease

(a) If the advanced rental is a Security Deposit which restricts

the lessor as to its use - such amount shall be excluded in the
determination of rental income.

(b) If the advance rental is prepaid rental received without

restriction as to its use the entire amount is taxable in the year it
is received.
7) Annuities, Proceeds from life
insurance or other types of insurance

Annuities - amounts payable yearly or at other regular intervals

for a certain or uncertain period. They also represent as installment
payments for life insurance sold by insurance companies.176

174

e.How.com

175

practicalaction.org

176

If the part of annuity payments represent interest = taxable income.

If the annuity is a mere return of premium = not taxable.

88
 Proceeds of life insurance paid by reason of the death of the
insured to his estate or to any beneficiary,177 directly or in trust.

Return of insurance premium178

8) Prizes and awards

Contest prizes and awards received are generally taxable.

Such payment constitutes gain derived from labor.

The exceptions are as follows:

Prizes and awards received in recognition of religious,

charitable, scientific, educational, artistic, literary or civic
achievements are exclusions from gross income if:

a. The recipient was selected without any action on his part to

enter a contest or proceedings; and
b. The recipient is not required to render substantial future
services as a condition to receiving the prize or award.

Prizes and awards granted to athletes in local and intl sports

competitions and tournaments held in the Philippines and abroad and
sanctioned by their national associations shall be exempt from income
tax.

177

individual, partnership, or corporation, but not a transferee for a valuable consideration.

If the proceeds are retained by the insurer, the interest thereon is taxable;

178

If such amounts (when added to amounts already received before the taxable year
under such contracts) exceed the aggregate premiums or considerations paid (whether or not
paid during the taxable year), then the excess shall be included in the gross income. However, in
the case of a transfer for a valuable consideration, by assignment or otherwise, of a life
insurance, endowment or annuity contract, or any interest therein, only the actual value of such
consideration and the amount of the premiums and other sums subsequently paid by the
transferee are exempt from taxation. No loss is realized on surrender of a life insurance policy
for its surrender value.

89
 9) Pensions, retirement benefit, or
separation pay

Pension refers to allowance paid regularly to a person on his

retirement or to his dependents on his death, in consideration of past
services, meritorious work, age, loss or injury.

Retirement benefits received under RA 7641 and those received

by officials and employees of private firms in accordance with a
reasonable private benefit plan maintained by the employer.179

Any amount received by an employee or by his heirs from the

employer as a consequence of separation of such official or employee
from the service of the employer because of death, sickness, other
physical disability or for any cause beyond the control of the
employee.180

The social security benefits, retirement gratuities, pensions and

other similar benefits received by resident or nonresident citizens of
the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions.

Payments of benefits due or to become due to any person

residing in the Philippines under the laws of the United States
administered by the United States Veterans Administration

179

Requisites:

i. The retiring employee has been in the service of the same employer for at least 10
years.

ii. The retiring employee is not less than 50 years of age at the time of his retirement

iii. The benefits shall be availed of by an employee only once.

iv. That there be a reasonable private benefit plan as defined below.

180

i.e., the separation of the employee must be involuntary and not initiated by him

90
 Benefits received from or enjoyed under the Social Security
System.

Benefits received from the GSIS, including retirement gratuity

received by government officials and employees.

10) Income from any source whatever

All income not expressly excluded or exempted from the class of

taxable income, irrespective of the voluntary or involuntary action of
the taxpayer in producing the income.181
a) Forgiveness of indebtedness

The cancellation and forgiveness of indebtedness may,

dependent upon the circumstances, amount to:

1. a payment of income;
2. a gift; or
3. a capital transaction.

If, for example, an individual performs services for a creditor

who, in consideration thereof cancels the debt, income to that amount
is realized by the debtor as compensation for his service.

If, however, a creditor merely desires to benefit a debtor and

without any consideration thereof cancels the debt, the amount of the
debt is a gift from the creditor to the debtor and need not be included
in the latters gross income.

If a corporation to which a stockholder is indebted forgives the

debt, the transaction has the effect of payment of dividends.182

b) Recovery of accounts previously

written off

181

Gutierrez vs. Collector of Internal Revenue, CTA case no. 65, August 31, 1965.

182

Sec. 50, Rev. Reg. 2

91
 Bad debts claimed as a deduction in the preceding year(s) but
subsequently recovered shall be included as part of the taxpayers
gross income in the year of such recovery to the extent of the income
tax benefit of said deduction.183There is an income tax benefit when the
deduction of the bad debt in the prior year resulted in lesser income
and hence tax savings for the company.184

c) Receipt of tax refunds or credit

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

the practice of profession, is taxable income 185 in the year of receipt to
the extent of the income tax benefit of said deduction.186

183
Tax Benefit Rule

184

Sec. 4, RR 5-99

185

e.g., refund of fringe benefit tax

186

i.e., the tax benefit rule applies

However, the following tax refunds are not to be included in the computation of gross
income:

1. Philippine income tax, except the fringe benefit tax

2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a
credit for such tax in the year it was paid or incurred.

3.Estate and donors taxes

4. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (Special assessments)

5.ValueAddedTax

6. Fines and penalties due to late payment of tax

92
 Tax credit takes place upon the issuance of a tax certificate or
tax credit memo, which can be applied against any sum that may be
due and collected from the taxpayer.

d) Income from any source

whatever187

f. Source rules in determining income from

within and without188

The following items of gross income shall be treated as gross

income from sources within the Philippines:

1) Interests

Interests derived from sources within the Philippines, and

interests on bonds, notes or other interest-bearing obligation of
residents, corporate or otherwise.

2) Dividends

The amount received as dividends:

(a) from a domestic corporation; and

(b) from a foreign corporation, unless less than fifty percent
(50%) of the gross income of such foreign corporation for the three-

7.Final taxes

8. Capital Gains Tax

187

supra

188

Sec. 42

93
year period ending with the close of its taxable year preceding the
declaration of such dividends or for such part of such period as the
corporation has been in existence) was derived from sources within
the Philippines as determined under the provisions of this Section; but
only in an amount which bears the same ration to such dividends as
the gross income of the corporation for such period derived from
sources within the Philippines bears to its gross income from all
sources.

3) Services

Compensation for labor or personal services performed in the

Philippines.

4) Rentals

Rentals and royalties from property located in the Philippines or

from any interest in such property, including rentals or royalties for -

(a) The use of or the right or privilege to use in the Philippines any
copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial,
commercial or scientific equipment;

(c) The supply of scientific, technical, industrial or commercial

knowledge or information;

(d) The supply of any assistance that is ancillary and subsidiary to,
and is furnished as a means of enabling the application or enjoyment of, any
such property or right as is mentioned in paragraph (a), any such equipment
as is mentioned in paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);

(e) The supply of services by a nonresident person or his employee in

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

(f) Technical advice, assistance or services rendered in connection

with technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

94
 (ii) Films or video tapes for use in connection with television;
and
(iii) Tapes for use in connection with radio broadcasting.

5) Royalties189

6) Sale of real property

Gains, profits and income from the sale of real property located
in the Philippines.

7) Sale of personal property

Gains, profits and income from the sale of personal property

The following items of gross income shall be treated as income

from sources without the Philippines:

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

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

(3) Compensation for labor or personal services performed without

the Philippines;

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

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

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

8) Shares of stock of domestic

corporation

Gain from the sale of shares of stock in a domestic corporation

shall be treated as derived entirely form sources within the
Philippines regardless of where the said shares are sold.

189

See 4) Rentals, supra

95
 g. Situs of Income Taxation190
h. Exclusions from Gross Income191

Refers to income received or earned but is not taxable as

income because it is exempted by law or by treaty. Receipts which are
not in fact income are also excluded from Gross Income.192
1) Rationale for the exclusions

a) Life Insurance proceeds

represents indemnity not income

b) Amount Received by Insured as Return of Premium

the amount returned are not income but return of
capital. They represent earnings which were previously
taxed.

c) Gifts, Bequests, and Devises

- the property is subject to donors or estate taxes
as the case may be. Further, there is no income.

d) Compensation for Injuries or Sickness

- they are mere compensation for injuries or
sickness suffered and not income.

e) Income Exempt under Treaty

- the principle of reciprocity and comity among
nations.

2) Taxpayers who may avail of the

exclusions

190
See Inherent Limitations, Territorial, supra

191

See Sec. 32 (B)

192

Exclusions are in the nature of tax exemptions, thus, the claimant must establish them
convincingly.

96
 a) Individuals b) Corporations; and c) Estates and trusts

3) Exclusions distinguished from

deductions and tax credit

Exclusions refer to income received or earned but is not

taxable because by law or treaty. Such tax free income is not to be
included in the income tax return unless information regarding it is
specifically called for.193

Deductions refer to the items or amounts authorized by law to

be subtracted from the pertinent items of gross income to arrive at
taxable income.194

Tax credit an amount subtracted from an individuals or

entitys tax liability to arrive at the total tax liability.195
4) Under the Constitution

a) Income derived by the

government or its political
subdivisions from the exercise of
any essential governmental
function

Refers only to income derived by the Government or any of its

political subdivisions from:

1) any public utility; and

193

Sec. 61, Rev. Regs. No. 2

194

Secs. 34 and 35, NIRC

195

M.E. Holding Corp. vs. Commissioner of Internal Revenue, CTA Case No. 5314, prom.
August 17, 1998 citing Blacks Law Dictionary, 6 th Ed.

97
 (2) the exercise of any essential governmental function.196

5) Under the Tax Code

a) Proceeds of life insurance

policies

The proceeds of life insurance policies paid to the heirs or

beneficiaries upon the death of the insured, whether in a single sum
or otherwise.197

b) Return of premium paid

The amount received by the insured as a return of premiums

paid by him under life insurance, endowment, or annuity contracts,
either during the term or at the maturity of the term of the contract of
upon surrender.198
c) Amounts received under life
insurance, endowment or annuity
contracts199

196
Thus, income from sources other than those mentioned is subject to income tax.

197

Reason for exclusion: The contract of insurance is a contract of indemnity, hence, the
proceeds thereof are considered indemnity rather than a gain or profits.

Instances when proceeds from insurance are taxable:

a) Where proceeds are held by the insurer under an agreement to pay interest. The
interest is included in determination of gross income.

b) Where the transfer is for valuable consideration.

198

Reason for the exclusion: The return of premium is a mere return of capital. However,
where the included in the gross amount received exceed the aggregate premiums paid, the
excess shall be income

98
 d) Value of property acquired by
gift, bequest, devise or descent

The value the property acquired by gift, devise, or descent shall

be excluded. However, the income from such property, as well as gift,
bequest, devise, or descent of income from property, in cases of
transfers of divided interest, shall be included in gross income.

e) Amount received through

accident or health insurance

Amounts received, through Accident or Health Insurance or

under Workmens Compensation Acts, as compensation for personal
injuries or sickness, plus the amounts of any damages received,
whether by suit or agreement, on the account of such injuries or
sickness.200

f) Income exempt under tax treaty

Income of any kind, to the extent required by any treaty

obligation binding upon the Government of the Philippines.

g) Retirement benefits, pensions,

gratuities, etc.

a) Retirements benefits received under RA 7641 and those

received by officials and employees of private firms in accordance
with reasonable private benefit plan.201

199

See b.

200

Example of damages recovered from personal injuries: Moral damages for personal
injuries.

If the award of damages is to compensate loss of property or an award of damages to

compensate loss of income / profits, such is subject to tax.

201

Requisites:

99
 b) Any amount received by an official or employees or by his
heirs from the employer as a consequence of separation from service
due to death, sickness or other physical disability beyond the control
of the said official or employer.
c) Terminal leave and other social security benefits.202
d) Benefits received under the US veterans Administration.
e) Benefits received from SSS
f) Benefits received from GSIS

h) Winnings, prizes, and awards,

including those in sports
competition

1) The retiring official or employees has been in service of the same employer for at
least ten years.

2) Is not less than 50 yrs. of age at the time of his retirement and

3) Available to official or employee only once.

A reasonable private benefit plan means a pension; gratuity, stock bonus or profit
sharing plan maintained by an employer for the benefit of some or all of his employees

a) wherein contributions are made by such employer or employees, or both, for the
purpose of distributing to such employer the earnings and principal of the fund thus
accumulated; and

b) wherein said plan provides that at no time shall any part of the principal or income
of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of
said employee

202

The terminal leave pay of government employees whose employment is co-terminous is

exempt since it falls within the meaning of the phrase for any cause beyond the control of the
said official or employees (BIR Ruling 143-98)

100
 1) Prizes and Award - to be excluded, the following conditions
must concur:

(1) Prizes and award made primarily in recognition of

religious, charitable, scientific, educational, artistic,
literary, or civic achievement.
(2) The recipient was selected without any action on his
part to enter the contest or proceeding.
(3) The recipient is not required to render substantial
future services as a condition in receiving the award.

2) Prizes and Award in Sports Competition - All prizes and

award granted to athletes in local and international sports
competitions and tournaments whether held in the Phils. or abroad
and sanctioned by sports associations.

6) Under a Tax Treaty

To the extent required by any treaty obligation binding upon the

Philippine government.

7) Under Special Laws

1. Prizes received by winners in charity horse race

sweepstakes from PCSO.
2. Back pay benefits
3. Income of cooperative marketing association
4. Salaries and stipends in dollars received by non Filipino
citizens on the technical staff of IRRI (International Rice
Research Institutes).
5. Supplemental allowances per diem, benefits received by
officer or employees of the Foreign Service.
6. Income from bonds and securities for sale in the international
market.

i. Deductions from Gross Income203

203

These are items or amounts authorized by the law to be subtracted from the pertinent
items of the gross income to arrive at the taxable income. The term taxable income means the
pertinent items of gross income specified in the National Internal Revenue Code [Sec. 32], less
the deductions [Sec. 34] and/or personal and additional exemptions [Sec. 35], if appropriate,
authorized for such types of income by the Code or other special laws. [Sec. 31].

Who can avail of deductions?

101
 1) General rules

a) Deductions must be paid or

incurred in connection with the
taxpayers trade, business or
profession

It must be directly connected with trade or business or

profession of the taxpayer.

b) Deductions must be supported

by adequate receipts or invoices204

The claimed deduction must be evidenced by official receipts or

other adequate records.205

General rule: All taxpayers

Exception: Those earning compensation income arising from personal

services

rendered under an employer-employee

relationship

Basic Principles Governing Tax Deductions:

He who claims it must point to the specific provision of the statute authorizing it, and
he must be able to prove that he is entitled to it.

If the exemption is not expressly stated in the law, the taxpayer must at least be
within the purview of the exemption by clear legislative intent. However, if there is an express
mention in the law or if the taxpayer falls within the purview of the exemption by clear
legislative intent, the rule on strict construction against the taxpayer-claimant will not apply.

Unlike gross income, there is no catch-all provision for deductions. Deductions must
comply with the substantiation requirement.

204

except standard deduction

205

102
 2) Return of capital (cost of sales or
services)

a) Sale of inventory of goods by

manufacturers and dealers of
properties
b) Sale of stock in trade by a real
estate dealer and dealer in
securities
c) Sale of services

3) Itemized deductions206

a) Expenses207

The evidence must establish the following;

a) the amount of expenses being deducted

b) the direct relation of such to the development, management, operation, and/or

conduct of the trade, business or profession of the taxpayer.

206

The following can claim itemized deductions:

a. Corporations, whether domestic or (resident) foreign

b. General Professional Partnerships

c. Individuals engaged in trade, profession or business (citizen, resident alien, non-

resident alien doing business in the Philippines)

d. Estates and trusts engaged in trade or business

e. Proprietary educational institutions and hospitals (non-profit)

f. Government-owned or controlled corporations

Only individuals, except non-resident aliens, can elect between itemized deductions
and optional standard deduction.

207

Sec. 34(A)

103
 (1) Requisites for
deductibility

1. It must be ordinary and necessary.

2. It must be paid or incurred during the taxable year.
3. It must be paid or incurred in carrying on or which are
directly attributable to the development, management, operation
and/or conduct of the trade, business or exercise of a profession.
4. The amount must be reasonable.
5. It must be substantiated with sufficient evidence, such as
official receipts or other adequate records, showing:

i. the amount of the expense being deducted, and

ii. the direct connection or relation of the expense being
deducted to the development, management, operation and/or
conduct of the trade, business or profession of the taxpayer.

6. It is not contrary to law, public policy or morals.

7. The tax required to be withheld on the amount paid or
payable must have been paid to the BIR by the taxpayer, who is
constituted as a withholding agent of the government.208

(a) Nature: Ordinary

and necessary209

Only deductions allowable are ordinary and necessary trade, business or professional
expenses

208

For instance, withholding tax on compensation income paid to employees, fringe

benefit tax on fringe benefits given to managerial and supervisory employees, etc. ( Sec. 2.58.5,
RR 2-98 as amended by Sec. 6, RR 14-2002)

209

The two conditions must concur. A court may decide on when an expense is, or is
not, ordinary, but as much as possible, it will refuse to substitute its judgment for that of the
taxpayer on the necessity of an expense.

104
 Ordinary expenses which are commonly incurred in the trade
or business of the taxpayers as distinguished from capital
expenditures. An expense is ordinary if it is normal or usual to the
line of business.

Necessary expenses which are appropriate and helpful to the

taxpayers business or if it is intended to realized profit or to minimize
a loss.

(b) Paid and incurred

during taxable year

Paid the payment is on cash receipt basis, expenses are

deductible in the year they are incurred.

Incurred the payment thereof is on accrual basis, expenses are

deductible in the year they are incurred, whether paid or not.

(2) Salaries, wages and other

forms of compensation for
personal services actually
rendered, including the
grossed-up monetary value
of the fringe benefit
subjected to fringe benefit
tax which tax should have
been paid210

(3) Travel/Transportation
expenses211

210

Sec. 34 (A)(1)(a)(i)

211

For travel expenses, here and abroad, while away from home, in the pursuit of trade,
business or profession.

Include meals and lodging, here and/or abroad.

While away from home means away from principal place of business

105
 (4) Cost of materials

(5) Rentals and/or other

payments for use or
possession of property212

(6) Repairs and

maintenance213

(7)Expenses under lease

agreements214

(8) Expenses for

professionals

If the trip is undertaken for purposes other than business or exercise of profession, the
transportation expenses are personal expenses and the meals and lodging are living expenses
and are not deductible.

Transportation expenses of an employee from his residence to his office and back are
not deductible. They are personal expenses. However, transportation expenses from his office
to his customers place of business and back are deductible. They are business expenses.

212

Required as a condition for the continued use or possession, for purposes of the trade,
business or profession, of property to which the taxpayer has not taken or is not taking title or in
which he has no equity other than that of a lessee, user or possessor.

213

Extraordinary repairs - those in the nature of replacements, alteration, and expansion to

the extent that they arrest deterioration and prolong the life of the property.

Ordinary repairs - those made to keep the property ordinarily efficient working
condition and do not materially add to the value of the property

214

See 5) Rentals, etc., supra

106
 (9) Entertainment expenses

(10) Political campaign

expenses

(11) Training expenses

b) Interest215

(1) Requisites for

deductibility

a) there must be indebtedness.

b) the indebtedness must be that of the taxpayer
c) the indebtedness must be connected with the trade, business or
profession of the taxpayer
d) the interest must have been paid or incurred during the taxable
year
e) the interest must have been stipulated in writing
f) the deduction for interest expense shall be reduced by an amount
equal to 38% of the interest income subject to final tax. 216
g) The interest payment arrangement must not be between
related taxpayers as mandated in Sec. 34(B)(2)(b), in relation to Sec.
36(B),217 both of the Tax Code of 1997.
h) The interest must not be incurred to finance petroleum operations.

215

The amount of interest paid or incurred within a taxable year on indebtedness in

connection with the taxpayer's profession, trade or business shall be allowed as
deduction from gross income. (Sec. 34, B (1))

216

beginning Jan. 1, 2000

217

infra

107
 i) In case of interest incurred to acquire property used in trade,
business or exercise of profession, the same was not treated as a capital
expenditure.

(2) Non-deductible interest

expense

1) Interest paid in advance by a taxpayer reporting income on

cash basis provided:

a) Such interest may be allowed as deduction in the year the

indebtedness is paid: and

(b) If the indebtedness is payable in periodic amortization -- the

interest corresponding to the amortized principal may be
deducted during the taxable year.

(2) If the indebtedness is incurred to finance petroleum

exploration.

(3) Interest on loans between related taxpayer:

(a) between members of a family

- Brothers and sisters218

- Spouse
- Ancestors
- Lineal descendants

(b) between an individual and a corporation --- where more than 50

% in the value of outstanding capital stock is owned by such
individual except in the case of distribution in liquidation.

(c) between two corporations where more than 50% of the OCS
of which is owned directly or indirectly by or for the same
individual except distribution in liquidation.

(d) between the Grantor and the fiduciary in Trust

(e) between the fiduciary of a trust and a fiduciary of another trust

if the same person is a grantor with respect to each trust.

218

whether full or half-blood

108
 (4) In the case of banks and loan or trust companies, interest
paid within the year on deposits or on savings received for investment
and secured by interest-bearing certificates of indebtedness issued by
such bank or company.

(3) Interest subject to special

rules

(a) Interest paid in

advance

If within the taxable year an individual taxpayer reporting

income on the cash basis incurs an indebtedness on which an interest
is paid in advance through discount or otherwise: Provided, That such
interest shall be allowed as a deduction in the year the indebtedness
is paid: Provided, further, That if the indebtedness is payable in
periodic amortizations, the amount of interest which corresponds to
the amount of the principal amortized or paid during the year shall be
allowed as deduction in such taxable year.

(b) Interest
periodically
amortized219

(c) Interest expense

incurred to acquire
property for use in
trade/business/professi
on

At the option of the taxpayer, interest incurred to acquire

property used in trade business or exercise of a profession may be
allowed as a deduction or treated as a capital expenditure.220

219

See a), above

220

Sec. 34 (B)(3)

109
 c) Taxes221

(1) Requisites for

deductibility

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

2. It must be paid or incurred in connection with the
taxpayers trade, profession or business. 222
3. It must be imposed directly on the taxpayer.
4. It must not be specifically excluded by law from being
deducted from the taxpayers gross income.

(2) Non-deductible taxes

221

The word taxes means taxes proper and no deduction should be allowed for
amounts representing interest, surcharge, or penalties incident to delinquency. (Sec. 80, RR-2)

222

Examples:

1) Import duties

2) Business taxes

3) Occupation taxes

4) Privilege and license taxes

5) Excise taxes

6) Documentary stamp taxes

7) Automobile registration fees

8) Real property taxes

Limitation: In the case of a nonresident alien individual engaged in trade or

business (NRAETB) and a resident foreign corporation (RFC), the deductions for taxes shall be
allowed only if and to the extent that they are connected with income from sources within the
Philippines.

110
 1. Foreign income tax, if not claimed as tax credit 223
2. Final Taxes
3. Estate and donors taxes
4. Stock transaction tax on the sale, barter or exchange of s/s listed
and traded through the local stock exchange.
5. Taxes assessed against local benefits tending to increase the value
of the property224
6. Taxes which are not in connection with the trade, business or
profession of taxpayer.
7. Income tax imposed by the Philippine govt.
8. Value added Tax (VAT)225
9. Energy Taxes

223

Income tax imposed by a foreign country are deductible only if:

a) the taxpayer is qualified to avail of tax credit;

b) He does not signify in its return his desire to avail of the same.

The right to deduct income taxes paid to a foreign government is given only as an
alternative or substitute to his right to claim a tax credit for such foreign income taxes.

Limitation on deduction

a) non resident alien engaged in trade or business in the Phils.

b) resident foreign corporation --- the deductions for taxes shall be allowed only if
and to the extent that they are connected with income from sources within the Phils.

224

special assessment or levies

225

To be deductible, the taxes must be imposed by law and payable by the taxpayer. Thus,
a value- added tax is not deductible by the customer upon whom the burden of the tax is shifted
by the seller. However, the customer may consider the tax burden as part of his cost as an
ordinary or capital expenditure if incurred in business or trade.

111
 (3)Treatment/of
surcharges/interests/fines/for
delinquency226

(4) Treatment of special

assessment

A special assessment227 is levied on land.

A special assessment is not a personal liability of the person
assessed; it is limited to the land.
A special assessment is based wholly on benefits, not necessity.
A special assessment is exceptional both as to time and place.

226

See (F)(3)(a)(2), under Tax Remedies under the NIRC, infra

227

an enforced proportional contribution from owners of lands, especially or peculiarly

benefited by public improvements.

112
 (5) Tax credit228 vis--vis
deduction

Tax Credit Tax deduction

-- deducted from -- deducted from
Phil income tax the gross income
-- all taxes are -- only foreign
allowed to be income taxes
deducted with the may be claimed
exception of the as credits
taxes expressly
excluded

d) Losses

228

refers to the taxpayers right to deduct from the income tax due, the amount of tax he
has paid to foreign country.

Persons entitled to tax credit

1 .Resident Citizen of the Philippines

2. Domestic Corp. except General Professional Partnership

3. Members of the GPP

4. Beneficiaries of Estates and Trusts.

Persons not entitled to Tax credit

1. Non Resident Citizen

2. Aliens, whether residents or non residents

3. Foreign Corporation, whether residents or non - residents

113
 Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be
allowed as deductions:

1) If incurred in trade, profession or business;

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

(1) Requisites for

deductibility229

a) The loss must be that of the taxpayer.230

b) There must be an actual loss suffered in a closed and completed
transaction.231
c) The loss must be connected with the taxpayers trade, business or
profession.
d) The loss must not be compensated for by insurance or otherwise.
e) The loss must be actually sustained and charge off during the
taxable year.232

229

Despite concurrence of requisites, when is loss nonetheless NOT deductible?

In computing net income, no deductions shall in any case be allowed in respect

of losses from sales or exchanges of property directly or indirectly [between related
taxpayers (Sec. 36 (B) ]

230

The loss is personal to the taxpayer and is not transferable or usable by another. The
loss of a predecessor partnership is not deductible by a successor corporation. The loss of the
parent company may not be deducted by its subsidiary.

231

closed transaction means that taxable year when the amount of loss was finally
ascertained.

232

114
 f) In the case of casualty loss, declaration of loss 233 must be
filed within 45 days from the occurrence of the casualty loss. 234
g) The loss must not be claimed as deduction for estate tax purposes
in the estate tax return.

(2) Other types of losses

(a) Capital losses

(a) Losses from sale or exchange of capital assets.

b) Losses resulting from securities becoming worthless and
which are capital assets235
(c) Losses from short sales of property.
(d) Losses due to failure to exercise privilege or options to buy
or sell.

The deduction shall be in full or not at all.

However, if the loss is compensated by insurance or otherwise, the loss is postponed

to a subsequent year in which it appears that no compensation at all can be had, or there is a
remaining net loss (or there is no full compensation). Deduction will be denied if there is a
measurable right to compensation for the loss, with ultimate collection reasonably clear. So
where there is reasonable ground for reimbursement, the taxpayer must seek his redress and
may not secure a loss deduction until he establishes that no recovery may be had. In other
words, the taxpayer must first exhaust his remedies to recover or reduce his loss. ( Plaridel Surety
and Insurance Co. v. Collector, 21 SCRA 1187)

233

Sworn Declaration of Loss

234

RR 12-77

235

A mere loss on account of the shrinkage in value of securities or shares of stock is not
deductible. The loss to be deducted must be actually suffered when the stock is disposed.

115
 (b) Securities
becoming worthless

If any securities which are capital assets, are ascertained to be

worthless and charged-off within the taxable year, the loss resulting
therefrom to the taxpayer236 is not considered as a bad debt but as a
capital loss.

(c) Losses on wash

sales of stocks or
securities

Loss on wash sales not deductible when:

1) A taxpayer who is not a dealer of stocks in trade has

disposed shares and
2) Within the period of 60(sixty) days beginning 30 days before
the date of such sale and ending 30 days after such date.
3) The taxpayer has acquired substantially identical stocks or
securities.237

(d) Wagering losses

Wagering losses are deductible only to the extent of the gains

from such wagering transaction. If there is no gain from the wagering
transaction, the loss therefrom cannot be deducted from gross
income.238

(e) NOLCO

236

other than a bank or trust company incorporated under the laws of the Phil.

237

However, if losses from wash sales are claimed by a dealer in securities in the ordinary course
of business, such losses are deductible.

238

Wagering transactions - are those in which the outcome is uncertain or those that
involve games of chance.

116
 Net Operating Loss denotes the excess of allowable deductions
over gross income.

Net Operating loss Carry over it means that the net

operating loss for the taxable year immediately preceding the current
taxable year shall be carried over as a deduction from gross income
for the next three (3) consecutive taxable yrs. immediately following
the year of such loss.239
e) Bad debts

239

Limitations of availability of NOLCO

a) There must be no substantial change in ownership of the business or enterprise in

that:

1. Not less than 75% in nominal value of the outstanding issued shares, if the
business is on the name of the corporation, is held by or on behalf of the same persons; or

2. Not less than 75% of the paid up capital of the corporation, if the business is in the
name of the corporation, is held by or on behalf of the same persons.

b) Where one business operation is income tax exempt and the other is not, the
losses in the latter operations are not deductible from the profits in the taxable operation.

c) Any net loss incurred in a taxable year during which the taxpayer was exempt from
income tax shall not be allowed to be carried over to the next three years.

NOLCO For mines other than oil and gas wells - the net operating loss of mines
incurred in the first 10 yrs. of operation shall be carried over to the next five (5) yrs following the
loss.

117
 Debts due to the taxpayer when actually ascertained to be
worthless240 and charged-off within the taxable year.241

They refer to those debts resulting from the worthlessness or

uncollectibility, in whole or in part, of amounts due to the taxpayer by
others, arising from money lent or from uncollectible amounts of
income from goods sold or services rendered.242

(1) Requisites for

deductibility

1) There must be a valid and subsisting debt.243

2) The same must be connected with the taxpayers trade, business or
practice of profession.
240

In general, a debt is not worthless simply because it is of doubtful value or difficult to

collect. Worthlessness is not determined by an inflexible formula or slide rule calculation but
upon the exercise of sound business judgment. The determination of worthlessness in a given
case must depend upon the particular facts and the circumstances of the case. A taxpayer may
not postpone a bad debt deduction on the basis of a mere hope of ultimate collection or
because of a continuance of attempts to collect notes which have long become overdue, and
where there is no showing that the surrounding circumstances differ from those relating to
other notes which were charged off in a prior year. While a mere hope probably will not justify
postponement of the deduction, a reasonable possibility of recovery will permit the account
to be carried along notwithstanding that the probabilities are that the debt may not be
collected at all.

241

Sec.34 [E1]

242

Sec.2 [a], Rev. Regs. No.5-99

243

A valid and subsisting debt is one the collection of which may be enforced in a court of
law. A debt which had prescribed is no longer valid and subsisting.

118
 3) The same must not be sustained in a transaction entered into
between related parties enumerated under Sec. 36 (B)244 of the NIRC.
4) The same must be actually charged-off the books of accounts of the
taxpayer as of the end of the taxable year.245
5) The same must be actually ascertained to be worthless and
uncollectible as of the end of the taxable year .246

f) Depreciation

244

The said section provides:

In computing net income, no deduction shall in any case be allowed in respect of

losses from sales or exchange of property directly or indirectly.

i. Between members of a family. For the purpose of this paragraph, the family of an
individual shall include only his brothers and sisters (whether by the whole half-blood), spouse,
ancestors, and lineal descendants; or

ii. Except in the case of distributions in liquidation, between an individual and a

corporation more than fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for such individual; or

iii. Except in the case of distributions in liquidation, between two corporations more
than fifty percent (50%) in value of the outstanding stock of each of which is owned, directly or
indirectly, by or for the same individual, if either one of such corporations, with respect to the
taxable year of the corporation preceding the date of the sale or exchange was, under the law
applicable to such taxable year, a personal holding company or a foreign personal holding
company;

iv. Between the grantor and a fiduciary of any trust; or

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

vi. Between a fiduciary of a trust and a beneficiary of such trust.

245

A partial writing-off of a bad debt is not allowed; it must be charged-off in full or not at
all (Fernandez Hermanos, Inc. vs. Commissioner, 29 SCRA 552; Philippine Refining Co. vs. Court of
Appeals, 70 SCAD 544, 256 SCRA 667).

119
 The gradual diminution in the useful value of tangible property
used in trade or business resulting from exhaustion, wear and tear,
and normal obsolescence.

The term is also applied to amortization of value of intangible

assets the use of which in trade or business is definitely limited in
duration.247

(1) Requisites for

deductibility

a) The allowance for depreciation must be reasonable248

b) It must be for property arising out of its use or employment in the
business or trade, or out of its not being used temporarily during
the year249
c) It must be charged-off during the taxable year; 250
d) A statement on the allowance must be attached to the return.
e) The property must have a limited useful life.

246

In general, a debt is not worthless simply because it is of doubtful value or difficult to collect.
Worthlessness is determined upon the exercise of a sound business judgment. The determination of
worthlessness in a given case must depend upon the particular facts and circumstances of the case.

247

Basilan Estates, Inc. vs. Comm., 21 SCRA 17

248

Bacolod-Murcia Milling Co. Inc. vs. Comm., CTA Case No. 1402, Oct. 31, 1969

249

Connel Bros. Co. vs. Collector, CTA Cases No. 411 & 610, April 30, 1966).

250

The deduction must be made in the year in which the wear & tear occurs. Depreciation
may not be accumulated.

120
 (2) Methods of computing
depreciation allowance

(a) Straight-line
method251

This method spreads the total depreciation over the useful life
of the asset and generally results in an equal depreciation per unit of
time regardless of the use to which the properties are put.
(b) Declining-balance
method

This method uses a rate252 to the declining book value of the

asset. Depreciation is largest in amount the first year and declines in
the years thereafter.

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

This method requires the application of a changing fraction to

the cost basis of the property, reduced by the estimated residual
salvage value.

g) Charitable and other

contributions253

251

Fixed Percentage Method

252

usually 1.5 or 2 times the straight-line rate

253

Kinds of contributions allowed as deduction:

1) Ordinary or contributions with limit or subject to limitation
2) Special or contributions deductible in full

121
 (1) Requisites for
deductibility

1) The contribution must actually be paid or made to the Phil.

Government or any of its agencies or political subdivision or to any
domestic corporations or associations specified by the Tax Code or
other entities as allowed by the Tax Code and existing special laws.
2) It must be made within the taxable year;
3) It must not exceed 10% of the individuals taxable income and 5%
of the corporations taxable income before deducting the
contribution (applicable only to contributions with limit); and
4) It must be evidenced by adequate records or receipts. 254

(2) Amount that may be

deducted

The following are subject to limit:255

1.) Donations to the Philippine government or any of its agencies or

any political subdivision thereof exclusively for public purposes;

2.) Donations to accredited domestic corporations or associations

organized and operated exclusively for:

a.) Religions;
b.) Charitable;
c.) Scientific;
d.) Youth and sports development;
e.) Cultural; or
f.) Educational purposes; or for the
g.) Rehabilitations of veterans; and

3.) Donations to social welfare institutions or to non-government

organizations in accordance with rules and regulations
promulgated by the Secretary of Finance, provided no part of
the net income of which inures to the benefit of any private
stockholders or individual.256

254

Sec. 34 (H)

255

5%/10%

256

122
 Contributions deductible in full under the Tax Code:

1.) Donations to the government of the Philippines or to any of its

agencies or political subdivisions including fully-owned
government corporations exclusively to finance, to provide for, or
to be used in undertaking priority activities in:

a.) Education;
b.) Health;
c.) Youth and sports development;
d.) Human settlements;
e.) Science and culture; and
f.) Economic development

According to the national priority plan determined by NEDA

provided, that donations not in accordance with the said annual
priority plan shall be with limit;

2.) Donations to foreign institutions or international organizations in

pursuance or compliance with agreements, treaties, or
commitments entered into by the government of the and the
foreign laws or international organizations or in pursuance of
special laws, and

3.) Donations to certain accredited non-government organization. 257

h) Contributions to pension trusts

(1) Requisites for

deductibility258

1) The employer must have established a pension or retirement plan

to provide for the payment of reasonable pensions to its
employees;

Sec. 34 (H)(1)

257

see Sec. 34(H)( 2)

258

under Sec. 34 [J]

123
 2) The pension plan is reasonable and actuarially sound. 259
3) It must be funded by the employer; i.e., the employer contributes
cash to the plan;
4) The amount contributed must no longer be subject to its control or
disposition; and
5) The payment has not therefore been allowed as a deduction.

4) Optional standard deduction

a) Individuals, except non-resident

aliens

The OSD allowed to individual taxpayers shall be a maximum of

forty percent (40%) of gross sales or gross receipts during the taxable
year. The cost of sales in case of individual seller of goods, or the
cost of services in the case of individual seller of services, is not
allowed to be deducted for purposes of determining the basis of the
OSD inasmuch as the law260 is specific as to the basis thereof which
states that for individuals, the basis of the 40% OSD shall be the
gross sales or gross receipts and not gross income261
b) Corporations, except non-
resident foreign corporations

The OSD shall be in an amount not exceeding forty percent

(40%) of their gross income.

5) Personal and additional exemption262

259

Sec. 118, Regs.

260

R.A. 9504, Minimum Wage Earner Law

261

Rev. Reg. No. 16-2008

262

R. A. 9504

124
 a) Basic personal exemptions

Fifty thousand pesos (P50,000) for each individual taxpayer.263

b) Additional exemptions for

taxpayer with dependents

Twenty-five thousand pesos (P25,000) for each dependent 264 not

exceeding four (4).265

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

263

Sec. 4, id.
In the case of married individual where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption.

264

means a legitimate, illegitimate or legally adopted child chiefly dependent upon and
living with the taxpayer if such dependent is not more than twenty-one (21) years of age,
unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of
self-support because of mental or physical defect.

265

In the case of legally separated spouses, additional exemptions may be claimed only by
the spouse who has custody of the child or children:

Provided, That the total amount of additional exemptions that may be claimed by
both shall not exceed the maximum additional exemptions herein allowed. (ibid)

125
 1. If taxpayer marries during taxable year, taxpayer may claim
the corresponding BPE266 in full for such year267

2. If taxpayer should have additional dependent(s) during

taxable year, taxpayer may claim corresponding AE 268 in full for such
year.

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

4. If during the taxable year

a. spouse dies, or
b. any of the dependents dies or marries, turns 21 years
old or becomes gainfully employed, taxpayer may still claim
same exemptions as if the spouse or any of the dependents died,
or married, turned 21 years old or became gainfully employed at
the close of such year.269

6) Items not deductible

266

Basic personal exemption

267

i.e., no need to pro- rate the exemption

268

additional exemption(s)

269

Sec. 35 (C)

126
 a) General rules

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

of the taxpayer.

b) Personal, living or family

expenses

These are not deductible from compensation and

business/professional income.270

c) Amount paid for new buildings

or for permanent improvements
(capital expenditures)

Does not apply to intangible drilling and development cost

incurred in petroleum operations which are deductible under Sec.34
(G)(1)271 of the NIRC (Depletion).

d) Amount expended in restoring

property272

They are capital expenditures or those expenditures that result

in obtaining benefits of a permanent nature such as lands, buildings
and machineries

e) Premiums paid on life insurance

policy covering life or any other
officer or employee financially
interested

270
under Sec. 24 (A)

271

See Reference

272

major repairs

127
 A person is said to be financially interested in the taxpayers
business, if he is a stockholders thereof or he is to receive as his
compensation a share of the property of the business.

f) Interest expense, bad debts, and

losses from sales of property
between related parties

Interest Expense

In general, the amount of interest paid or incurred within a

taxable year on indebtedness in connection with the taxpayer's
profession, trade or business.273
Bad Debts

In general, debts due to the taxpayer actually ascertained to be

worthless and charged off within the taxable year except those not
connected with profession, trade or business and those sustained in a
transaction entered into between parties mentioned under Section 36
(B) of this Code: Provided, That recovery of bad debts previously
allowed as deduction in the preceding years shall be included as part
of the gross income in the year of recovery to the extent of the income
tax benefit of said deduction.274

Losses from sales of property between related parties:

(1) Between members of a family;275 or

273
Sec. 34 (B)

274

Id., (E)

275

The family of an individual shall include only his brothers and sisters (whether by the
whole or half-blood), spouse, ancestors, and lineal descendants;

128
 (2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for such
individual; or
(3) Except in the case of distributions in liquidation, between two
corporations more than fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for the same individual if
either one of such corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was under the law
applicable to such taxable year, a personal holding company or a foreign
personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor with respect to
each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust. 276

g) Losses from sales or exchange

or property

In general, losses actually sustained during the taxable year and

not compensated for by insurance or other forms of indemnity:

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or
profession, if the loss arises from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement.277

h) Non-deductible interest

276

Sec. 36 (B)

277

Sec. 34 (D)(1)

129
 (a) interest paid in advance through discount or otherwise 278
allowed as deduction in the year the debt is paid if indebtedness is
payable in periodic amortizations, interest is deducted in proportion
of the amt. of the principal paid.

(b) payments made:

1. between members of a family279

2. between an individual & a corp. more than 50% in value of
outstanding stock is owned by such individual (except in case of
distributions in liquidation)
3. between 2 corps. more than 50% in value of outstanding
stock owned by same individual, if either one is a personal holding co.
or a foreign holding co. during the taxable yr. preceding the date of
sale/exchange
4. between grantor & fiduciary of any trust
5. between Fiduciary of a trust & the fiduciary of another if
same person is a grantor to each trust
6. between Fiduciary & a beneficiary of a trust
7. indebtedness is incurred by a service contractor to finance
petroleum corp.
8. interest on preferred stock which in reality is dividend
9. interest on unpaid salaries and bonuses
10. interest calculated for cost keeping on account of capital or
surplus invested in business which does not represent charges arising
under interest-bearing obligation
11. interest paid when there is no stipulation for the payment
thereof

i) Non deductible taxes

a) Philippine income tax280

278

in case of cash basis taxpayer

279

supra

280

but FBT can be deducted from gross income (RR 8-98)

130
 b) income tax imposed by authority of any foreign country
(except when the taxpayer signifies his desire to avail of the tax credit
for taxes of foreign countries)
c) estate & donors taxes
d) taxes assessed against local benefits of a kind tending to
increase the value of the property assessed
e) final taxes, being in the nature of income tax
f) special assessments

j) Non-deductible losses

1. Losses from Illegal Transactions

2. Losses from sales or exchanges of property between related
taxpayers281 but the gains are taxable

k) Losses from wash sales of stock

or securities

Not deductible unless claim is made by a dealer in

stock/securities & made in ordinary course of business.

j. Exempt Corporations

1. General Professional Partnerships282

Any other partnership is liable for corporate income tax.

2. Joint Venture under a service contract with the government

A merger of two (2) or more corporations for the purpose of engaging

in construction projects or energy operations pursuant to a consortium
agreement or a service contract with the government. The corporations

281

As provided under Sec. 36

282

Two (2) requisites to be exempt from corporate income tax:

1. It is formed by persons for the sole purpose of exercising their common profession;
and

2. No part of the income of which is derived from engaging in any trade or business.

131
comprising the joint venture or consortium must be engaged in the same
line of business.

It is only the joint venture or consortium itself which is exempt from

corporate income tax, not the income of each corporation from the joint
venture consortium. Thus, each corporation comprising of the joint venture
or consortium is liable for corporate income tax.283

3. Government-owned or controlled corporations:

i. Government Service Insurance System (GSIS),

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

Other exempt corporations:

The following organizations shall not be taxed in respect to income

received by them as such:

(A) Labor, agricultural or horticultural organization not organized

principally for profit;

(B) Mutual savings bank not having a capital stock represented by

shares, and cooperative bank without capital stock organized and operated
for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the

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

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

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

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

283
Batangas Land Transportation Co. vs. Collector, 102 Phil. 822

132
 (F) Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures to the
benefit of any private stock-holder, or individual;

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

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

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company,

mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character, the income of
which consists solely of assessments, dues, and fees collected from members
for the sole purpose of meeting its expenses; and

(K) Farmers, fruit growers, or like association organized and operated

as a sales agent for the purpose of marketing the products of its members
and turning back to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the

income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income, shall
be subject to tax imposed under this Code. 284

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

and Resident Aliens
a. General rule: Resident citizens Taxable on
income from all sources within and without
the Philippines

The tax base is net income.

b. Taxation on Compensation Income

1) Inclusions

a) Monetary compensation

(1) Regular salary/wage

284

Sec. 30

133
 Compensation income derived from an employer-employee
relationship in consideration of services rendered, except in the case
of a minimum wage earner.285

(2) Separation
pay/retirement benefit not
otherwise exempt

Separation pay received by an employee who voluntarily resigns

is subject to income tax. Retirements benefits may be subject to tax if
it does not comply with the provision of Sec. 32 (B)(6)(a).286
(3) Bonuses, 13th month pay,
and other benefits not
exempt

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

(4) Directors fees287

b) Non-monetary compensation

(1) Fringe benefit not subject

tax288

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

285
infra

286

See Reference

287

See (1) Regular salary/wage, supra

288

Sec. 33, consolidated with Sec. 2.33 (C), RR 03-98

134
 (2) Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file employees, whether

granted under a collective bargaining agreement or not; and

(4) De minimis benefits.289

(5) If the grant of fringe benefits to the employee is required by

the nature of, or necessary to the trade, business, or profession of the
employer.

(6) If the grant of the fringe benefits is for the convenience of

the employer.290

2) Exclusions

a) Fringe benefit subject to tax

Any good, service or other benefit furnished or granted in cash or in

kind by an employer to an individual employee 291 such as, but not limited to,
the following:

(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;

289

infra

290

Convenience of the employer rule

291

except rank and file employees

135
 (4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer
for the employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows.

b) De minimis benefits

Limited to facilities or privileges furnished or offered by an

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

(a) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per
month amounting to not more than P1,500; and

(b)Uniform and clothing allowance not exceeding P4,000 per

annum.292

c) 13th month pay and other

benefits and payments specifically
excluded from taxable
compensation income

Gross benefits received by officials and employees of public and

private entities: Provided, the total exclusion shall not exceed Thirty
thousand pesos (P30,000) which shall cover:

(i) Benefits received by officials and employees of the national and

local government pursuant to Republic Act No. 6686;

(ii) Benefits received by employees pursuant to Presidential Decree

No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;

292

RR 5-2008

136
 (iii) Benefits received by officials and employees not covered by
Presidential decree No. 851, as amended by Memorandum Order No. 28,
dated August 13, 1986; and

(iv) Other benefits such as productivity incentives and Christmas

bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000)
may be increased through rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at the end of the
taxable year.293

3) Deductions

a) Personal exemptions and

additional exemptions

A basic personal exemption amounting to Fifty thousand pesos

(P50,000) for each individual taxpayer.294

An additional exemption of Twenty-five thousand pesos (25,000)

for each dependent not exceeding four (4).295

293
Sec. 32 (e)

294

Sec. 35(A), as amended by R.A. 9504

In the case of married individual where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption

295

Sec. 35 (B), id.

The additional exemption for dependents shall be claimed by only one of the spouses
in the case of married individuals.

In the case of legally separated spouses, additional exemptions may be claimed only
by the spouse who has custody of the child or children:

Provided, That the total amount of additional exemptions that may be claimed by
both shall not exceed the maximum additional exemptions herein allowed

137
 b) Health and hospitalization
insurance

The amount of premiums not to exceed Two thousand four

hundred pesos (P2,400) per family or Two hundred pesos (P200) a
month paid during the taxable year for health and/or hospitalization
insurance taken by the taxpayer for himself, including his family:
Provided, said family has a gross income of not more than Two
hundred fifty thousand pesos (P250,000) for the taxable year, and in
the case of married taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction.296

c) Taxation of compensation
income of a minimum wage earner

(1) Definition of Statutory

Minimum Wage

The rate fixed by the Regional Tripartite Wage and Productivity

Board, as defined by the Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and Employment (DOLE)297

(2) Definition of Minimum

Wage Earner298

296

Sec. 34 (M)

297

Sec. 22, as amended by R.A. 9504

298

See II. (A) (6), Kinds of Taxpayers, supra

138
 (3) Income also subject to
tax exemption: holiday pay,
overtime pay, night shift
differential, and hazard pay299

c. Taxation of Business Income/Income from

Practice of Profession

Optional Standard Deduction (OSD) or Itemized deductions

Optional Standard Deductions 10 % of the gross income. May

be availed only by individuals300 who are not purely compensation
income earners. This is in lieu of the itemized deductions.

Premium payments on health and/or hospital insurance.301

Personal and additional exemptions.

d. Taxation of Passive Income

1) Passive income subject to final tax

a) Interest income

299

ibid

300

except nonresident aliens

301

if requisites are complied with

139
 Interest income derived by a resident individual 302 from a
depositary bank under the expanded foreign service deposit system
7.5%.

Interest income from long term deposit or investment evidenced

by certificates prescribed by BSP:

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

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

b) Royalties

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

compositions 20%

Royalties on books literary works and musical compositions 10%

c) Dividends from domestic

corporation

Cash and or property dividend actually or constructively

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

d) Prizes and other winnings

Prizes over P10,000 20%

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

Other winnings, except PCSO and Lotto, derived from sources

within the Philippines 20%

2) Passive income not subject to final tax

302

non-resident citizen not included

140
 Interest income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced
by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from final tax.303

e. Taxation of capital gains

1) Income from sale of shares of stock of

a Philippine corporation

a) Shares traded and listed in the

stock exchange

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

Tax on Sale, Barter or Exchange of Shares of Stock Listed and

Traded Through the Local Stock Exchange. - There shall be levied,
assessed and collected on every sale, barter, exchange, or other
disposition of shares of stock listed and traded through the local stock
exchange other than the sale by a dealer in securities, a tax at the
rate of one-half of one percent (1/2 of 1%) of the gross selling price or
gross value in money of the shares of stock sold, bartered, exchanged
or otherwise disposed which shall be paid by the seller or transferor.304

b) Shares not listed and traded in

the stock exchange

303

See Sec. 24 (B)(1)

304

Sec. 127 (A)

141
 A final tax at the rates prescribed below shall be imposed on net
capital gains realized during the taxable year from the sale, exchange
or other disposition of shares of stock in a domestic corporation
except shares sold or disposed of through the stock exchange:

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

Amount in excess of P100,000.. 10%305

2) Income from the sale of real property

situated in the Philippines

A final tax of six percent (6%) based on the gross selling price or
current fair market value, whichever is higher, upon capital gains
presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts xxx.306

3) Income from the sale, exchange, or

other disposition of other capital assets

A final tax of 6% on the gross selling price, or the current fair

market value at the time of the sale, whichever is higher.

11. Taxation of Non-resident Aliens Engaged in

Trade or Business

a. General rules

A nonresident alien individual engaged in trade or business in

the Philippines shall be subject to an income tax in the same manner
as an individual citizen and a resident alien individual, on taxable
income received from all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines and stay therein for
an aggregate period of more than one hundred eighty (180) days

305
Sec. 27 (D)(2)

306

Sec. 24 (D)

142
during any calendar year shall be deemed a 'nonresident alien doing
business in the Philippines.307

b. Cash and/or property dividends

10% final tax, by January 1, 2000, on the following:

a) Cash and or property dividend actually or constructively received

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

b) Share of an individual in the distributive net income after tax of a

partnership except a general professional partnership of which he is a
partner

c) Share of an individual in the net income after tax of an association,

joint account, or a joint venture or consortium taxable as a corporation of
which he is a member or a co-venture.308

c. Capital gains

Capital gains realized from sale, barter or exchange of shares of

stock in domestic corporations not traded through the local stock
exchange, and real properties shall be subject to the tax prescribed
under Subsections (C) and (D) of Section 24.309

[12. Exclude Non-resident Aliens Not Engaged in

Trade or Business]

13. Individual Taxpayers Exempt from Income Tax

307

Sec. 25 (A)(1)

308

Id., (A)(2)

309

Id., (A)(3)

143
 a. Senior citizens

Senior Citizen is:

1. any resident citizen of the Philippines

2. at least sixty 60 years old, including those who have retired

from both government offices and private enterprises, and

3. has an income of not more than sixty thousand pesos

(P60,000.00) per annum subject to the review of the National
Economic Development Authority(NEDA) every three (3) years.

b. Exemptions granted under international

agreements

NRAETB310 may deduct personal exemption 311 but only to the

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

14. Taxation of Domestic Corporations

a. Tax payable

1) Regular tax

An income tax of thirty-five percent (35%) 312 is hereby imposed

upon the taxable income derived during each taxable year from all

310

Non-resident alien engaged in trade or business

311

but not additional exemption

312

lowered to 30% beginning January 1, 2009 (R.A. 9337)

144
sources within and without the Philippines by every corporation, 313 and
taxable as a corporation, organized in, or existing under the laws of
the Philippines.314

2) Minimum corporate income tax

(MCIT)

a) Imposition of MCIT315

A tax rate of 2% is imposed on the gross income of domestic

corporations and resident foreign corporations.

b) Carry forward of excess

minimum tax

Any excess of the minimum corporate income tax (MCIT) over

the normal income tax shall be carried forward on an annual basis and
credited against the normal income tax for the three (3) immediately
succeeding taxable yrs.

313

The term "corporation" shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating consortium
agreement under a service contract with the Government. (Sec. 22(B))

314

Sec. 27 (A)

315

a. It is imposed beginning the fourth (4th) taxable year immediately following the
taxable yr. in which such corporation starts its business operation.

b. It is imposable only if such corporation has zero or negative taxable income or

whenever the amount of MCIT is greater than the Normal Corporate Income Tax (NCIT) due from
such corporation.

145
 c) Relief from the MCIT under
certain conditions

The Sec. of Finance, upon recommendation of the Commissioner

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

a. Prolonged labor dispute316

b. Legitimate business reverses317
c. Force majeure318
d) Corporations exempt from the
MCIT

The following corporations are not subject to MCIT:

(1.) Proprietary Educational Institution

(2.) Non-profit hospitals
(3.) Depository banks under expended FCDU
(4.) International carriers
(5.) Offshore Banking Units
(6.) ROHQs of resident foreign corp.

e) Applicability of the MCIT where

a corporation is governed both
under the regular tax system and a
special income tax system

316

e.g. strikes for more than 6 months

317

e.g. strikes for more than 6 months)

318

e.g. war

146
 Only one may be imposed. A minimum corporate income tax of
2% of the gross income xxx is imposed xxx on a corporation 319 xxx
when the minimum income tax is greater than the (net income tax)320

b. Allowable deductions

1) Itemized deductions

Business321 expenses which are ordinary and necessary in the

conduct of business.322

2) Optional standard deduction323

May be taken by an individual, in lieu of itemized deductions.324

319

domestic and resident foreign

320

Secs. 27 (E) and 28 (A)(2)

321

or professional

322

or in the exercise of profession

323

See also (9)(h)(4)(b), supra

324

Section 34(L)

Requisites:

147
 c. Taxation of Passive Income

1) Passive income subject to tax

a) Interest from deposits and yield

or any other monetary benefit from
deposit substitutes and from trust
funds and similar arrangements
and royalties

A final tax at the rate of twenty percent (20%) is hereby imposed

upon the amount of interest on currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds
and similar arrangements received by domestic corporations, and
royalties, derived from sources within the Philippines: Provided,
however, That interest income derived by a domestic corporation from
a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and
one-half percent (7 1/2%) of such interest income.325

b) Capital gains from the sale of

shares of stock not traded in the
stock exchange

On sale, barter, exchange or other disposition of shares

of stock of a
domestic corporation not listed and traded through a local stock
exchange, held as a capital asset:

On the net capital gain:

a. Available only to citizens and resident aliens

b. The standard deduction is optional; i.e., unless the taxpayer signifies in his return
his intention to elect this deduction, he is considered as having availed of the itemized
deductions.

c. Such election, when made by the qualified taxpayer, is irrevocable for the year in
which made; however, he can change to itemized deductions in succeeding years.

325

Sec. 27 (D)(1)

148
 Not over P100,000
Final Tax of 5%

On any amount in excess of P100,000

plus 10% Final tax on the excess

c) Income derived under the

expanded foreign currency deposit
system

Income derived by a depository bank under the expanded foreign

currency deposit system from foreign currency transactions with local
commercial banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
with foreign currency depository system units and other depository banks
under the expanded foreign currency deposit system, including interest
income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject
to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be
exempt from income tax.326

d) Intercorporate dividends

Dividends received by a domestic corporation from another

domestic corporation shall not be subject to tax.

e) Capital gains realized from the

sale, exchange, or disposition of
lands and/or buildings

On the sale, exchange or disposition of lands and/or buildings

which are not actually used in the business of a corporation and are
treated as capital assets.

On the gross selling price, or the current fair market value at

the time of the sale, whichever is higher, a final tax of 6%.327
326

Id., (D)(3)

327

Tax treatment is the same as that of individuals

149
 2) Passive income not subject to tax328

d. Taxation of Capital Gains

1) Income from sale of shares of stock329

2) Income from the sale of real property

situated in the Philippines330

3) Income from the sale, exchange, or

other disposition of other capital assets331

e. Tax on proprietary educational institutions

and hospitals

Proprietary educational institutions and hospitals which are

nonprofit shall pay a tax of ten percent (10%) on their taxable income
except those covered by Subsection (D) hereof: Provided, that if the
gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax
prescribed in Subsection (A) hereof shall be imposed on the entire
taxable income..332

328

supra

329
See 10 (e), Taxation of Capital Gains, supra

330

ibid

331

See (A)(10)(e)(3), under Taxation of Capital Gains, supra

332

150
 f. Tax on government-owned or controlled
corporations, agencies or instrumentalities

The provisions of existing special or general laws to the contrary

notwithstanding, all corporations, agencies, or instrumentalities
owned or controlled by the Government, except the Government
Service Insurance System (GSIS), the Social Security System (SSS),
the Philippine Health Insurance Corporation (PHIC), the Philippine
Charity Sweepstakes Office (PCSO) and the Philippine Amusement
and Gaming Corporation (PAGCOR), shall pay such rate of tax upon
their taxable income as are imposed upon corporations or
associations engaged in s similar business, industry, or activity.333

15. Taxation of Resident Foreign Corporations334

a. General rule

Sec. 27 (B)

A "Proprietary educational institution" is any private school maintained and

administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may
be, in accordance with existing laws and regulations.

333

The term 'unrelated trade, business or other activity' means any trade, business or
other activity, the conduct of which is not substantially related to the exercise or performance by
such educational institution or hospital of its primary purpose or function. (ibid)

Id., (C)

334

Income subject to Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross
Income Tax (GIT) under the subheading of domestic corporations is equally applicable to resident
foreign corporations, both as to concepts and computations, except that RFCs are taxed only on
income from sources within the Philippines.

151
 Resident foreign corporations are subject to any or some of the
following:

1. Capital Gain Tax

2. Final Tax on Passive Income
3. Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or]
Gross Income Tax (GIT)
4. Branch Profit Remittance Tax

b. With respect to their income from sources

within the Philippines

Normal corporate income tax rate at 35% 335 of net taxable

income from sources within the Philippines.

c. Minimum corporate income tax

At 2% of MCIT Gross Income from sources within the

Philippines. The MCIT is imposed on RFCs under the same conditions
as domestic corporations.336

d. Tax on certain income

(1) Interest from deposits and yield or

any other monetary benefit from deposit
substitutes, trust funds and similar
arrangements and royalties

Interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements and royalties derived from sources within the
Philippines shall be subject to a final income tax at the rate of twenty
percent (20%) of such interest: Provided, the interest income derived
by a resident foreign corporation from a depository bank under the
expanded foreign currency deposit system shall be subject to a final

335

Lowered to 30% beginning January 1, 2009

336

Sec. 28(A)(2)

152
income tax at the rate of seven and one-half percent (7 1/2%) of such
interest income.337

(2)Income derived under the expanded

foreign currency deposit system

Income derived by a depository bank under the expanded

foreign currency deposit system from foreign currency transactions
with local commercial banks including branches of foreign banks that
may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system units,
including interest income from foreign currency loans granted by such
depository banks under said expanded foreign currency deposit
system to residents, shall be subject to a final income tax at the rate
of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or

corporations, from transactions with depository banks under the
expanded system shall be exempt from income tax.338

(3) Capital gain from sale of shares of

stock not traded in the stock exchange

A final tax at the rates prescribed below is hereby imposed upon

the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock
exchange:

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

On any amount in excess of P100,000 10%

337
Sec. 28 (A)(7)(a)

338

Id., (A)(7)(c)

153
 (4) Intercorporate dividends339

16. Taxation of Non-resident Foreign Corporations

a. General rule

Non-resident foreign corporations are subject to any or

some of the following:

1. Capital Gains Tax

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

b. Tax on certain income

(1) Interest on foreign loans

A final withholding tax at the rate of twenty percent (20%) is

hereby imposed on the amount of interest on foreign loans contracted
on or after August 1, 1986.340

(2) Intercorporate dividends

15%, as long as the country in which the nonresident foreign

corporation is domiciled allows a tax credit for taxes deemed paid in
the Philippines equivalent to 20%.

20% represents the difference between the regular income tax

of 35% on corporations and the 15% tax on dividends

If the country within which the NRFC is domiciled does not

allow a tax credit, a final withholding tax at the rate of 35% is
imposed on the dividends received from a domestic corporation.341

339
supra

340

Sec. 28 (B)(5)(2)

341

154
 (3) Capital gains from sale of shares of
stock not traded in the stock exchange342

17. Improperly Accumulated Earnings of

Corporations

Every corporation formed or availed for the purpose of avoiding

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

18. Exemption from tax on corporations

A) Labor, agricultural or horticultural organization not organized

principally for profit;

(B) Mutual savings bank not having a capital stock represented by

shares, and cooperative bank without capital stock organized and operated
for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the

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

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

(E) Nonstock corporation or association organized and operated

exclusively for religious, charitable, scientific, athletic, or cultural purposes,
or for the rehabilitation of veterans, no part of its net income or asset shall

Sec. 28 (B)(5)(b)

In other words, the dividends are subject to the third kind of tax: Final Tax on [Other]
Gross Income from sources within the Philippines.

342

See 10 (e)(1)(b), under Taxation of capital gains

155
belong to or inures to the benefit of any member, organizer, officer or any
specific person;

(F) Business league chamber of commerce, or board of trade, not

organized for profit and no part of the net income of which inures to the
benefit of any private stock-holder, or individual;

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

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company,

mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character, the income of
which consists solely of assessments, dues, and fees collected from members
for the sole purpose of meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and

operated as a sales agent for the purpose of marketing the products of its
members and turning back to them the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the

income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income, shall
be subject to tax imposed under this Code. 343

19. Taxation of Partnerships344

343

Sec. 30

344

partnerships wherein all or part of their income is derived from the conduct of trade or
business

156
 Rules:

1. The partnership is subject to the same rules on corporations

(capital gains tax, final tax on passive income, normal tax, minimum
corporate income tax [MCIT] and gross income tax [GIT]), but is not subject
to the improperly accumulated earnings tax [IAET]. The partnership must
file quarterly and year-end income tax returns.

2. The taxable income of the partnership, less the normal corporate

income tax thereon, is the distributable net income of the partnership.

3. The share of a partner in the partnerships distributable net

income of a year shall be deemed to have been actually or constructively
received by the partners in the same taxable year and shall be taxed to them
in their individual capacity, whether actually distributed or not. 345 Such share
will be subjected to a final tax of 10% to be withheld by the
346
partnership.

20. Taxation of General Professional Partnerships347

345

Sec. 73(D)

346

Sec. 24(B)(2)

347

GPP is not a taxable entity The partnership is a mere mechanism or a flow-through

entity in the generation of income by, and the ultimate mechanism distribution of such income
to the individual partners. (Tan v. Commissioner [Oct. 3, 1994]) But, the partnership itself is
required to file income tax returns for the purpose of furnishing information as to the share in
the gains or profits which each partner shall include in his individual return. (RR 2- 1998)

The share of an individual partner in the net profit of a general professional

partnership is deemed to have been actually or constructively received by the partner in the
same taxable year in which such partnership net income was earned, and shall be taxed to
them in their individual capacities, whether actually distributed or not, at the graduated
income tax ranging from 5% to 32%. Thus, the principle of constructive receipt of income or
profit is being applied to undistributed profits of GPPs. The payment [to the partners] of such
tax-paid profits in another year should no longer be liable to income tax. (Mamalateo)

157
 Rules:

1. A GPP as such shall not be subject to the income tax.

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

3. For purposes of computing the distributive share of the

partners, the net income of the GPP shall be computed in the same manner
as a corporation.

4. Each partner shall report as gross income his distributive share,

actually or constructively received, in the net income of the partnership.

6. The share of a partner shall be subject to a creditable withholding

income tax of 15%.348

21. Taxation on Estates and Trusts

a) Application

The tax imposed upon individuals shall apply to the income of

estates or of any kind of property held in trust, including:

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

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

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

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

3. Income received by estates of deceased persons during the

period of administration or settlement of the estate; and
4. Income which, in the discretion of the fiduciary, may be
either distributed to the beneficiaries or accumulated.

348

RR 2- 1998

158
 b) Exception

The tax shall not apply to employee's trust which forms

part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees:

i. if contributions are made to the trust by such employer, or

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

ii. if under the trust instrument it is impossible, at any time

prior to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to be349 used for,
or diverted to, purposes other than for the exclusive benefit of his
employees.350

c) Determination of tax

1) Consolidation of income of two or

more trusts

Where, in the case of two or more trusts, the creator of the

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

2) Taxable income351

349

within the taxable year or thereafter

350

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

159
 General rule:

Any amount actually distributed to any employee or distributee

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

3) Revocable trusts

Where at any time the power to revest in the grantor title to

any part of the corpus of the trust is vested:

i. in the grantor either alone or in conjunction with any person

not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom, or

351

The taxable income of the estate or trust shall be computed in the same manner and on
the same basis as in the case of an individual, except that:

(A) There shall be allowed as a deduction in computing the taxable income of

the estate or trust the amount of the income of the estate or trust for the taxable year which is
to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income
collected by a guardian of an infant which is to be held or distributed as the court may direct,
BUT the amount so allowed as a deduction shall be included in computing the taxable
income of the beneficiaries, whether distributed to them or not. Any amount allowed as a
deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this
Section in the same or any succeeding taxable year.

(B) In the case of income received by estates of deceased persons during the period
of administration or settlement of the estate, and in the case of income which, in the discretion
of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be
allowed as an additional deduction the amount of the income of the estate or trust for its
taxable year, which is properly paid or credited during such year to any legatee, heir or
beneficiary but the amount so allowed as a deduction shall be included in computing the taxable
income of the legatee, heir or beneficiary.

(C) In the case of a trust administered in a foreign country, the deductions mentioned in
Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any
income included in the return of said trust shall not be included in computing the income of
the beneficiaries. (Sec. 61)

160
 ii. in any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, the
income of such part of the trust shall be included in computing the
taxable income of the grantor.352

4) Income for benefit of grantor

Where any part of the income of a trust

i. is, or in the discretion of the grantor or of any person

not having a substantial adverse interest in the disposition of such
part of the income may be held or accumulated for future distribution
to the grantor, or
ii. may, or in the discretion of the grantor or of any person
not having a substantial adverse interest in the disposition of such
part of the income, be distributed to the grantor, or
iii. is, or in the discretion of the grantor or of any person
not having a substantial adverse interest in the disposition of such
part of the income may be applied to the payment of premiums upon
policies of insurance on the life of
the grantor, such part of the income of the trust shall be included in
computing the taxable income of the grantor.353

5) Meaning of "in the discretion of the

grantor"

'In the discretion of the grantor' means in the discretion of the

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

22. Withholding tax

352

Exception

353

ibid

161
 a. Concept

This practice which is also known as taxation at source refers

to the requirement that taxes imposed or prescribed by the NIRC are
to be deducted and withheld by the payor-corporations and/or persons
from payments made to payees-corporations and/or persons for the
former to pay the same directly to the BIR.

b. Kinds

1) Withholding of final tax of certain

incomes

Subject to rules and regulations the Secretary of Finance may

promulgate, upon the recommendation of the Commissioner, requiring
the filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(1), 27(D)(2),
27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)
(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
28(B)(5)(c); 33; and 282 of this Code on specified items of income
shall be withheld by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as provided in
Section 58 of this Code.354

2) Withholding of creditable tax at

source

The Secretary of Finance may, upon the recommendation of the

Commissioner, require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the rate of not
less than one percent (1%) but not more than thirty- two percent
(32%) thereof, which shall be credited against the income tax liability
of the taxpayer for the taxable year.355

354

Sec. 57 (A); see Reference

355

Id., (B)

162
 c. Withholding on wages

1) Requirement for withholding

Every employer making payment of wages shall deduct

and withhold upon such wages a tax determined in accordance
with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner: No
withholding of a tax shall be required where the total compensation
income of an individual does not exceed the statutory
minimum wage, or five thousand pesos (P5,000.00) per
month, whichever is higher.356

2) Tax paid by recipient

If the employer fails to deduct and withhold the tax as

required, and thereafter the tax against which such tax may be
credited is paid, the tax so required to be deducted and withheld shall
not be collected from the employer; but in no case relieve the
employer from liability for any penalty or addition to the tax otherwise
applicable in respect of such failure to deduct and withhold.357

3) Refunds or credits

(1) Employer. - When there has been an overpayment of tax,

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

(2) Employees. - The amount deducted and withheld

during any calendar year shall be allowed as a credit to the recipient
of such income against the tax imposed under Section 24(A). 358
Refunds and credits in cases of excessive withholding shall be granted

356

Sec. 79 (A)

357

Id. (B)

163
under rules and regulations promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.

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

Refunds shall be made upon warrants drawn by the

Commissioner or by his duly authorized representative without the
necessity of counter- signature by the Chairman, Commission on Audit
or the latter's duly authorized representative as an exception to the
requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of
Book V of Executive Order No. 292, otherwise known as the
Administrative Code of 1987.359

4) Year-end adjustment

On or before the end of the calendar year but prior to the

payment of the compensation for the last payroll period, the employer
shall determine the tax due from each employee on taxable
compensation income for the entire taxable year in accordance
with Section 24(A).360 The difference between the tax due from the
employee for the entire year and the sum of taxes withheld from
January to November shall either be withheld from his salary in
December of the current calendar year or refunded to the employee
not later than January 25 of the succeeding year.361

358

See Reference

359

Id. (C)

360

supra

164
 5) Liability for tax

The employer shall be liable for the withholding and remittance

of the correct amount of tax required to be deducted and withheld. If
the employer fails to withhold and remit the correct amount of tax as
required to be withheld, such tax shall be collected from the employer
together with the penalties or additions to the tax otherwise
applicable in respect to such failure to withhold and remit.

Where an employee fails or refuses to file the withholding

exemption certificate or willfully supplies false or inaccurate
information thereunder, the tax otherwise required to be withheld by
the employer shall be collected from him including penalties or
additions to the tax from the due date of remittance until the date of
payment. On the other hand, excess taxes withheld made by the
employer due to:

(1) failure or refusal to file the withholding exemption

certificate; or
(2) false and inaccurate information shall not be refunded to
the employee but shall be forfeited in favor of the Government.362

d. Withholding of VAT

(a) The government or any of its political subdivisions,

instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and/or services taxed at twelve

361

Id. (H)

362

Sec. 80

165
percent (12%0 VAT pursuant to Secs. 106 and 108 363 of the Tax Code,
deduct and withhold a final VAT due at the rate of five percent (5%) of
the gross payment thereof.

The five percent (5%) final VAT withholding rate shall represent
the net VAT payable of the seller. The remaining seven percent (7%)
effectively accounts for the standard input VAT for sales of goods or
services to government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, in lieu of the actual
input VAT directly attributable or ratably apportioned to such sales.
Should actual input VAT attributable to sale to government exceeds
seven percent (7%) of gross payments, the excess may form part of
the sellers expense or cost. On the other hand, if actual input VAT is
less than seven percent (7%) of gross payment, the difference must be
closed to expense or account.

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

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

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

residents; and
(2) Other services rendered in the Philippines by non-
residents.364

e. Filing of return and payment of taxes

withheld

1) Return and payment in case of

government employees

363

supra

364

RR 16-2005, as amended by RR 4-2007

166
 If the employer is the Government of the Philippines or any
political subdivision, agency or instrumentality thereof, the return of
the amount deducted and withheld upon any wage shall be made by
the officer or employee having control of the payment of such wage,
or by any officer or employee duly designated for the purpose.365

2) Statements and returns

(A) Requirements. - Every employer required to deduct and withhold

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

(B) Annual Information Returns. - Every employer required to deduct

and withhold the taxes in respect of the wages of his employees shall, on or
before January thirty-first (31st) of the succeeding year, submit to the
Commissioner an annual information return containing a list of employees,
the total amount of compensation income of each employee, the total
amount of taxes withheld therefrom during the year, accompanied by copies
of the statement referred to in the preceding paragraph, and such other
information as may be deemed necessary. This return, if made and filed in
accordance with rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, shall be sufficient
compliance with the requirements of Section 68 of this Title in respect of
such wages.

(C) Extension of time. - The Commissioner, under such rules and

regulations as may be promulgated by the Secretary of Finance, may grant
to any employer a reasonable extension of time to furnish and submit the
statements and returns required under this Section. 366

f. Final withholding tax at source

365
Sec. 82

366

Sec. 83

167
 Subject to rules and regulations the Secretary of Finance may
promulgate, upon the recommendation of the Commissioner, requiring
the filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)
(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c),
28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)
(5)(c); 33; and 282 of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 58
of this Code.367

g. Creditable withholding tax

1) Expanded withholding tax

The Secretary of Finance may, upon the recommendation of the

Commissioner, require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the rate of not
less than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the
taxpayer for the taxable year.368

2) Withholding tax on compensation369

367

Sec. 57 (A), supra

368

Id. (B)

369

Elements of Withholding on Compensation:

168
 Every employer must withhold from compensation paid, an
amount computed in accordance with the regulations.

Exception:

Where such compensation income of an individual:

1. Does not exceed the statutory minimum wages; or

2. Five thousand pesos (P5,000) monthly (P60,000 a year)
-whichever is higher

h. Fringe benefit tax

A final tax of thirty-two percent (32%) is imposed on the

grossed-up monetary value of fringe benefit furnished or granted to
the employee370 by the employer, whether an individual or a
corporation, unless the fringe benefit is required by the nature of, or
necessary to the trade, business or profession of the employer, or
when the fringe benefit is for the convenience or advantage of the
employer.371

B. Estate Tax

1. Basic principles

The estate tax accrues as of the death of the decedent and the
accrual of the tax is distinct from the obligation to pay the same. Upon
1. There must be an employer-employee relationship

2. There must be payment of compensation or wages

for services rendered

3. There must be a payroll period

370

except rank and file employees

371

Sec. 33 (A)

169
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.372
Not a direct tax on the property transmitted or transferred
although its amount is based thereon.

2. Definition

A graduated tax imposed on the privilege of the decedent to

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

3. Nature

It is not a direct tax on property nor is it a capitation tax, that is,

the tax is laid neither on the property, nor on the transferee or
transferor, but on the right of the decedent to transmit his estate.

It is not a property tax but an excise tax.

4. Purpose or object

a) Benefit-Received Theory

For the performance of services rendered by the government in

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

b) Redistribution of Wealth Theory

Is a contributing factor to the inequalities in wealth and income.

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

c) Ability-to pay- theory

372

Sec. 3, RR 2-2003

170
 The receipt of inheritance places assets in the hands of the heirs
and beneficiaries thereby creating an ability to pay the tax and thus to
contribute to governmental income; and

d) Privilege theory or State Partnership theory

Inheritance is not a right but a privilege granted by the state

and large estates have been acquired only with the protection of the
state. The State, as a passive and silent partner in the accumulation
of property has the right to collect the share which is properly due to
it

5. Time and transfer of properties

At the time of death. The tax should not be construed as a direct

tax on the property of the decedent although the tax is based
thereon.

6. Classification of decedent

a) resident decedent
b) non resident alien decedent

7. Gross estate vis--vis Net estate

The total value of all property, whether real or personal,

tangible or intangible belonging to the decedent at the time of his
death, situated within or outside the Philippines, where such decedent
was a resident or citizen of the Philippines.

In the case of a nonresident alien decedent, it shall include only

property situated in the Philippines.

8. Determination of gross estate and net estate

Formula:

Gross Estate373

373

when the gross estate exceeds P2,000,000.00, the estate tax return shall be
accompanied by a statement, which is certified by an independent public accountant stating:

171
 Less: Allowable deductions
Estate after allowable deductions

Less: net share of surviving spouse on conjugal or community

property374
Family home allowance375

= Net estate of decedent

Less: P200, 000.00 exemptions

= Taxable net estate X Tax Rate in section 84.

= Amount of estate tax due

9. Composition of gross estate

Gross Estate. - the value of the gross estate of the decedent

shall be determined by including the value at the time of his death of
all property, real or personal, tangible or intangible, wherever
situated: Provided, however, that in the case of a nonresident
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 shall be included in his taxable estate.

(A) Decedent's Interest. - To the extent of the interest therein of the

decedent at the time of his/death;

1. The itemized assets of the decedent with its corresponding gross value at the time
of his death or in the case of a non-resident, not citizen of the Philippines that part of his gross
estate situated in the Philippines.

2. The itemized deductions from the gross estate.

3. The amount of tax due, whether paid or still due and outstanding.

374

if applicable

375

ibid

172
 (B) Transfer in Contemplation of Death. - To the extent of any interest
therein of which the decedent has at any time made a transfer, by trust or
otherwise, in contemplation of or intended to take effect in possession or
enjoyment at or after death, or of which he has at any time made a transfer,
by trust or otherwise, under which he has retained for his life or for any
period which does not in fact end before his death

(1) the possession or enjoyment of, or the right to the income

from the property, or

(2) the right, either alone or in conjunction with any person, to

designate the person who shall possess or enjoy the property or the
income therefrom; except in case of a bonafide sale for an adequate
and full consideration in money or money's worth.

(C) Revocable Transfer. -

(1) To the extent of any interest therein, of which the decedent

has at any time made a transfer 376 by trust or otherwise, where the
enjoyment thereof was subject at the date of his death to any change
through the exercise of a power 377 by the decedent alone or by the
decedent in conjunction with any other person (without regard to
when or from what source the decedent acquired such power), to
alter, amend, revoke, or terminate, or where any such power is
relinquished in contemplation of the decedent's death.

(2) For the purpose of this Subsection, the power to alter,

amend or revoke shall be considered to exist on the date of the
decedent's death even though the exercise of the power is subject to a
precedent giving of notice or even though the alteration, amendment
or revocation takes effect only on the expiration of a stated period
after the exercise of the power, whether or not on or before the date
of the decedent's death notice has been given or the power has been
exercised. In such cases, proper adjustment shall be made
representing the interests which would have been excluded from the
power if the decedent had lived, and for such purpose if the notice has
not been given or the power has not been exercised on or before the

376

except in case of a bona fide sale for an adequate and full consideration in money or
money's worth

377

in whatever capacity exercisable

173
 date of his death, such notice shall be considered to have been given,
or the power exercised, on the date of his death.

(D) Property Passing Under General Power of Appointment. - To the

extent of any property passing under a general power of appointment
exercised by the decedent: (1) by will, or (2) by deed executed in
contemplation of, or intended to take effect in possession or enjoyment at, or
after his death, or (3) by deed under which he has retained for his life or any
period not ascertainable without reference to his death or for any period
which does not in fact end before his death (a) the possession or enjoyment
of, or the right to the income from, the property, or (b) the right, either alone
or in conjunction with any person, to designate the persons who shall
possess or enjoy the property or the income therefrom; except in case of a
bona fide sale for an adequate and full consideration in money or money's
worth.

(E) Proceeds of Life Insurance. - To the extent of the amount

receivable by the estate of the deceased, his executor, or administrator, as
insurance under policies taken out by the decedent upon his own life,
irrespective of whether or not the insured retained the power of revocation,
or to the extent of the amount receivable by any beneficiary designated in
the policy of insurance, except when it is expressly stipulated that the
designation of the beneficiary is irrevocable.

(F) Prior Interests. - Except as otherwise specifically provided therein,

Subsections (B), (C) and (E) of this Section shall apply to the transfers,
trusts, estates, interests, rights, powers and relinquishment of powers, as
severally enumerated and described therein, whether made, created,
arising, existing, exercised or relinquished before or after the effectivity of
this Code.

(G) Transfers of Insufficient Consideration. - If any one of the

transfers, trusts, interests, rights or powers enumerated and described in
Subsections (B), (C) and (D) of this Section is made, created, exercised or
relinquished for a consideration in money or money's worth, but is not a
bona fide sale for an adequate and full consideration in money or money's
worth, there shall be included in the gross estate only the excess of the fair
market value, at the time of death, of the property otherwise to be included
on account of such transaction, over the value of the consideration received
therefor by the decedent.

(H) Capital of the Surviving Spouse. - The capital of the surviving

spouse of a decedent shall not, for the purpose of this Chapter, be deemed a
part of his or her gross estate.378

378

Sec. 85

174
 10. Items to be included in gross estate

In case of resident citizens, nonresident citizens and resident

aliens:

1. Real Property within and without the Philippines;

2. Tangible personal property within and without the Philippines; and
3. Intangible personal property within and without the Philippines.

In cases of nonresident aliens:

1. Real property within the Philippines;

2. Tangible personal property within the Philippines and;
3. Intangible personal property within the Philippines, unless there is
reciprocity in which case, it is not taxable.

11.Deductions from estate

The following are the expenses, losses, indebtedness and taxes

that may be allowed as deductions from the gross estate:

A) If decedent is a resident decedent:

Ordinary deductions:

1) Funeral Expenses379

379

The amount deductible is equal to 5% of the gross estate or the amount of the actual
funeral expenses whichever is lower, but in no case to exceed P200, 000.

Actual funeral expenses are those which were actually incurred in connection with
the interment or burial of the deceased and paid for from the estate of said deceased.

Funeral expenses include:

a) Costs of coffin, tombstone, mausoleum, and burial lot;

b) Funeral parlor fees;

c) Mourning clothing of the surviving spouse and the unmarried minor children;

d) Costs of obituary notices; and

e) Expenses during the wake

The following cannot be deducted under funeral expenses:

175
 2) Medical expenses380
3) Judicial expenses of the testamentary or intestate proceedings. 381
4) Claims against the decedents estate382
5) Claims against insolvent persons383
6) Unpaid mortgages indebtedness384
7) Casualty Losses385
8) Unpaid Taxes386
9) Vanishing deduction387
10) Transfer for public use388
11) Family home389

a) Cash advances of the surviving spouse and the heirs;

b) Expenses paid by the relatives and friends; and

c) Expenses after the burial.

380

Provided, that the following requisites are met:

a. Must be incurred by the decedent within one (1) year prior to his death

b. Must be duly substantiated by receipts; and

c. Must not exceed P500, 000.00.

381

Include administration expenses to those actually incurred in the administration of

the estate

Examples:

a) fees of the executor or administrator;

b) attorneys fees;

c) accountants fees;

d) court fees;

e) salaries of employees; and

All other expense related to the administration of the estate.

176
 12) Standard deduction equivalent to P1, 000,000.00 390
13) Amounts received by heirs under RA NO.4917 from the
decedents employer as a consequence of the death of the decedent
employee provided that such amount is included in the gross estate of
the decedent.
14) Net share of the surviving spouse in the conjugal / community
property.
15) Tax credit for estate tax paid to a foreign country.

B) If decedent is a non resident alien.

Expenses not essential to the proper settlement of the estate but incurred for the individual
benefit of the heirs, legatees, or devisees are not allowed as deductions.

382

Debts or obligations of the decedent that is enforceable against the estate provided that
the following requisites are met:

a) They were contracted in good faith and for an adequate and full consideration in
money or moneys worth.

b) They must be existing against the estate.

c) They must be legally enforceable obligations of the decedent and ought to be

enforced by the claimants.

d) They must be reasonably certain in amount; and;

e) At the time the indebtedness was incurred, the debt instrument was duly notarized
and if the loan was contracted within three (3) years before the death of the decedent, the
administrator or executor shall submit a statement showing the disposition of the proceeds of
the loan.

383

Requisites for deductibility:

a) The amount of said claims has been initially included as part of the gross estate;
and

b) The incapacity of the debtors to pay their obligations is proven and not merely
alleged.

177
 The deductions allowed to citizens or residents of the
Philippines are also extended to a non-resident alien decedent with
respect to his estates situated in the Philippines at the time of his
death.

In case of deductions for expenses, losses, indebtedness and

taxes, the amount of the allowable deduction is limited only to the
proportion of such deductions with the value of such part of his gross

384

Requisites for deductibility:

a) The fair market value of the property mortgaged without deducting the mortgage
indebtedness has been initially included as part of his gross estate; and

b) The mortgage indebtedness was contracted in good faith and for an adequate and
full consideration in money or moneys worth.

385

They include all losses incurred during the settlement of the estate arising from fires,
storms, shipwreck or other casualties or from robbery, theft or embezzlement.

Provided, that the following requisites are met:

a) Losses not compensated by an insurance or otherwise;

b) Losses not have been claimed as a deduction for income tax purposes; and

c) Losses incurred not later than the last day for payment of the estate tax (6 months
from death).

386

Unpaid income tax on income due or received before death of the decedent, and real
property taxes, which have accrued prior to the death of the decedent (real property taxes
accrued at the beginning of the year but may be paid before or at the end of each quarter) are
deductible.

Income taxes upon income received after the death of the decedent, or property
taxes not accrued before his death, or any estate tax cannot be deducted because they are

178
estate which at the time of his death, is situated in the Philippines,
bears to the value of his entire gross estate wherever situated.391

12. Exclusions from estate

The following properties are excluded from gross estate:392

1) Amount receivable by any beneficiary irrevocably designated in the

policy of insurance by the insured.

chargeable to the income of the estate.

387

property previously taxed

Is an amount allowed to reduce the taxable estate of a decedent where the property:

a. received by him from prior decedent by gift, bequest, devise or inheritance, or

b. transferred to him by gift, has been the object of previous transfer deduction.

It is so-called a vanishing deduction because the rate of deduction gradually

diminishes and entirely vanishes depending upon the time interval between the two (2)
successive transfers.

Two (2) factors necessary in vanishing deduction, these are;

a. There are two (2) deceased persons and the first is the donor; and

b. The second decedent dies within five (5) years after the death of the prior
decedent or in the case of gifts the decedent donee dies within the same period after the date
of the gift.

Rationale:

The deduction operates to ease the harshness of successive taxation of the same
property within a relatively short period of time.

388

Requisites:

a. The disposition must be testamentary in character.

179
 2) Proceeds of a group insurance policy taken out by a company for its
employees.
3) Proceeds of insurance policies issued by the GSIS to government
officials and employees.
4) Benefits accruing under the Social Security Act.
5) Proceeds of life insurance payable to the heirs of deceased members
of the military personnel of the United States Army or Philippine Army
under laws administered by the United State veterans Administration.
6) Accident insurance proceeds.393
7) Separate property of the surviving spouse.

b. To take effect after death.

c. In favor of the government of the Philippines, or any political subdivision thereof.

d. Exclusively for public purpose.

389

Refers to the dwelling house, including the land on which it is situated, where the
husband and wife, or an unmarried person who is the head of the family and members of their
immediate family resides as certified by the Barangay Captain of the locality.

For the purpose of availing of a family home deduction to the extent provided by law,
a person may constitute only one family home.

The amount deductible is equivalent to the current fair market value of the
decedents family home if said current fair market value exceeds P1, 000,000.00., the excess
shall be subject to estate tax.

Requisites to be deductible:

a. The family home must be the actual residential home of the decedent and his
family at the time of his death as certified by the barangay Captain of the locality where the
family is situated.

b. The total value of the family home must be included in the gross estate of the
decedent.

c. The allowable deduction must be in an amount equivalent to the current fair

market value of the family home as declared or included in the gross estate not exceeding P1,
000,000.00.

390

180
 13. Tax credit for estate taxes paid in a foreign
country

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

14. Exemption of certain acquisitions and

transmissions

a. The first P200, 000.00 value of the estate.394

b. The merger of the usufruct in the owner of the naked title.

does not include the P 200,000.00 exemption

391

Sec. 86 (B)

392

In the determination of the gross estate, the nature of the property, whether common
property of the spouses, separate or exclusive property either of the deceased or of the
surviving spouse, becomes of vital importance. What regime of property relations shall govern
the spouses?

Under the Civil Code, the husband and wife who got married before August 3, 1988
are governed by the Conjugal Partnership of Gains, while those who got married on or after
August 3, 1988 are governed by the Absolute Community of Property, unless a different regime
was agreed upon in the marriage settlement.

393

Items 1 6 are proceeds of insurance not includible in the gross estate of the decedent

394

Sec. 84

181
 c. The transmission from the first heir, legatee, or donee in favor of
another beneficiary in accordance with the desire of the predecessor.
d. All bequest, devises, legacies or transfers to social welfare, cultural
and charitable institutions, no part of the net income of which inured to the
benefit of any individual and provided that not more than 30% of the said
bequest, etc. shall be used by such institution for administration purposes.
e. Intangible personal property of non-resident aliens under the
principle of reciprocity.
f. Retirement benefits of employees of private firms from private
pension plans approved by the BIR.
g. Amount received for war damages.
h. Grants and donations to the Intramuros administration .

15. Filing of notice of death

Where the gross value of the estate exceeds twenty thousand

pesos (P 20,000.00) although exempt, the executor, administrator, or
any of the legal heirs shall give, within two (2) months after the
decedents death or within like period after the executor or
administrator qualifies as such, a written notice thereof, to the
Commissioner of Internal Revenue.395

16. Estate tax return

An estate tax return, under oath, is required by law to be filed

by the executor, administrator, or any of the legal heirs;

a) Where the gross value of the estate exceeds p200, 000.00 though
exempt from the estate tax; or
b) Regardless of the gross value of the estate, where the said estate
consists of registered or registrable real property, such as real
property, motor vehicle, shares of stock or other similar property
for which a clearance from the Bureau of Internal Revenue is
required as a condition precedent for the tr5ansfer of ownership
thereof in the name of the transferee.

C. Donors Tax

1. Basic principles

It is levied, assessed, collected and paid upon the transfer of any

person, resident or non-resident, of the property by gift inter vivos. It

395

Sec. 89

182
applies whether the transfer is in trust or otherwise, whether the gift
is direct or indirect, and whether the property is real or personal,
tangible or intangible.396

A gift is merely subjected to donors tax.

2. Definition

A tax on the privilege of transmitting ones property or property

rights to another or others without adequate and full valuable
consideration.

3. Nature

Gift or donation an act of liberality whereby a person disposes

gratuitously of a thing or right in favor of another who accepts it.397

4. Purpose or object

Donors tax shall be imposed whether the transfer is in trust or

otherwise, whether the gift is direct or indirect and whether the
property is real or personal, tangible or intangible.

5. Requisites of valid donation

1. The donor must have capacity

2. There must be an intent to donate
3. There must be delivery, either actual or constructive
4. The donee must accept the donation

6. Transfers which may be constituted as donation

396

Sec. 98

397

Art. 725, CC

183
 a. Sale/exchange/transfer of property for
insufficient consideration398

If bona fide sale no value shall be included in the gross estate.

If not a bona fide sale - the excess of the fair market value at the
time of death over the value of the consideration received by the
decedent shall form part of his gross estate.

If inter vivos transfer is proven fictitious - total value of the

property at the time of
death included in the gross estate.399

b. Condonation/remission of debt

If a creditor wishes merely to benefit the debtor, and without

any consideration therefore, cancels the debt, the amount of the debt
is a gift to the debtor and need not be included in the latters report of
income.

7. Transfer for less than adequate and full

consideration

Where property, other than real property referred to in Section

24(D),400 is transferred for less than an adequate and full consideration
in money or money's worth, then the amount by which the fair market
value of the property exceeded the value of the consideration shall,
for the purpose of the tax imposed, be deemed a gift, and shall be

398

Transfers that are not bona fide sales of property for an adequate and full consideration
in money or moneys worth

399

Sec. 85 (G)

400

real property located in the Philippines, classified as capital assets

184
included in computing the amount of gifts made during the calendar
year.401

8. Classification of donor

1. Citizens or Residents of the Philippines all properties

located not only within the Philippines but also in foreign countries

2. Nonresident Alien all real and tangible properties within the

Philippines, and intangible personal property, unless there is
reciprocity,402 in which case it is not taxable

9. Determination of gross gift

10. Composition of gross gift

Include real and personal property, whether tangible or

intangible, or mixed, wherever situated: Provided, however, That
where the decedent or donor was a nonresident alien at the time of
his death or donation, as the case may be, his real and personal
property so transferred but which are situated outside the Philippines
shall not be included as part of his "gross estate" or "gross gift".

11. Valuation of gifts made in property

401

Sec. 100

402

There is reciprocity if the foreign country of which the decedent was a citizen and
resident at the time of his death:

a) did not impose a transfer tax of any character, in respect of intangible personal
property of citizens of the Philippines not residing in that foreign country; or

b) allowed a similar exemption from transfer tax in respect of intangible personal

property owned by citizens of the Philippines not residing in that country (Sec. 104)

In sum, both states must exempt nonresidents (citizens of the other state) from
transfer taxes in respect of intangible personal property.

For the reciprocity rule to apply, there must be total reciprocity.

185
 If the gift is made in property, the fair market value thereof at
the time of the gift shall be considered the amount of the gift. In case
of real property, the provisions of Section 88(B) shall apply to the
valuation thereof.403

12. Tax credit for donors taxes paid in a foreign

country

In General. - The tax imposed by this Title upon a donor who

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

Limitations on Credit. - The amount of the credit taken under

this Section shall be subject to each of the following limitations:

(a) The amount of the credit in respect to the tax paid to any country
shall not exceed the same proportion of the tax against which such credit is
taken, which the net gifts situated within such country taxable under this
Title bears to his entire net gifts; and

(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the donor's
net gifts situated outside the Philippines taxable under this title bears to his
entire net gifts.404

13. Exemptions of gifts from donors tax

The following gifts or donations shall be exempt from the tax:

(A) In the Case of Gifts Made by a Resident. -

(1) Dowries or gifts made on account of marriage and before its

celebration or within one year thereafter by parents to each of their
legitimate, recognized natural, or adopted children to the extent of the first
Ten thousand pesos (P10,000):

403
Sec. 102.

404

Sec. 101 (C)

186
 (2) Gifts made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for profit, or to
any political subdivision of the said Government; and
(3) Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited nongovernment
organization, trust or philanthropic organization or research institution or
organization: Provided, however, That not more than thirty percent (30%) of
said gifts shall be used by such donee for administration purposes. For the
purpose of the exemption, a 'non-profit educational and/or charitable
corporation, institution, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or organization' is a
school, college or university and/or charitable corporation, accredited
nongovernment organization, trust or philanthropic organization and/or
research institution or organization, incorporated as a non-stock entity,
paying no dividends, governed by trustees who receive no compensation,
and devoting all its income, whether students' fees or gifts, donation,
subsidies or other forms of philanthropy, to the accomplishment and
promotion of the purposes enumerated in its Articles of Incorporation.

(B) In the Case of Gifts Made by a Nonresident Not a Citizen of

the Philippines. -

(1) Gifts made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for profit, or to
any political subdivision of the said Government.

(2) Gifts in favor of an educational and/or charitable, religious,

cultural or social welfare corporation, institution, foundation, trust or
philanthropic organization or research institution or organization: Provided,
however, That not more than thirty percent (30%) of said gifts shall be used
by such donee for administration purposes. 405

14. Person liable

There shall be levied, assessed, collected and paid upon the

transfer by any person, resident or nonresident, of the property by
gift, a tax, computed as provided in Section 99.

The tax shall apply whether the transfer is in trust or otherwise,

whether the gift is direct or indirect, and whether the property is real
or personal, tangible or intangible.406

405

Sec. 101

406

187
 15. Tax basis

(A) In General. - The tax for each calendar year shall be computed on
the basis of the total net gifts made during the calendar year in accordance
with the following schedule:

If the net gift is:

OVER BUT NOT THE TAX PLUS OF THE

OVER SHALL BE EXCESS OVER

P 100,000 Exempt
P 100,000 200,000 0 2% P100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000

(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or

beneficiary is stranger, the tax payable by the donor shall be thirty percent
(30%) of the net gifts. For the purpose of this tax, a "stranger", is a person
who is not a:

(1) Brother, sister (whether by whole or half-blood), spouse,

ancestor and lineal descendant; or
(2) Relative by consanguinity in the collateral line within the
fourth degree of relationship.

(C) Any contribution in cash or in kind to any candidate, political

party or coalition of parties for campaign purposes shall be governed by the
Election Code, as amended.

D. Value-Added Tax (VAT)

Sec. 98

188
 1. Concept

VAT is a percentage tax imposed at every stage of the

distribution process on the sale, barter, or exchange, or lease of goods
or properties, and on the performance of service in the course of trade
or business, or on the importation of goods, whether for business
or non-business purposes.

It is a business tax levied on certain transactions

involving a wide range of goods, properties, and services, such tax
being payable by the seller, lessor, or transferor. The tax is so- called
because it is imposed on the value not previously subjected to VAT.407

It is also an excise tax, or a tax on the privilege of engaging in

the business of selling goods or services, or in the importation of
goods.

The taxpayer408 determines his tax liability by computing the tax

on the gross selling price or gross receipt 409 and subtracting or
crediting the earlier VAT on the purchase or importation of goods or
on the sale of service (input tax) against the tax due on his own sale.

2. Characteristics

It is an indirect tax, the amount of which may be shifted to or

passed on the buyer, transferee, or lessee of the goods, properties or
services.410

407

De Leon, The National Internal Revenue Code Annotated, 2000 edition

408

seller

409

output tax

410

189
 This rule shall likewise apply to existing contracts of sale or
lease of goods, properties or services at the time of the effectivity of
RA No. 9337.411

It is equitable: The law is equipped with a threshold margin

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

VAT, by its very nature, is regressive. But the Constitution

does not really prohibit the imposition of indirect taxes 412. What
it simply provides is that Congress shall evolve a progressive system
of taxation. In Tolentino v. Sec. of Finance, the Court said that
direct taxes are to be preferred, and as much as possible, indirect
taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them.

The Constitution mandate to evolve a progressive system of

taxation simply means that direct taxes are to be preferred as much
as possible, and indirect taxes should be minimized. Resort to
indirect taxes should be minimized but not avoided entirely. Also, the
regressive effects are corrected by the zero rating of certain
transactions and through the exemptions. The transactions which
are subject to VAT are those which involve goods and services which
are used or availed of mainly by higher income groups.413

Sec. 105

411

RR 16-200523

412

which is essentially regressive

413

190
 3. Impact of tax414

The seller415 who shifts the burden to

4. Incidence of tax416

the customer who finally bears the incidence of the tax.

5. Tax credit method

This method relies on invoices, an entity can credit against or

subtract from the VAT charged on its sales or outputs the VAT paid on
its purchases, inputs and imports.417

real properties held primarily for sale to customers, right or privilege to use patent,
copyright...

414

The point on which a tax is originally imposed. In so far as the law is concerned, the
taxpayer is the person who must pay the tax to the government. He is also termed as the
statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax

415

manufacturer

416

That point on which the tax burden finally rests or

settle down. It takes place when shifting has been effected from the statutory

taxpayer to another

417

Commissioner of Internal Revenue v. Seagate Technology Philippines, G. R. No. 153866,

February 11, 2005 citing various cases and authorities; Abakada Guro Party List (etc.) v. Ermita,
etc., et al., G. R. No. 168056, September 1, 2005 and companion cases)

191
 If at the end of a taxable period, the output taxes charged by a
seller are equal to the input taxes passed on by the suppliers, no
payment is required. It is when the output taxes exceed the input
taxes that the excess has to be paid. If however, the input taxes
exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from
zero-rated or effectively zero-rated transactions or from acquisition of
capital goods, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue
taxes.418

6. Destination principle

VAT is imposed in the country in which the products or services

are actually consumed or used. Exports exempt, imports taxable.419

7. Persons liable420

A. Any person who, in the course of trade or business421

418

Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866,

February 11, 2005 citing various cases and authorities

419

Situs: country of Consumption.

420

Sec. 105

421

The phrase in the course of trade or business means the regular conduct or pursuit of
a commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-stock, nonprofit organization

192
 (1) sells, barters, exchanges goods or properties,
(2) leases goods or properties,
(3) renders services; and
(4) any person who imports goods. 422

8. VAT on sale of goods or properties

a. Requisites of taxability of sale of goods or

properties:

1) Value-added tax collection as a percentage of Gross Domestic

Product (GDP) of the previous year exceeds 2 4/5%; or
2) National government deficit as a percentage of GP of the previous
year exceeds 1 %.423

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

effectively zero-rated sales of goods or properties

1. Export Sales as provided in Section 106(A)(2)(a)424

2. Foreign Currency Denominated Sale as provided in Section 106 (A)
(2)(b)425

(irrespective of the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity (Sec. 105)

422

The importer, whether an individual or corporation and whether or not made in the
course of his trade or business, shall be liable to pay VAT. (RR 16-2005)

423

Sec. 106 (i)(ii)

424

See Reference

425

193
 3. Sale to persons or entities which is VAT exempt under special laws
or international agreements to which the Philippines is a signatory
as provided in Section 106 (A)(2)(c)
4. Transactions subject to zero-rated (0%) as provided in Section
108(B)426

10. Transactions deemed sale427

a. Transfer, use or consumption not in the

course of business of goods/properties originally
intended for sale or use in the course of business.

e.g. when a VAT-registered person withdraws goods from his

business for his personal use.428
b. Distribution or transfer to shareholders,
investors or creditors

Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-

registered persons; or (b) Creditors in payment of debt.429

Ibid.

426

Ibid.

427

Sec. 106 (B)

428

RR 16-2005

429

Property dividends which constitute stocks in trade or properties primarily held for sale
or lease declared out of retained earnings on or after Jan. 1, 1996 and distributed by the
company to its shareholders shall be subject to VAT based on the zonal value or FMV at

194
 c. Consignment of goods if actual sale not
made within 60 days from date of consignment

Consigned goods returned by the consignee within the 60-day

period are not deemed sold.430

d. Retirement from or cessation of business

with respect to inventories on hand

Retirement from or cessation of business, with respect to

inventories of taxable goods existing as of such retirement or
cessation431 as of the date of such retirement or cessation, whether or
not the business is continued by the new owner or successor.
Examples are change of ownership of the business 432 and
dissolution of a partnership and creation of a new partnership which
takes over the business.433

the time of the distribution, whichever is applicable. ( RR 16-2005)

430

RR 16-2005

431

with respect to all goods on hand, whether capital goods, stock-in-trade, supplies
or materials

432

e.g. when a sole proprietorship incorporates, or the proprietor sells his entire
business

433

RR 16-2005

195
 11.Change or cessation of status as VAT-registered
person

VAT shall apply to goods disposed of or existing as of a certain

date if under the circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person as a VAT-
registered person changes or is terminated. xxx

a. Subject to VAT

Subject to output tax - applicable to goods/properties

originally intended for sale or use in business and capital goods which
are existing as of the occurrence of the following:

1) Change of business activity from VAT

taxable status to VAT-exempt status

2) Approval of request for cancellation of

a registration due to reversion to exempt
status

3) Approval of request for cancellation of

registration due to desire to revert to
exempt status after lapse of 3
consecutive years434

b. Not subject to VAT

1) Change of control of a corporation

434

from the time of registration by a person who voluntarily registered despite being
exempt under Sec. 109 (2)

196
 Change of control of a corporation by the acquisition of the
controlling interest of such corporation by another stockholder or
group of stockholders.

2) Change in the trade or corporate

name

Change in the trade or corporate name of the business

3) Merger or consolidation of
corporations

The unused input tax of the dissolved corporation, as of the date

of merger or consolidation, shall be absorbed the surviving or
new corp.

12. VAT on importation of goods

On every importation of goods.435

a. Transfer of goods by tax exempt persons

If importer is tax-exempt, the subsequent purchasers,

transferees or recipients of such imported goods shall be considered
as importers who shall be liable for the tax on importation.

The tax due on such importation shall constitute a lien on the

goods superior to all charges or liens on the goods, irrespective of the
possessor thereof.436
13. VAT on sale of service and use or lease of
properties

a. Requisites for taxability

435

whether or not goods are for use in business

436

Sec. 107 (B)

197
 The President, upon the recommendation of the Sec. of Finance,
shall, effective January 1, 2006, raise the rate of value- added tax to
12%, after any of the following conditions has been satisfied:

1. Value-added tax collection as a percentage of Gross Domestic

Product (GDP) of the previous year exceeds 2 4/5%; or
2. National government deficit as a percentage of GP of the
previous year exceeds 1 %.437

14. Zero-rated sale of services438

1) Processing, manufacturing or repacking goods for other persons

doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP.

2) Services other than those mentioned in the preceding paragraph

rendered to a person engaged in business conducted outside the Philippines
or to a nonresident person not engaged in business who is outside the
Philippines when the services are performed, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP.

3) Services rendered to persons or entities whose exemption under

special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero percent
(0%) rate.

4) Services rendered to persons engaged in international shipping or

international air transport operations, including leases of property for use
thereof;439 Provided, however, that the services referred to herein shall not
pertain to those made to common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place in the Phil. to

437
Sec. 108 (A)

438

Sec. 108 (B)

439

Ibid.

198
another place in the Phil., the same being subject to 12% VAT under Sec.
108.440

5) Services performed by subcontractors and/or contractors in

processing, converting, of manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of total annual production.

6) Transport of passengers and cargo by air or sea vessels from the

Philippines to a foreign country and;

7) Sale of power or fuel generated through renewable sources of

energy such as, but not limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging energy sources using
technologies such as fuel cells and hydrogen fuels. 441 Zero-rating shall apply
strictly to the sale of power or fuel generated through renewable sources of
energy, and shall not extend to the sale of services related to the
maintenance or operation of plants generating said power.

15. VAT exempt transactions442

a. VAT exempt transactions, in general

Refer to sale of goods or properties and/or services and the use or

lease of properties that is not subject to VAT 443 and the seller is not allowed
any tax credit of VAT444 on purchases. The person making the exempt sale of
440

supra

441

Ibid.

442

Sec. 109

443

output tax

444

199
goods, properties or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT.

1. Sale/ import of agricultural, marine food products in original

state;445 of livestock and poultry.446

Original state even if they have undergone the simple processes of

preparation or preservation for the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses,
ordinary salt, and copra shall be considered in their original state.

2. Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish,

prawn, livestock and poultry feeds.

3. Import of personal and household effects of Phil resident returning

from abroad and nonresident citizens coming to resettle in the Philippines

4. Import of professional instruments and implements, wearing

apparel, domestic animals, and personal household effects belonging to
persons coming to settle in the Philippines, for their own use and not for
sale, barter or exchange.

5. Services subject to percentage tax under Title V.

6. Services by agricultural contract growers and milling for others of

palay into rice, corn into grits and sugar cane into raw sugar;

input tax

445

Original state including preservation using advanced technological means of packaging,

such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging
methods (RR 16-2005)

446

Livestock or poultry does not include fighting cocks, race horses, zoo animals and
other animals generally considered as pets

200
 7. Medical, dental, hospital and veterinary services except those
rendered by professionals.447
8. Educational services rendered by private educational institutions,
duly accredited by DEPED, CHED, TESDA, and those rendered by
government educational institutions.

9. Services rendered by individuals pursuant to an employer-employee

relationship;

10. Services rendered by regional or area headquarters established in

the Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region and do not earn or
derive income from the Philippines;

11. Transactions which are exempt under international agreements to

which the Philippines is a signatory or under special laws, except those
under Presidential Decree No. 529 [Petroleum Exploration Concessionaires
under the Petroleum Act of 1949]

12. Sales by agricultural cooperatives duly registered with the

Cooperative Development Authority to their members as well as sale of their
produce. Exemption includes importation of direct farm inputs, machineries
and equipment, including spare parts thereof, to be used directly and
exclusively in the production and/or processing of their produce.

13. Gross receipts from lending activities by credit or multi-purpose

cooperatives duly registered with the Cooperative Development Authority.

14. Sales by non-agricultural, non- electric and non-credit

cooperatives duly registered with the Cooperative Development Authority
are exempt BUT their importation of machineries and equipment, including
spare parts thereof, to be used by them are subject to vat.

15. Export sales by persons who are not VAT- registered;

16. Sale of real properties the ff. sales are exempt:

1) Sale of real properties NOT primarily held for sale to

customers or held for lease in the ordinary course of trade or
business.

447

Ibid

Laboratory services are exempted. If the hospital or clinic operates a pharmacy or

drug store, the sale of drugs and medicine is subject to VAT. [RR 16-2005]

201
 2) Sale of real properties utilized for low-cost housing as
defined by RA No. 7279, otherwise known as the "Urban
Development and Housing Act of 1992" and other related laws, such
as RA No. 7835 and RA No. 8763. Low-cost housing" refers to
housing projects intended for homeless low- income family
beneficiaries, undertaken by the Government or private
developers, which may either be a subdivision or a condominium
registered and licensed by the Housing and Land Use Regulatory
Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other
similar law, wherein the unit selling price is within the selling price
ceiling per unit of P750,000.00 under RA No. 7279, and other laws,
such as RA No. 7835 and RA No. 8763.

3) Sale of real properties utilized for socialized housing as

defined under RA No. 7279, and other related laws, such as RA No.
7835 and RA No. 8763, wherein the price ceiling per unit is
P225,000.00 or as may from time to time be determined by the
HUDCC and the NEDA and other related laws. "Socialized housing"
refers to housing programs and projects covering houses and lots or
home lots only undertaken by the Government or the private sector
for the underprivileged and homeless citizens which shall include
sites and services development, long-term financing, liberated terms
on interest payments, and such other benefits in accordance with the
provisions of RA No. 7279 and RA No. 7835 and RA No. 8763.
"Socialized housing" shall also refer to projects intended for the
underprivileged and homeless wherein the housing package selling
price is within the lowest interest rates under the Unified Home
Lending Program (UHLP) or any equivalent housing program of the
Government, the private sector or non-government organizations.

4) Sale of residential lot valued at P1.5M and below, or house

& lot and other residential dwellings valued at P2.5M and below,
where the instrument of sale/transfer/disposition was executed on or
after July 1, 2005;448 If two or more adjacent residential lots are sold or
disposed in favor of one buyer, for the purpose of utilizing the lots as
one residential lot, the sale shall be exempt from VAT only if the
aggregate value of the lots does not exceed P1.5M. Adjacent
residential lots, although covered by separate titles and/or separate
tax declarations, when sold or disposed to one and the same buyer,
whether covered by one or separate Deed of Conveyance, shall be
presumed as a sale of one residential lot. 449

448

To be adjusted every 3 years from Jan 31, 2009

449

202
 17. Lease of residential units with a monthly rental per unit not
exceeding P10K, regardless of the amount of aggregate rentals received
by the lessor during the year.
Lease of residential units where the monthly rental per unit exceeds
10K but the aggregate of such rentals of the lessor during the year do not
exceed One Million Five Hundred Pesos P1.5M shall likewise be
exempt from VAT, however, the same shall be subjected to three
percent (3%) percentage tax.

In cases where a lessor has several residential units 450 for

lease, some are leased out for a monthly rental per unit of not exceeding
P10K while others are leased out for more than P10K per unit, his tax
liability will be as follows:

a. The gross receipts from rentals not exceeding P10K per

month per unit shall be exempt from VAT regardless of the aggregate
annual gross receipts.

b. The gross receipts from rentals exceeding P10K per month

per unit shall be subject to VAT if the aggregate annual gross receipts
from said units only 451 exceeds P1.5M. Otherwise, the gross
receipts will be subject to the 3% tax imposed under Section 116 of
the Tax Code.

18. Sale, importation, printing or publication of books and any

newspaper, magazine review or bulletin which appears at regular intervals
with fixed prices for subscription and sale and which is not devoted
principally to the publication of paid advertisements;

RR 16-2005

450

The term 'residential units' shall refer to apartments and houses & lots used for
residential purposes, and buildings or parts or units thereof used solely as dwelling places
(e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms.

The term 'unit' shall mean an apartment unit in the case of apartments, house in the
case of residential houses; per person in the case of dormitories, boarding houses and bed
spaces; and per room in case of rooms for rent. [RR 16-2005]

451

not including the gross receipts from units leased for not more than P10K

203
 19. Sale, importation or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof for domestic
or international transport operations.

20. Importation of fuel, goods, and supplies by persons engaged in

international shipping or air transport operations.

21. Services of banks, non-bank financial intermediaries performing

quasi-banking functions and other non-bank financial intermediaries; and

22. Sale or lease of goods or properties or the performance of services

other than the transactions mentioned in the preceding paragraphs, the
gross annual sales and/or receipts do not exceed the amount of
P1,500,0000.

b. Exempt transactions, enumerated

1) Subject to the provisions of subsection (2) hereof, the

following shall be exempt from the value-added tax:

(a) Sale or importation of agricultural and marine food

products in their original state, livestock and poultry of or kind
generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials therefor.

Products classified under this paragraph and paragraph (a) shall be

considered in their original state even if they have undergone the simple
processes of preparation or preservation for the market, such as freezing,
drying, salting, broiling, roasting, smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses,
ordinary salt, and copra shall be considered in their original state;

(b) Sale or importation of fertilizers; seeds, seedlings and

fingerlings; fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race horses,
fighting cocks, aquarium fish, zoo animals and other animals
generally considered as pets);

(c) Importation of personal and household effects belonging to

the residents of the Philippines returning from abroad and
nonresident citizens coming to resettle in the Philippines: Provided,
That such goods are exempt from customs duties under the Tariff
and Customs Code of the Philippines;

(d) Importation of professional instruments and implements,

wearing apparel, domestic animals, and personal household effects
(except any vehicle, vessel, aircraft, machinery other goods for use in

204
the manufacture and merchandise of any kind in commercial quantity)
belonging to persons coming to settle in the Philippines, for their own
use and not for sale, barter or exchange, accompanying such
persons, or arriving within ninety (90) days before or after their
arrival, upon the production of evidence satisfactory to the
Commissioner, that such persons are actually coming to settle in the
Philippines and that the change of residence is bona fide;

(e) Services subject to percentage tax under Title V;

(f) Services by agricultural contract growers and milling for

others of palay into rice, corn into grits and sugar cane into raw
sugar;

(g) Medical, dental, hospital and veterinary services except

those rendered by professionals.

(h) Educational services rendered by private educational

institutions, duly accredited by the Department of Education,
Culture and Sports (DECS) Department of Education (DEPED), the
Commission on Higher Education (CHED), the Technical Education
and Skills Development Authority (TESDA), and those rendered by
government educational institutions.

(i) Services rendered by individuals pursuant to an employer-

employee relationship;

(j) Services rendered by regional or area headquarters

established in the Philippines by multinational corporations which act
as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region and do
not earn or derive income from the Philippines;

(k) Transactions which are exempt under international

agreements to which the Philippines is a signatory or under special
laws, except those under Presidential Decree No. 529;

(l) Sales by agricultural cooperatives duly registered with the

Cooperative Development Authority to their members as well as sale
of their produce, whether in its original state or processed form, to
non-members; their importation of direct farm inputs, machineries
and equipment, including spare parts thereof, to be used directly and
exclusively in the production and/or processing of their produce;
(m) Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered with the Cooperative
Development Authority;

(n) Sales by non-agricultural, non- electric and non-credit

cooperatives duly registered with the Cooperative Development
Authority: Provided, That the share capital contribution of each

205
member does not exceed Fifteen thousand pesos (P15,000) and
regardless of the aggregate capital and net surplus ratably distributed
among the members;

(o) Export sales by persons who are not VAT-registered;

(p) Sale of real properties not primarily held for sale to

customers or held for lease in the ordinary course of trade or business
or real property utilized for low-cost and socialized housing as defined
by Republic Act No. 7279, otherwise known as the Urban
Development and Housing Act of 1992, and other related laws,
residential lot valued at one million five hundred thousand pesos
(P1,500,000) and below, house and lot, and other residential
dwellings valued at two million five hundred thousand pesos
(P2,500,000) and below: Provided, That not later than January 31,
2009 and every three (3) years thereafter, the amounts herein stated
shall be adjusted to their present values using the Consumer Price
Index, as published by the national Statistics Office (NSO);

(q) Lease of a residential unit with a monthly rental not

exceeding Ten thousand pesos (P10,000); Provided, That not later
than January 31, 2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to its present value using the
Consumer Price Index as published by the National Statistics Office
(NS0);

(r) Sale, importation, printing or publication of books and any

newspaper, magazine review or bulletin which appears at regular
intervals with fixed prices for subscription and sale and which is
not devoted principally to the publication of paid advertisements;
and

(s) Sale, importation or lease of passenger or cargo vessels

and aircraft, including engine, equipment and spare parts thereof for
domestic or international transport operations;

(t) Importation of fuel, goods, and supplies by persons engaged

in international shipping or air transport operations;

(u) Services of banks, non-bank financial intermediaries

performing quasi-banking functions and other non-bank financial
intermediaries; and

(v) Sale or lease of goods or properties or the performance of

services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not exceed the
amount of One million five hundred thousand pesos (P1,500,000):
Provided, That not later than January 31, 2009 and every three (3)
years thereafter, the amount herein stated shall be adjusted to its

206
 present value using the Consumer Price Index, as published by the
National Statistics Office (NSO).

(2) A vat-registered person may elect that subsection (1) not apply to
its sale of goods or properties or services: provided, that an election made
under this subsection shall be irrevocable for a period of three (3) years
from the quarter the election was made.

16. Input tax and output tax, defined

Input tax - the VAT due from or paid by a VAT- registered person
in the course of his trade or business on importation of goods or
local purchase of goods or services, including lease or use of property,
from a VAT-registered person. It includes the transitional input tax
determined in accordance with Section 111452 of this Code.

It includes input taxes which can be directly attributed to

transactions subject to the VAT plus a ratable portion of any input tax
which cannot be directly attributed to either the taxable or exempt
activity. Input tax must be evidenced by a VAT invoice or official
receipt issued by a VAT- registered person in accordance with Secs.
113 and 237453 of the Tax.454

Output tax - the VAT due on the sale or lease of taxable goods or
properties or services by any person registered or required to register
under Section 236455 of this Code.

452

See Reference

453

Ibid.

454

RR 16-2005

455

See Reference

207
 17. Sources of input tax

a. Purchase or importation of goods456

b. Purchase of real properties for which a VAT

has actually been paid

c. Purchase of services in which VAT has

actually been paid

d. Transactions deemed sale

(1) Transfer, use or consumption not in the course of business

of goods or properties originally intended for sale or for use in the
course of business;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the

VAT-registered persons; or
(b) Creditors in payment of debt;

456

(i) For sale; or

(ii) For conversion into or intended to form part of a finished product for sale including
packaging materials; or

(iii) For use as supplies in the course of business; or

(iv) For use as materials supplied in the sale of service; or

(v) For use in trade or business for which deduction for depreciation or amortization is
allowed under this Code, except automobiles, aircraft and yachts. (Sec. 110 (A)(1)

208
 (3) Consignment of goods if actual sale is not made within sixty
(60) days following the date such goods were consigned; and

(4) Retirement from or cessation of business, with respect to

inventories of taxable goods existing as of such retirement or
cessation.457

e. Transitional input tax458

f. Presumptive input tax

Persons or firms engaged in the processing of sardines,

mackerel and milk, and in manufacturing refined sugar and cooking
oil and packed noodle based instant meals, shall be allowed a
presumptive input tax, creditable against the output tax, equivalent
four percent (4 %) of the gross value in money of their purchases of
primary agricultural products which are used as inputs to their
production.

As used in this Subsection, the term "processing" shall mean

pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner substance
of a product in such manner as to prepare it for special use to which it
could not have been put in its original form or condition.459

g. Transitional input tax credits allowed under

the transitory and other provisions of the
regulations460

457
Sec. 106 (B)

458

See input tax, supra

459

Id. (B)

460

209
 A person who becomes liable to value-added tax or any person
who elects to be a VAT-registered person shall, subject to the filing of
an inventory according to rules and regulations prescribed by the
Secretary of finance, upon recommendation of the Commissioner, be
allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to two percent (2%) of the value of such inventory
or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the
output tax.461

18.Persons who can avail of input tax credit

The input tax on domestic purchase of goods or properties shall be

creditable:

(a) To the purchaser upon consummation of sale and on importation of

goods or properties; and

(b) To the importer upon payment of the value-added tax prior to the
release of the goods from the custody of the Bureau of Customs.

However, in the case of purchase of services, lease or use of

properties, the input tax shall be creditable to the purchaser, lessee or
licensee upon payment of the compensation, rental, royalty or fee.

A VAT-registered person who is also engaged in transactions not

subject to the value-added tax shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions

subject to value-added tax; and

(b) A ratable portion of any input tax which cannot be directly

attributed to either activity. 462

See e) Transitional input tax, supra

461

Sec. 111 (A)

462

Sec. 110 (A)(2)(3)

210
 19.Determination of output/input tax; VAT payable;
Excess input tax credits

a. Determination of output tax

If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the Vat-registered person. If the
input tax exceeds the output tax, the excess shall be carried over to
the succeeding quarter or quarters, any input tax attributable to the
purchase of capital goods or to zero-rated sales by a VAT-registered
person may at his option be refunded or credited against other
internal revenue taxes, subject to the provisions of Section 112.463
b. Determination of input tax creditable

The sum of the excess input tax carried over from the preceding
month or quarter and the input tax creditable to a VAT-registered
person during the taxable month or quarter shall be reduced by the
amount of claim for refund or tax credit for value-added tax and other
adjustments, such as purchase returns or allowances and input tax
attributable to exempt sale.

The claim for tax credit referred to in the foregoing paragraph

shall include not only those filed with the Bureau of Internal Revenue
but also those filed with other government agencies, such as the
Board of Investments the Bureau of Customs.464

c. Allocation of input tax on mixed transactions

463

See Reference

464

Sec. 110 (C)

211
 A VAT-registered person who is also engaged in transactions not
subject to Vat shall be allowed to recognize input tax credit on
transactions subject to Vat as follows:

All the input taxes that can be directly attributed to transactions

subject to VAT may be recognized for input tax credit; Provided, that
input taxes that can be directly attributable to VAT taxable sales of
goods and services to the Government or any of its political
subdivisions, instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall not be credited
against output taxes arising from sales to non-Government entities;
and

2. If any input tax cannot be directly attributed to either a VAT

taxable or VAT-exempt transaction, the input tax shall be pro-rated to
the VAT taxable and VAT-exempt transactions and only the ratable
portion pertaining to transactions subject to VAT may be recognized
for input tax credit.

d. Determination of the output tax and VAT

payable and computation of VAT payable or
excess tax credits465

20. Substantiation of input tax credits466

a) Input taxes must be substantiated and supported by the

following documents, and must be reported in the information returns
required to be submitted to the Bureau:

(1) For the importation of goods import entry or other

equivalent document showing actual payment of VAT on the imported
goods.

465

See a., supra

466

RR 16-2005

212
 (2) For the domestic purchase of goods and propertiesinvoice
showing the information required under Secs. 113 and 237 467 of the
Tax Code.
(3) For the purchase of real property - public instrument i.e.,
deed of absolute sale, deed of conditional sale, contract/agreement to
sell, etc., together with VAT invoice issued by the seller.
(4) For the purchase of servicesofficial receipt showing the
information required under Secs. 113 and 237 of the Tax Code.

A cash register machine tape issued to a registered buyer shall

constitute valid proof of substantiation of tax credit only if it shows
the information required under Secs. 113 and 237 of the Tax Code.

b) Transitional input tax shall be supported by an inventory of

goods as shown in a detailed list to be submitted to the BIR.

(c) Input tax on "deemed sale" transactions shall be

substantiated with the invoice required.

(d) Input tax from payments made to non- residents (such as for
services, rentals and royalties) shall be supported by a copy of the
Monthly Remittance Return of Value Added Tax Withheld (BIR Form
1600) filed by the resident payor in behalf of the non-resident
evidencing remittance of VAT due which was withheld by the payor.

(e) Advance VAT on sugar shall be supported by the Payment

Order showing payment of the advance VAT

21.Refund or tax credit of excess input tax

a. Who may claim for refund/apply for

issuance of tax credit certificate (TCC)

Any VAT-registered person, whose sales are zero-rated or

effectively zero-rated may apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however, That
in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and

467
See Reference

213
(B)468 and Section 108 (B)(1) and (2),469 the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP): Provided, further, That where the taxpayer is engaged in zero-
rated or effectively zero-rated sale and also in taxable or exempt sale
of goods of properties or services, and the amount of creditable input
tax due or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis of
the volume of sales.470

b. Period to file claim/apply for issuance of

TCC

Within two (2) years after the close of the taxable quarter when
the sales were made,

c. Manner of giving refund

Refunds shall be made upon warrants drawn by the

Commissioner or by his duly authorized representative without the
necessity of being countersigned by the Chairman, Commission on
audit, the provisions of the Administrative Code of 1987 to the
contrary notwithstanding: Provided, That refunds under this
paragraph shall be subject to post audit by the Commission on Audit.471

468

Ibid.

469

Ibid.

470

Sec. 112 (A)

471

Id. (E)

214
 d. Destination principle or Cross-border
doctrine472

Destination principle goods and services are taxed only in the

country where these are consumed.

Cross border doctrine mandates that no VAT shall be imposed

to form part of the cost of the goods destined for consumption outside
the territorial border of the taxing authority.

22.Invoicing requirements

a. Invoicing requirements in general

A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the
following information shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person,
followed by his taxpayer's identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to

pay to the seller with the indication that such amount includes the
value-added tax.

b. Invoicing and recording deemed sale

transactions

Transaction Invoicing Requirement

Transfer, use or consumption Memorandum entry in the
not in the course of business subsidiary sales journal to record
of goods or properties withdrawal of goods for personal
originally intended for sale or use
for use in the course of
business
Distribution or transfer to Invoice, at the time of the
shareholders/investors or transaction, which should include
creditors all the info prescribed in Sec. 113
(B)

472
See also (D)(7), supra

215
 Consignment of goods if Invoice, at the time of the
actual sale is not made transaction, which should include
within 60 days all the info prescribed in Sec. 113
(B)
Retirement from or cessation An inventory shall be prepared
of business with respect to and submitted to the RDO who
all goods in hand has jurisdiction over the
taxpayers principal place of
business not later than 30 days
after retirement or cessation
from the business. An invoice
shall be prepared for the entire
inventory, which shall be the
basis of the entry into the
subsidiary sales journal. The
invoice need not enumerate the
specific items appearing in the
inventory regarding the
description of the goods. If the
business is to be continued by the
new owners or successors, the
entire amount of output tax on
the amount deemed sold shall be
allowed as input taxes.

c. Consequences of issuing erroneous VAT

invoice or VAT official receipt

(1) If a person who is not a VAT-registered person issues an

invoice or receipt showing his Taxpayer Identification Number (TIN),
followed by the word VAT:

a) The issuer shall, in addition to any liability to other

percentage taxes, be liable to:

i. The tax imposed in Section 106 or 106 without the

benefit of any input tax credit; and

ii. A 50% surcharge under Section 248 (B)473 of this code;

473

See Reference

216
 (b) The VAT shall, if the other requisite information required
under Subsection (B) hereof is shown on the invoice or receipt, be
recognized as an input tax credit to the purchaser under Section
110474 of this Code.

(2) If a VAT-registered person issues a VAT invoice or VAT

official 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 liable to account for the tax imposed in Section 106 or
108 as if Section 109475 did not apply.476

23.Filing of return and payment

Every person liable to pay the value-added tax imposed under
this Title shall file a quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days following the close of each
taxable quarter prescribed for each taxpayer: Provided, that VAT-
registered persons shall pay the value-added tax on a monthly basis.
Any person, whose registration has been cancelled in
accordance with Section 236, shall file a return and pay the tax due
thereon within twenty-five (25) days from the date of cancellation of
registration: Provided, That only one consolidated return shall be filed
by the taxpayer for his principal place of business or head office and
all branches.477
24. Withholding of final VAT on sales to government

474

See Reference

475

supra

476

Sec. 113 (D)

477

Sec. 114 (A)

217
 The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or
-controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods from sellers and services rendered
by contractors which are subject to the value-added tax imposed in
Sections 106 and 108478 deduct and withhold the value-added tax due
at the rate of three percent (3%) of the gross payment for the
purchase of goods and six percent (6%) on gross receipts for services
rendered by contractors on every sale or installment payment which
shall be creditable against the value-added tax liability of the seller or
contractor: Provided, That in the case of government public works
contractors, the withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or use of
properties or property rights to nonresident owners shall be subject to
ten percent (10%) withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment shall be
considered as the withholding agent.

The value-added tax withheld shall be remitted within ten (10)

days following the end of the month the withholding was made.479

E. Compliance Requirements (Internal Revenue Taxes)

1. Administrative requirements

a. Registration requirements

1) Annual registration fee

An annual registration fee in the amount of Five hundred pesos

(P500) for every separate or distinct establishment or place of
business, including facility types where sales transactions occur, shall
be paid upon registration and every year thereafter on or before the
last day of January: Provided, however, That cooperatives, individuals

478

supra

479

Sec. 114 (C)

218
earning purely compensation income, whether locally or abroad, and
overseas workers are not liable to the registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank

located within the revenue district, or to the Revenue Collection
Officer, or duly authorized Treasurer of the city of municipality where
each place of business or branch is registered.480

2) Registration of each type of internal

revenue tax

Every person who is required to register with the Bureau of

Internal Revenue shall register each type of internal revenue tax for
which he is obligated, shall file a return and shall pay such taxes, and
shall updates such registration of any changes in accordance with
Subsection (E) hereof.481

3) Transfer of registration

In case a registered person decides to transfer his place of

business or his head office or branches, it shall be his duty to update
his registration status by filing an application for registration
information update in the form prescribed therefor.482

4) Other updates

Any person registered shall, whenever applicable, update his

registration information with the Revenue District Office where he is

480

Sec. 236 (B)

481

Id., (C)

482

Id., (D)

219
registered, specifying therein any change in type and other taxpayer
details.483

5) Cancellation of registration

The registration of any person who ceases to be liable to a tax

type shall be cancelled upon filing with the Revenue District Office
where he is registered an application for registration information
update in a form prescribed therefor.484

6) Power of the Commissioner to

suspend the business operations of any
person who fails to register

The Commissioner or his authorized representative is hereby

empowered to suspend the business operations and temporarily close
the business establishment of any person for any of the following
violations:

(a) In the case of a VAT-registered Person. -

(1) Failure to issue receipts or invoices;

(2) Failure to file a value-added tax return as required
under Section 114; or
(3) Understatement of taxable sales or receipts by thirty
percent (30%) or more of his correct taxable sales or
receipts for the taxable quarter.

(b) Failure of any Person to Register as Required under Section

236. -

483

Id., (E)

484

Id., (F)

220
 The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only upon
compliance with whatever requirements prescribed by the
Commissioner in the closure order.485

b. Persons required to register for VAT

1) Optional registration for VAT of

exempt person

Any person whose transactions are exempt from value-added tax

under Section 109(z)486 of this Code; or any person whose transactions
are exempt from the value-added tax under Section 109(a), (b), (c),
and (d)487 of this Code, who opts to register as a VAT taxpayer with
respect to his export sales only, may update his registration
information in accordance with Subsection (E) hereof, not later than
ten (10) days before the beginning of the taxable quarter and shall
pay the annual registration fee prescribed in Subsection (B) hereof. 488

2) Cancellation of VAT registration489

485

Sec. 115

486

supra

487

Id.

488

Id., (I)

489

221
 3) Changes in or cessation of status of a
VAT-registered person490

c. Supplying taxpayer identification number

(TIN)

Any person required under the authority of this Code to make, render
or file a return, statement or other document shall be supplied with or
assigned a Taxpayer Identification Number (TIN) which he shall indicate in
such return, statement or document filed with the Bureau of Internal
Revenue for his proper identification for tax purposes, and which he shall
indicate in certain documents, such as, but not limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments;

(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds of
Assessor's Office;
(4) Registration certificate of transportation equipment by land, sea or
air;
(5) Documents to be registered with the Securities and Exchange
Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other
financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of Trade &
Industry; and
(10) Such other documents which may hereafter be required under
rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

In cases where a registered taxpayer dies, the administrator or

executor shall register the estate of the decedent in accordance with
Subsection (A) hereof and a new Taxpayer Identification Number (TIN) shall
be supplied in accordance with the provisions of this Section.

In the case of a nonresident decedent, the executor or administrator

of the estate shall register the estate with the Revenue District Office where
he is registered: Provided, however, That in case such executor or

See E (1)(a)(5), under Compliance Requirements, supra

490

See (D)(11)

222
administrator is not registered, registration of the estate shall be made with
the Taxpayer Identification Number (TIN) supplied by the Revenue District
Office having jurisdiction over his legal residence.

Only one Taxpayer identification Number (TIN) shall be assigned to a

taxpayer. Any person who shall secure more than one Taxpayer Identification
Number shall be criminally liable under the provision of Section 275 on
'Violation of Other Provisions of this Code or Regulations in General. 491

d. Issuance of receipts or sales or commercial

invoices

All persons subject to an internal revenue tax shall, for each sale
or transfer of merchandise or for services rendered valued at Twenty-
five pesos (P25.00) or more, issue duly registered receipts or sales or
commercial invoices, prepared at least in duplicate, showing the date
of transaction, quantity, unit cost and description of merchandise or
nature of service: Provided, however, That in the case of sales,
receipts or transfers in the amount of One hundred pesos (P100.00) or
more, or regardless of the amount, where the sale or transfer is made
by a person liable to value-added tax to another person also liable to
value-added tax; or where the receipt is issued to cover payment
made as rentals, commissions, compensations or fees, receipts or
invoices shall be issued which shall show the name, business style, if
any, and address of the purchaser, customer or client: Provided,
further, That where the purchaser is a VAT-registered person, in
addition to the information herein required, the invoice or receipt
shall further show the Taxpayer Identification Number (TIN) of the
purchaser.

The original of each receipt or invoice shall be issued to the

purchaser, customer or client at the time the transaction is effected,
who, if engaged in business or in the exercise of profession, shall keep
and preserve the same in his place of business for a period of three (3)
years from the close of the taxable year in which such invoice or
receipt was issued, while the duplicate shall be kept and preserved by
the issuer, also in his place of business, for a like period.

491

Id., (I)

223
 The Commissioner may, in meritorious cases, exempt any person
subject to internal revenue tax from compliance with the provisions of
this Section.492

1) Printing of receipts or sales or

commercial invoices

All persons who are engaged in business shall secure from the
Bureau of Internal Revenue an authority to print receipts or sales or
commercial invoices before a printer can print the same.

No authority to print receipts or sales or commercial invoices

shall be granted unless the receipts or invoices to be printed are
serially numbered and shall show, among other things, the name,
business style, Taxpayer Identification Number (TIN) and business
address of the person or entity to use the same, and such other
information that may be required by rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of
the Commissioner.

All persons who print receipt or sales or commercial invoices

shall maintain a logbook/register of taxpayers who availed of their
printing services. The logbook/register shall contain the following
information:

(1) Names, Taxpayer Identification Numbers of the persons or

entities for whom the receipts or sales or commercial invoices were
printed; and

(2) Number of booklets, number of sets per booklet, number of

copies per set and the serial numbers of the receipts or invoices in
each booklet.

2) Invoicing requirements for VAT

a) Information contained in the

VAT invoice or VAT official receipt

492

Sec. 237

224
 A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the
following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person,

followed by his taxpayer's identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to

pay to the seller with the indication that such amount includes the
value-added tax.

b) Consequences of issuing
erroneous VAT invoice or official
receipts493

e. Exhibition of certificate of payment at place

of business

The certificate or receipts showing payment of taxes issued to a

person engaged in a business subject to an annual registration fee
shall be kept conspicuously exhibited in plain view in or at the place
where the business is conducted; and in case of a peddler or other
persons not having a fixed place of business, shall be kept in the
possession of the holder thereof, subject to production upon demand
of any internal revenue officer.494

f. Continuation of business of deceased person

When any individual who has paid the annual registration fee
dies, and the same business is continued by the person or persons
interested in his estate, no additional payment shall be required for
the residue of the term which the tax was paid: Provided, however,
That the person or persons interested in the estate should, within
thirty (30) days from the death of the decedent, submit to the Bureau

493

See (D)(22)(c), supra

494

Sec. 241

225
of Internal Revenue or the regional or revenue District Office
inventories of goods or stocks had at the time of such death.

The requirement under this Section shall also be applicable in

the case of transfer of ownership or change of name of the business
establishment.495

g. Removal of business to other location

Any business for which the annual registration fee has been
paid may, subject to the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, be
removed and continued in any other place without the payment of
additional tax during the term for which the payment was made.496

2. Tax returns

a. Income Tax Returns

1) Individual Tax Returns

a) Filing of individual tax returns

(1) Who are required to file

The following individuals are required to file an income tax

return:

(a) Every Filipino citizen residing in the Philippines;

495

Sec. 242

496

Sec. 243

226
 (b) Every Filipino citizen residing outside the Philippines, on his
income from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines.497
(a) Return of husband
and wife

Married individuals, whether citizens, resident or nonresident

aliens, who do not derive income purely from compensation, shall file
a return for the taxable year to include the income of both spouses,
but where it is impracticable for the spouses to file one return, each
spouse may file a separate return of income but the returns so filed
shall be consolidated by the Bureau for purposes of verification for the
taxable year.498

(b) Return of parent to

include income of
children

The income of unmarried minors derived from properly received

from a living parent shall be included in the return of the parent,
except (1) when the donor's tax has been paid on such property, or (2)
when the transfer of such property is exempt from donor's tax.499
(c) Return of persons
under disability

If the taxpayer is unable to make his own return, the return may
be made by his duly authorized agent or representative or by the
guardian or other person charged with the care of his person or
497

Sec. 51 (A)

498

Id., (D)

499

Id., (E)

227
property, the principal and his representative or guardian assuming
the responsibility of making the return and incurring penalties
provided for erroneous, false or fraudulent returns.500

(2) Who are not required to

file

The following individuals shall not be required to file an income

tax return;

(a) An individual whose gross income does not exceed his total
personal and additional exemptions for dependents under Section
35:501 Provided, That a citizen of the Philippines and any alien
individual engaged in business or practice of profession within the
Philippine shall file an income tax return, regardless of the amount of
gross income;

(b) An individual with respect to pure compensation income, as

defined in Section 32 (A)(1),502 derived from sources within the
Philippines, the income tax on which has been correctly withheld
under the provisions of Section 79503 of this Code: Provided, That an
individual deriving compensation concurrently from two or more
employers at any time during the taxable year shall file an income tax
return: Provided, further, That an individual whose compensation
500

Id., (F)

501

supra

502

Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items.

503

supra

228
income derived from sources within the Philippines exceeds Sixty
thousand pesos (P60,000) shall also file an income tax return;

(c) An individual whose sole income has been subjected to final

withholding tax pursuant to Section 57(A)504 of this Code; and

(d) An individual who is exempt from income tax pursuant to the

provisions of this Code and other laws, general or special.

The foregoing notwithstanding, any individual not required to

file an income tax return may nevertheless be required to file an
information return pursuant to rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the
Commissioner.505

b) Where to file

Except in cases where the Commissioner otherwise permits, the

return shall be filed with an authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal residence or principal
place of business in the Philippines, or if there be no legal residence
or place of business in the Philippines, with the Office of the
Commissioner.506

c) When to file

504

Id.

505

Id., (A)(2)

506

Id., (B)

229
 (1) The return of any individual specified above shall be filed on
or before the fifteenth (15th) day of April of each year covering
income for the preceding taxable year.

(2) Individuals subject to tax on capital gains;

(a) From the sale or exchange of shares of stock not

traded thru a local stock exchange as prescribed under Section
24(c) shall file a return within thirty (30) days after each
transaction and a final consolidated return on or before April 15
of each year covering all stock transactions of the preceding
taxable year; and

(b) From the sale or disposition of real property under

Section 24(D507) shall file a return within thirty (30) days
following each sale or other disposition.508

2) Corporate Returns

a) Requirement for filing returns

Every corporation subject to the tax herein imposed, except

foreign corporations not engaged in trade or business in the
Philippines, shall render, in duplicate, a true and accurate quarterly
income tax return and final or adjustment return in accordance with
the provisions of Chapter XII509 of this Title. The return shall be filed
by the president, vice-president or other principal officer, and shall be
sworn to by such officer and by the treasurer or assistant treasurer.510

507

See Reference

508

Id., (C)

509

Quarterly Corporate Income Tax Annual Declaration and Quarterly Payments of Income
Taxes

230
 (1) Declaration of quarterly
corporate income tax

Every corporation shall file in duplicate a quarterly summary

declaration of its gross income and deductions on a cumulative basis
for the preceding quarter or quarters upon which the income tax shall
be levied, collected and paid. The tax so computed shall be decreased
by the amount of tax previously paid or assessed during the preceding
quarters and shall be paid not later than sixty (60) days from the close
of each of the first three (3) quarters of the taxable year, whether
calendar or fiscal year.511

(a) Place of filing

Except as the Commissioner otherwise permits, the quarterly

income tax declaration required in Section 75 512 and the final
adjustment return required I Section 76 shall be filed with the
authorized agent banks or Revenue District Officer or Collection
Agent or duly authorized Treasurer of the city or municipality having
jurisdiction over the location of the principal office of the corporation
filing the return or place where its main books of accounts and other
data from which the return is prepared are kept.513

(b) Time of fling

510

Sec. 52

511

Sec. 75

512

supra

513

Sec. 77 (A)

231
 The corporate quarterly declaration shall be filed within sixty
(60) days following the close of each of the first three (3) quarters of
the taxable year. The final adjustment return shall be filed on or
before the fifteenth (15th) day of April, or on or before the fifteenth
(15th) day of the fourth (4th) month following the close of the fiscal
year, as the case may be.514

(2) Final adjustment return

Every corporation liable to tax shall file a final adjustment

return covering the total taxable
income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal
to
the total tax due on the entire taxable income of that year, the
corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as
the case may be.

In case the corporation is entitled to a tax credit or refund of the

excess estimated quarterly income taxes paid, the excess amount
shown on its final adjustment return may be carried over and credited
against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. Once the option to carry-
over and apply the excess quarterly income tax against
income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be allowed.515

(a) Place of filing

514

Id., (B)

515

Sec. 76

232
 Except as the Commissioner otherwise permits, the quarterly
income tax declaration required in Section 75 516 and the final
adjustment return required in Section 76517 shall be filed with:
a) the authorized agent banks or
b) Revenue District Officer or
c) Collection Agent or
d) duly authorized Treasurer of the city or municipality
having jurisdiction over the location of the principal office of the
corporation filing the return or place where its main books of
accounts and other data from which the return is prepared are
kept.518

(b) Time of filing

Quarterly declaration shall be filed within sixty (60) days

following the close of each of the first three (3) quarters of the taxable
year.

The final adjustment return - shall be filed on or before the

fifteenth (15th) day of April, or on or before the fifteenth (15th) day of
the fourth (4th) month following the close of the fiscal year, as the
case may be.519

516

supra

517

Id.

518

Sec. 77 (A)

519

Id., (B)

233
 (3) Taxable year of
corporations

A corporation may employ either calendar year or fiscal year as

a basis for filing its annual income tax return: Provided, the
corporation shall not change the accounting period employed without
prior approval from the Commissioner in accordance with the
provisions of Section 47520 of this Code.521

(4)Extension of time to file

return

The Commissioner may, in meritorious cases, grant a reasonable

extension of time for filing returns of income (or final and adjustment
returns in case of corporations), subject to the provisions of Section
56 of this Code.522

b) Return of corporation
contemplating dissolution or
reorganization

Every corporation shall, within thirty (30) days after the

adoption by the corporation of a resolution or plan for its dissolution,
or for the liquidation of the whole or any part of its capital stock,
including a corporation which has been notified of possible

520

See Reference

521

Sec. 52 (B)

522

Sec. 53

234
involuntary dissolution by the Securities and Exchange Commission,
or for its reorganization, render a correct return to the Commissioner,
verified under oath, setting forth the terms of such resolution or plan
and such other information as the Secretary of Finance, upon
recommendation of the commissioner, shall, by rules and regulations,
prescribe.

The dissolving or reorganizing corporation shall, prior to the

issuance by the Securities and Exchange Commission of the
Certificate of Dissolution or Reorganization, as may be defined by
rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, secure a certificate of tax
clearance from the Bureau of Internal Revenue which certificate shall
be submitted to the Securities and Exchange Commission.523

c) Return on capital gains realized

from sale of shares of stock not
traded in the local stock exchange

Every corporation deriving capital gains from the sale or

exchange of shares of stock not traded thru a local stock exchange as
prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and
28 (B)(5)(c),524 shall file a return within thirty (30) days after each
transactions and a final consolidated return of all transactions during
the taxable year on or before the fifteenth (15th) day of the fourth
(4th) month following the close of the taxable year.525
3) Returns of receivers, trustees in
bankruptcy or assignees

523

Sec. 52 (C)

524

supra

525

Id., (D)

235
 In cases wherein receivers, trustees in bankruptcy or assignees
are operating the property or business of a corporation, subject to the
tax imposed by this Title, such receivers, trustees or assignees shall
make returns of net income as and for such corporation, in the same
manner and form as such organization is hereinbefore required to
make returns, and any tax due on the income as returned by
receivers, trustees or assignees shall be assessed and collected in the
same manner as if assessed directly against the organizations of
whose businesses or properties they have custody or control.526

4) Returns of general partnerships

Every general professional partnership shall file, in duplicate, a

return of its income, except income exempt under Section 32 (B) 527 of
this Title, setting forth the items of gross income and of deductions
allowed by this Title, and the names, Taxpayer Identification Numbers
(TIN), addresses and shares of each of the partners.528

5) Fiduciary returns

Guardians, trustees, executors, administrators, receivers,

conservators and all persons or corporations, acting in any fiduciary
capacity, shall render, in duplicate, a return of the income of the
person, trust or estate for whom or which they act, and be subject to
all the provisions of this Title, which apply to individuals in case such
person, estate or trust has a gross income of Twenty thousand pesos

526

Sec. 54

527

supra

528

Sec. 55

236
(P20,000) or over during the taxable year. Such fiduciary or person
filing the return for him or it, shall take oath that he has sufficient
knowledge of the affairs of such person, trust or estate to enable him
to make such return and that the same is, to the best of his knowledge
and belief, true and correct, and be subject to all the provisions of this
Title which apply to individuals: Provided, That a return made by or
for one or two or more joint fiduciaries filed in the province where
such fiduciaries reside; under such rules and regulations as the
Secretary of Finance, upon recommendation of the Commissioner,
shall prescribe, shall be a sufficient compliance with the requirements
of this Section.529

b. Estate Tax Returns

1) Notice of death to be filed

In all cases of transfers subject to tax, or where, though exempt

from tax, the gross value of the estate exceeds Twenty thousand pesos
(P20,000), the executor, administrator or any of the legal heirs, as the
case may be, within two (2) months after the decedent's death, or
within a like period after qualifying as such executor or administrator,
shall give a written notice thereof to the Commissioner.530

2) Estate tax returns

a) Requirements

In all cases of transfers subject to the tax imposed herein, or

where, though exempt from tax, the gross value of the estate exceeds
Two hundred thousand pesos (P200,000), or regardless of the gross
value of the estate, where the said estate consists of registered or
registrable property such as real property, motor vehicle, shares of
stock or other similar property for which a clearance from the Bureau
of Internal Revenue is required as a condition precedent for the
transfer of ownership thereof in the name of the transferee, the

529

Sec. 65

530

Sec. 89

237
executor, or the administrator, or any of the legal heirs, as the case
may be, shall file a return under oath in duplicate, setting forth:

(1) The value of the gross estate of the decedent at the time of
his death, or in case of a nonresident, not a citizen of the Philippines,
of that part of his gross estate situated in the Philippines;

(2) The deductions allowed from gross estate in determining the

estate as defined in Section 86; and

(3) Such part of such information as may at the time be

ascertainable and such supplemental data as may be necessary to
establish the correct taxes.

Provided, however, That estate tax returns showing a gross

value exceeding Two million pesos (P2,000,000) shall be supported
with a statement duly certified to by a Certified Public Accountant
containing the following:

(a) Itemized assets of the decedent with their corresponding

gross value at the time of his death, or in the case of a nonresident,
not a citizen of the Philippines, of that part of his gross estate situated
in the Philippines;

(b) Itemized deductions from gross estate allowed in Section 86;

and

(c) The amount of tax due whether paid or still due and
outstanding.531

b) Time of filing and extension of

time

The Commissioner shall have authority to grant, in meritorious

cases, a reasonable extension not exceeding thirty (30) days for filing
the return.532

531

Sec. 90 (A)

532

Ibid., (C)

238
 c) Place of filing

Except in cases where the Commissioner otherwise permits, the

return required under Subsection (A) shall be filed with an authorized
agent bank, or Revenue District Officer, Collection Officer, or duly
authorized Treasurer of the city or municipality in which the decedent
was domiciled at the time of his death or if there be no legal residence
in the Philippines, with the Office of the Commissioner.533

3) Discharge of executor or
administrator from personal liability

If the executor or administrator makes a written application to

the Commissioner for determination of the amount of the estate tax
and discharge from personal liability therefore, the Commissioner (as
soon as possible, and in any event within one (1) year after the
making of such application, or if the application is made before the
return is filed, then within one (1) year after the return is filed, but
not after the expiration of the period prescribed for the assessment of
the tax in Section 203 shall not notify the executor or administrator of
the amount of the tax. The executor or administrator, upon payment of
the amount of which he is notified, shall be discharged from personal
liability for any deficiency in the tax thereafter found to be due and
shall be entitled to a receipt or writing showing such discharge.534

a) Definition of deficiency

(a) The amount by which the tax imposed by this Chapter

exceeds the amount shown as the tax by the executor, administrator
or any of the heirs upon his return; but the amounts so shown on the
return shall first be increased by the amounts previously assessed (or
collected without assessment) as a deficiency and decreased by the
amount previously abated, refunded or otherwise repaid in respect of
such tax; or

533

Ibid., (D)

534

Sec. 92

239
 (b) If no amount is shown as the tax by the executor,
administrator or any of the heirs upon his return, or if no return is
made by the executor, administrator, or any heir, then the amount by
which the tax exceeds the amounts previously assessed (or collected
without assessment) as a deficiency; but such amounts previously
assessed or collected without assessment shall first be decreased by
the amounts previously abated, refunded or otherwise repaid in
respect of such tax.535

c. Donors Tax Returns

1) Requirements

Any individual who makes any transfer by gift 536shall, for the
purpose of the said tax, make a return under oath in duplicate. The
return shall set forth:

(1) Each gift made during the calendar year which is to be

included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by rules and
regulations made pursuant to law.537
2) Time and place of filing

The return of the donor required in this Section shall be filed

within thirty (30) days after the date the gift is made and the tax due

535

Sec. 93

536

except those which, under Section 101, are exempt from the tax provided for in this
Chapter

537

Sec. 103 (A)

240
thereon shall be paid at the time of filing. Except in cases where the
Commissioner otherwise permits, the return shall be filed and the tax
paid to an authorized agent bank, the Revenue District Officer,
Revenue Collection Officer or duly authorized Treasurer of the city or
municipality where the donor was domiciled at the time of the
transfer, or if there be no legal residence in the Philippines, with the
Office of the Commissioner. In the case of gifts made by a
nonresident, the return may be filed with the Philippine Embassy or
Consulate in the country where he is domiciled at the time of the
transfer, or directly with the Office of the Commissioner.538

d. VAT Returns

1) In general

Every person liable to pay the value-added tax imposed under

this Title shall file a quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days following the close of each
taxable quarter prescribed for each taxpayer: Provided, however, That
VAT-registered persons shall pay the value-added tax on a monthly
basis.

Any person, whose registration has been cancelled in

accordance with Section 236, shall file a return and pay the tax due
thereon within twenty-five (25) days from the date of cancellation of
registration: Provided, that only one consolidated return shall be filed
by the taxpayer for his principal place of business or head office and
all branches.539

2) Where to file the return540

538

Id., (B)

539

Sec. 114 (A)

540

and pay the tax

241
 Except as the Commissioner otherwise permits, the return shall
be filed with and the tax paid to an authorized agent bank, Revenue
Collection Officer or duly authorized city or municipal Treasurer in
the Philippines located within the revenue district where the taxpayer
is registered or required to register.541

e. Withholding Tax Returns

1) Quarterly returns and payments of

taxes withheld

Taxes deducted and withheld under Section 57 by withholding

agents shall be covered by a return and paid to, except in cases where
the Commissioner otherwise permits, an authorized Treasurer of the
city or municipality where the withholding agent has his legal
residence or principal place of business, or where the withholding
agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall

be held as a special fund in trust for the government until paid to the
collecting officers.

The return for final withholding tax shall be filed and the
payment made within twenty-five (25) days from the close of each
calendar quarter, while the return for creditable withholding taxes
shall be filed and the payment made not later than the last day of the
month following the close of the quarter during which withholding
was made: Provided, That the Commissioner, with the approval of the
Secretary of Finance, may require these withholding agents to pay or
deposit the taxes deducted or withheld at more frequent intervals
when necessary to protect the interest of the government.542

2) Annual information return

541

Id., (B)

542

Sec. 58

242
 Every withholding agent required to deduct and withhold taxes
under Section 57 shall submit to the Commissioner an annual
information return containing the list of payees and income payments,
amount of taxes withheld from each payee and such other pertinent
information as may be required by the Commissioner. In the case of
final withholding taxes, the return shall be filed on or before January
31 of the succeeding year, and for creditable withholding taxes, not
later than March 1 of the year following the year for which the annual
report is being submitted. This return, if made and filed in accordance
with the rules and regulations approved by the Secretary of Finance,
upon recommendation of the Commissioner, shall be sufficient
compliance with the requirements of Section 68 of this Title in respect
to the income payments.
The Commissioner may, by rules and regulations, grant to any
withholding agent a reasonable extension of time to furnish and
submit the return required in this Subsection.543
3. Tax payments

a. Income Taxes

1) Payment, in general; time

of payment

The total amount of income tax imposed shall be paid by the

person subject thereto at the time the return is filed. In the case of
tramp vessels, the shipping agents and/or the husbanding agents, and
in their absence, the captains thereof are required to file the return
herein provided and pay the tax due thereon before their departure.
Upon failure of the said agents or captains to file the return and pay
the tax, the Bureau of Customs is hereby authorized to hold the vessel
and prevent its departure until proof of payment of the tax is
presented or a sufficient bond is filed to answer for the tax due.544

2) Installment payment

543

Id., (C)

544

Sec. 56 (A)(1)

243
 When the tax due is in excess of Two thousand pesos (P2,000),
the taxpayer other than a corporation may elect to pay the tax in two
(2) equal installments in which case, the first installment shall be paid
at the time the return is filed and the second installment, on or before
July 15 following the close of the calendar year. If any installment is
not paid on or before the date fixed for its payment, the whole amount
of the tax unpaid becomes due and payable, together with the
delinquency penalties.545

3) Payment of capital gains

tax

The total amount of tax imposed and prescribed under Section

24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) 546 shall be paid on
the date the return prescribed therefor is filed by the person liable
thereto: Provided, That if the seller submits proof of his intention to
avail himself of the benefit of exemption of capital gains under
existing special laws, no such payments shall be required : Provided,
further, That in case of failure to qualify for exemption under such
special laws and implementing rules and regulations, the tax due on
the gains realized from the original transaction shall immediately
become due and payable, subject to the penalties prescribed under
applicable provisions of this Code: Provided, finally, That if the seller,
having paid the tax, submits such proof of intent within six (6) months
from the registration of the document transferring the real property,
he shall be entitled to a refund of such tax upon verification of his
compliance with the requirements for such exemption.

In case the taxpayer elects and is qualified to report the gain by

installments under Section 49 of this Code, the tax due from each
installment payment shall be paid within (30) days from the receipt of
such payments.
No registration of any document transferring real property shall
be effected by the Register of Deeds unless the Commissioner or his

545

Id., (A)(2)

546

supra

244
duly authorized representative has certified that such transfer has
been reported, and the tax herein imposed, if any, has been paid.547
b. Estate Taxes

1) Time of payment

The estate tax imposed by Section 84 shall be paid at the time

the return is filed by the executor, administrator or the heirs.548

a) Extension of time

When the Commissioner finds that the payment on the due date
of the estate tax or of any part thereof would impose undue hardship
upon the estate or any of the heirs, he may extend the time for
payment of such tax or any part thereof not to exceed five (5) years, in
case the estate is settled through the courts, or two (2) years in case
the estate is settled extrajudicially. In such case, the amount in
respect of which the extension is granted shall be paid on or before
the date of the expiration of the period of the extension, and the
running of the Statute of Limitations for assessment as provided in
Section 203 of this Code shall be suspended for the period of any such
extension.

Where the taxes are assessed by reason of negligence,

intentional disregard of rules and regulations, or fraud on the part of
the taxpayer, no extension will be granted by the Commissioner.

If an extension is granted, the Commissioner may require the

executor, or administrator, or beneficiary, as the case may be, to
furnish a bond in such amount, not exceeding double the amount of
the tax and with such sureties as the Commissioner deems necessary,
conditioned upon the payment of the said tax in accordance with the
terms of the extension.549

547

Id., (A)(3)

548

Sec. (91) (A)

549

245
 2) Liability for payment

a) Discharge of
executor or
administrator from
personal
liability550

b) Definition of
deficiency 551

3) Payment before delivery

by executor or administrator

No judge shall authorize the executor or judicial administrator

to deliver a distributive share to any party interested in the estate
unless a certification from the Commissioner that the estate tax has
been paid is shown.552

a) Payment of tax
antecedent to the
transfer of shares,
bonds or rights

There shall not be transferred to any new owner in the books of

any corporation, sociedad anonima, partnership, business, or industry
organized or established in the Philippines any share, obligation, bond
Id., (B)

550

See (E)(2)(b)(3), under Estate Tax Returns

551

ibid

552

Sec. 94

246
or right by way of gift inter vivos or mortis causa, legacy or
inheritance, unless a certification from the Commissioner that the
taxes fixed in this Title and due thereon have been paid is shown.

If a bank has knowledge of the death of a person, who

maintained a bank deposit account alone, or jointly with another, it
shall not allow any withdrawal from the said deposit account, unless
the Commissioner has certified that the taxes imposed thereon by this
Title have been paid: Provided, however, That the administrator of the
estate or any one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an amount not
exceeding Twenty thousand pesos (P20,000) without the said
certification. For this purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors are still living at
the time of withdrawal by any one of the joint depositors and such
statement shall be under oath by the said depositors.553

4) Duties of certain officers

and debtors

Registers of Deeds shall not register in the Registry of Property

any document transferring real property or real rights therein or any
chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or
inheritance, unless a certification from the Commissioner that the tax
fixed in this Title and actually due thereon had been paid is show, and
they shall immediately notify the Commissioner, Regional Director,
Revenue District Officer, or Revenue Collection Officer or Treasurer of
the city or municipality where their offices are located, of the non-
payment of the tax discovered by them. Any lawyer, notary public, or
any government officer who, by reason of his official duties,
intervenes in the preparation or acknowledgment of documents
regarding partition or disposal of donation inter vivos or mortis causa,
legacy or inheritance, shall have the duty of furnishing the
Commissioner, Regional Director, Revenue District Officer or Revenue
Collection Officer of the place where he may have his principal office,
with copies of such documents and any information whatsoever which
may facilitate the collection of the aforementioned tax. Neither shall a
debtor of the deceased pay his debts to the heirs, legatee, executor or
administrator of his creditor, unless the certification of the
Commissioner that the tax fixed in this Chapter had been paid is
shown; but he may pay the executor or judicial administrator without

553

Sec. 97

247
said certification if the credit is included in the inventory of the estate
of the deceased.554

5) Restitution of tax upon

satisfaction of outstanding
obligations

If after the payment of the estate tax, new obligations of the

decedent shall appear, and the persons interested shall have satisfied
them by order of the court, they shall have a right to the restitution of
the proportional part of the tax paid.555

c. Donors Taxes

1) Time and place of

payment

The return of the donor required in this Section shall be filed

within thirty (30) days after the date the gift is made and the tax due
thereon shall be paid at the time of filing. Except in cases where the
Commissioner otherwise permits, the return shall be filed and the tax
paid to an authorized agent bank, the Revenue District Officer,
Revenue Collection Officer or duly authorized Treasurer of the city or
municipality where the donor was domiciled at the time of the
transfer, or if there be no legal residence in the Philippines, with the
Office of the Commissioner. In the case of gifts made by a
nonresident, the return may be filed with the Philippine Embassy or
Consulate in the country where he is domiciled at the time of the
transfer, or directly with the Office of the Commissioner.556

554

Sec. 95

555

Sec. 96

556

Sec. 103 (B)

248
 d. VAT

1) Payment of VAT

Every person liable to pay the value-added tax imposed under

this Title shall file a quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days following the close of each
taxable quarter prescribed for each taxpayer: Provided, however, That
VAT-registered persons shall pay the value-added tax on a monthly
basis.

Any person, whose registration has been cancelled in

accordance with Section 236, shall file a return and pay the tax due
thereon within twenty-five (25) days from the date of cancellation of
registration: Provided, That only one consolidated return shall be filed
by the taxpayer for his principal place of business or head office and
all branches.

2) Where to pay the VAT

Except as the Commissioner otherwise permits, the return shall

be filed with and the tax paid to an authorized agent bank, Revenue
Collection Officer or duly authorized city or municipal Treasurer in
the Philippines located within the revenue district where the taxpayer
is registered or required to register.557

F. Tax Remedies under the NIRC

1. Taxpayers Remedies

a. Assessment

1) Concept of assessment

1. It is the official action of an officer authorized by law in

ascertaining the amount of tax due under the law from a taxpayer.
This action necessarily involves:

a. the computation of the sum due;

b. giving notice to that effect to the taxpayer; and

557

Sec. 114 (B)

249
 c. the making, simultaneously with or sometime after the giving
of notice, of a demand upon him for the payment of the tax deficiency
stated.

a) Requisites for valid assessment

a. post-reporting notice or notice for an informal conference

after the tax audit
b. Pre-assessment notice, if required
c. Issuance and receipt of Notice of Assessment

i. must be issued prior to lapse of prescriptive period

ii. the written notice must state the facts and the law upon
which the assessment is based

b) Constructive methods of income

determination

c) Inventory method for income

determination558

Assessment is made when it is mailed, released or sent.

d) Jeopardy assessment

An assessment made demanding immediate payment of the tax

due without the usual formalities in instances when the Commissioner
believes that if the tax will be collected under normal procedures, the
collection of such tax is at risk which might result in loss to the
government.

Instances when jeopardy assessment may be issued:

When it shall come to the knowledge of the Commissioner that a

taxpayer is:

a. retiring from business subject to tax; or

b. intending
1. to leave the Philippines or remove his
property therefrom; or
2. to hide or conceal his property;

558

also called Net Investigatory Method

250
 c. performing any act tending
1. to obstruct the proceedings for the collection of
the tax for the past or current quarter or year; or
2. to render the same totally or partly ineffective
unless such proceedings are begun immediately.559
3.
e) Tax delinquency and tax
deficiency

Tax delinquency the taxpayer did not file a return

Tax deficiency the taxpayer filed a return but the same was
deficient. Deficiency is the difference between the tax due and the tax
paid.

2) Power of the Commissioner to make

assessments and prescribe additional
requirements for tax administration and
enforcement

a) Power of the Commissioner to

obtain information, and to
summon/examine, and take
testimony of persons

In ascertaining the correctness of any return, or in making a

return when none has been made, or in determining the liability of
any person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is
authorized:

(A) To examine any book, paper, record, or other data which

may be relevant or material to such inquiry;

(B) To Obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit or
investigation, or from any office or officer of the national and local

559

Sec. 6D, R.A. 8424

251
governments, government agencies and instrumentalities, including
the Bangko Sentral ng Pilipinas and government-owned or -controlled
corporations, any information such as, but not limited to, costs and
volume of production, receipts or sales and gross incomes of
taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional
operating headquarters of multinational companies, joint accounts,
associations, joint ventures of consortia and registered partnerships,
and their members;

(C) To summon the person liable for tax or required to file a

return, or any officer or employee of such person, or any person
having possession, custody, or care of the books of accounts and other
accounting records containing entries relating to the business of the
person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and
place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;

D) To take such testimony of the person concerned, under oath,

as may be relevant or material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass

from time to time of any revenue district or region and inquire after
and concerning all persons therein who may be liable to pay any
internal revenue tax, and all persons owning or having the care,
management or possession of any object with respect to which a tax is
imposed.

The provisions of the foregoing paragraphs notwithstanding,

nothing in this Section shall be construed as granting the
Commissioner the authority to inquire into bank deposits other than
as provided for in Section 6(F) of this Code.560

3) When assessment is made

a) Prescriptive period for

assessment

560

Sec. 5

252
 (1) False, fraudulent, and non-
filing of returns

Ten (10) years after the discovery of the falsity, fraud or

omission.561

b) Suspension of running of statute

of limitations

1) Periods suspended:

(a) periods for assessment in Secs. 203562 and 222563

(b) beginning of distraint or levy
(c) proceeding in court for collection

2) Grounds for suspension of prescriptive periods:

a) Commissioner is prohibited from making the

assessment or beginning distraint or levy or a proceeding in
court and for 60 days thereafter

b) Taxpayer requests for Reinvestigation which is granted

c) Taxpayer cannot be located in the address given in the

return filed, except if the taxpayer informs the Commissioner of
a change in address the prescriptive period will not be
suspended

d) When the warrant is duly served upon the taxpayer and

no property could be located

561

Sec. 222

562

See Reference

563

Ibid.

253
 e) When the taxpayer is out of the Phils.564

4) General provisions on additions to the

tax

a) Civil penalties
b) Interest565

Additions to the tax consist of the:

564

Sec. 223

565

This is an increment on any unpaid amount of tax, assessed at the rate of twenty
percent (20%) per annum, or such higher rate as may be prescribed y rules and regulations, from
the date prescribed for payment until the amount is fully paid. (Sec. 249 [A], 1997 NIRC)

Interest is classified into:

1.Deficiency interest

Any deficiency in the tax due, as the term is defined in this code, shall be subject to the
interest of 20% per annum, or such higher rate as may be prescribed by rules and regulations,
which shall be assessed and collected from the date prescribed for its payment until the full
payment thereof (Sec. 249 [B], 1997 NIRC)

2.Delinquency interest

This kind of interest is imposed in case of failure to pay:

(1)The amount of the tax due on any return required to be filed, or

(2)The amount of the tax due for which no return is required, or

254
 (1) civil penalty, otherwise known as surcharge, which may
either be 25% or 50 % of the tax depending upon the nature of the
violation;

(2) interest either for a deficiency tax or delinquency as to

payment;

(3) other civil penalties or administrative fines such as for

failure to file certain information returns and violations committed by
withholding agents.566

5) Assessment process567

a) Tax audit

(3)A deficiency tax, or any surcharge or interest thereon on the due date appearing in
the notice and demand of the Commissioner.

566

General Considerations on the Addition to tax

a. Additions to the tax or deficiency tax apply to all taxes, fees, and charges imposed
in the Tax Code.

b. The amount so added to the tax shall be collected at the same time, in the same
manner, and as part of the tax.

c. If the withholding agent is the government or any of its agencies, political

subdivisions or instrumentalities, or a government owned or controlled corporation, the
employee thereof responsible for the withholding and remittance of the tax shall be personally
liable for the additions to the tax prescribed (Sec. 247[b], 1997 NIRC) such as the 25% surcharge
and the 20% interest per annum on the delinquency (Secs. 248 and 249 [C], 1997 NIRC)

567

Assessments Prima facie correct Tax assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has the duty to prove otherwise. (Sy Po v. CTA, GRN
L- 81446 August 18, 1988.)

255
 The process of examining, going over, or scrutinizing the books
and records of the taxpayer to ascertain the correctness of the tax
declared and paid by the taxpayer. It can only be performed upon a
Letter of Authority issued by the Commissioner or Regional Director.

b) Notice of informal conference

A written notice informing a taxpayer that the findings of the

audit conducted on his books of accounts and accounting records
indicate that additional taxes or deficiency assessments have to be
paid

- If, after the culmination of an audit, a Revenue Officer

recommends the imposition of deficiency tax assessments, this
recommendation is communicated by the Bureau to the taxpayer
concerned during an informal conference called for this purpose, the
taxpayer shall have 15 days from receipt of the notice of informal
conference to explain his side.

c) Issuance of preliminary
assessment notice (PAN)

Communication issued by the Regional Assessment Division or

any other concerned BIR office, informing a taxpayer who has been
audited of the findings of the Revenue Officer, following the review of
these findings. The assessment shall be in writing, and should inform
the taxpayer of the law and the facts on which the assessment is
made; otherwise, the assessment is void.

- If the taxpayer disagrees with the findings in the PAN, he has

15 days to file a written reply contesting the proposed assessment.

d) Exceptions to Issuance of PAN

(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the
face of the return; or

(b) When a discrepancy has been determined between the tax

withheld and the amount actually remitted by the withholding agent;
or

(c) When a taxpayer 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

256
claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been
paid; or

(e) When the article locally purchased or imported by an exempt

person, such as, but not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold, traded or transferred to
non-exempt persons.568

e) Reply to PAN

Within a period to be prescribed by implementing rules and

regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
findings.569

f) Issuance of formal letter of

demand and assessment
notice/final assessment notice570

568

Sec. 228

569

570

GENERAL RULE: Taxes are self-assessing and do

not require the issuance of an assessment notice in

order to establish the tax liability of a taxpayer.

Exceptions:

257
 Notice of Assessment is a formal letter of demand where a
declaration of deficiency taxes is issued to a taxpayer who fails to
respond to a pre-assessment notice within the prescribed period of
time, or whose reply to the PAN was found to be without merit. This is
commonly known as the Final Assessment Notice. An assessment
contains not only a computation of under declaration of taxable sales,
receipts or income, OR a substantial overstatement of deductions.
g) Disputed assessment

Taxpayer or his duly authorized representative may

administratively protest against a Formal Letter of Demand and
Assessment notice within thirty (30) days from date of receipt thereof.

If the protest is denied in whole or part, or is not acted upon

within one hundred eighty (180) days from submission of documents,
the taxpayer adversely affected by the decision or inaction may appeal
to the CTA within 30 days from receipt of the said decision, or from
lapse of the one hundred (180)-day period: otherwise, the decision
shall become final and executor.

j) Administrative decision on a
disputed assessment

Adverse decision or ruling rendered by the Commissioner of

Internal Revenue in disputed assessment or claim for tax refund
or credit, taxpayer may appeal the same within thirty (30) days after
receipt.571

Appeal equivalent to a judicial action.

1. Tax period of a taxpayer is terminated (sec.

6d, NIRC)

2. Deficiency tax liability arising from a tax audit conducted by a BIR (sec 56b, NIRC)

3. Tax lien (sec. 219, NIRC)

4. Dissolving Corporation (sec. 52c, NIRC

571

Sec. 11, R.A. No. 1125

258
 In the absence of appeal, the decision becomes final and
executory. But where the taxpayer adversely affected has not received
the decision or ruling, he could not appeal the same to the CTA within
30 days from notice. Hence, it could not become final and executory.572

Motion for reconsideration suspends the running of the 30 - day

period of perfecting an appeal. Must advance new grounds not
previously alleged to toll the reglementary period; otherwise, it would
be merely pro-forma.573

6) Protesting assessment

a) Protest574 of assessment by
taxpayer

(1) Protested assessment

(2) When to file a protest

Filing a request for reconsideration575 or reinvestigation576 within

30 days from receipt of assessment.

572

Republic vs. De la Rama, 18 SCRA 861

573

Roman Catholic Archbishop vs. Coll., L-16683, Jan. 31, 1962

574

A protest is a vital document which is a formal declaration of resistance of the taxpayer.

It is a repository of all arguments. It can be used in court in case of administrative remedies have
been exhausted. It is also the formal act of the taxpayer questioning the official actuations of the
CIR. This is equivalent to a pleading.

575

a plea for re-evaluation of the assessment on the basis of existing records without need
of additional evidence. Involves a question of fact or law or both. (Revenue Regulation No. 12-
85)

259
 (3) Forms of protest

1. It is made in writing, and addressed to the Commissioner of

Internal Revenue.

2. It contains information as specified in RR12-85.

3. It states the facts, applicable law, rules and regulations or

jurisprudence on which his protest is based, otherwise the protest
shall be considered void and without force and effect.
4. It is filed within the period prescribed by law.

b) Submission of documents within

60 days from filing of protest

Within 60 days from filing, all relevant documents should be

filed, otherwise assessment becomes final and cannot be appealed.577
c) Effect of failure to protest578

576

a plea for re-evaluation of an assessment on the basis of newly discovered or additional

evidence that a taxpayer intends to present in the reinvestigation. Involves a question of fact or
law or both

577

Sec 228

Submission of documents within the 60 days period is optional to the taxpayer. The
relevant supporting documents mentioned in the law refers to such documents which the
taxpayer feels would be necessary to support his protest and not what the Commissioner feels
should be submitted, otherwise the taxpayer would always be at the mercy of the BIR which may
require production of such documents which taxpayer could not produce. (Standard Chartered
Bank v. CTA, Case No. 5696, Aug. 16, 2001)

578

See b), supra

260
 7) Rendition of decision by
Commissioner

a) Denial of protest579

(1) CIRs actions equivalent

to denial of protest

(a) Filing of criminal

action against taxpayer
(b) Issuing a warrant of
distraint and levy

These actions of the CIR serve as bases for appeal to the CTA.

(2) Inaction by Commissioner

The protest is not acted upon by the Commissioner within 180

days from submission of documents.

579

1. Direct Denial

The decision of the Commissioner or his duly rep shall (a) state the facts, applicable
law, rules and regulations or jurisprudence on which his protest is based, otherwise the protest
shall be considered void and without force and effect, in which case the same shall not be
considered a decision a disputed assessment and (b) that the same is his final decision. (sec.
3.1.5, RR 12-99)

2. Indirect Denial

a. Commissioner did not rule on the taxpayers MR of the assessment it was only when
respondent received summons on the civil action for the collection of deficiency income tax that
the period to appeal commenced to run. (CIR vs. Union Shipping Corp.)

b. Referral by the Commissioner of request for reinvestigation to the Solicitor General

(Republic vs. Lim Tian Teng Sons)

c. Reiterating the demand for immediate payment of the deficiency tax due to taxpayers
continued refusal to execute waiver (CIR vs. Ayala Securities Corp.)

d. Preliminary collection letter may serve as assessment notice (United Intl Pictures vs.
CIR)

261
 8) Remedies of taxpayer to action by
Commissioner

a) In case of denial of protest

Appeal of Protest to the Court of Tax Appeals (CTA) within 30

days from receipt of decision denying the protest.

b) In case of inaction by
Commissioner within 180 days
from submission of documents

Appeal of Protest to the Court of Tax Appeals (CTA) 30 days

from the lapse of 180 day period.

c) Effect of failure to appeal

The decision shall be final, executory and demandable.

b. Collection

1) Requisites

2) Prescriptive periods

Local taxes, fees or charges may be collected within five years

from the date of assessment by administrative or judicial action. No
such action shall be instituted after the expiration of such period.580

3) Distraint of personal property

including garnishment

a) Summary remedy of distraint of

personal property
(1) Procedure for distraint
and garnishment

The officer serving the warrant of distraint shall make or cause

to be made an account of the goods, chattels, effects or other personal

580

sec. 194, LGC

262
property distrained, a copy of which, signed by himself, shall be left
either with the owner or person from whose possession such goods,
chattels, or effects or other personal property were taken, or at the
dwelling or place of business of such person and with someone of
suitable age and discretion, to which list shall be added a statement of
the sum demanded and note of the time and place of sale.

Stocks and other securities shall be distrained by serving a copy

of the warrant of distraint upon the taxpayer and upon the president,
manager, treasurer or other responsible officer of the corporation,
company or association, which issued the said stocks or securities.

Debts and credits shall be distrained by leaving with the person

owing the debts or having in his possession or under his control such
credits, or with his agent, a copy of the warrant of distraint. The
warrant of distraint shall be sufficient authority to the person owning
the debts or having in his possession or under his control any credits
belonging to the taxpayer to pay to the Commissioner the amount of
such debts or credits.

Bank accounts shall be garnished by serving a warrant of

garnishment upon the taxpayer and upon the president, manager,
treasurer or other responsible officer of the bank. Upon receipt of the
warrant of garnishment, the bank shall turn over to the Commissioner
so much of the bank accounts as may be sufficient to satisfy the claim
of the Government.581

(2) Sale of property

distrained and disposition of
proceeds

The Revenue District Officer or his duly authorized

representative, other than the officer referred to in Section 208 of this
Code shall, according to rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner,
forthwith cause a notification to be exhibited in not less than two (2)
public places in the municipality or city where the distraint is made,
specifying; the time and place of sale and the articles distrained. The
time of sale shall not be less than twenty (20) days after notice. One
place for the posting of such notice shall be at the Office of the Mayor
of the city or municipality in which the property is distrained.
581

Sec. 208

263
 At the time and place fixed in such notice, the said revenue
officer shall sell the goods, chattels, or effects, or other personal
property, including stocks and other securities so distrained, at public
auction, to the highest bidder for cash, or with the approval of the
Commissioner, through duly licensed commodity or stock exchanges.

In the case of Stocks and other securities, the officer making the
sale shall execute a bill of sale which he shall deliver to the buyer, and
a copy thereof furnished the corporation, company or association
which issued the stocks or other securities. Upon receipt of the copy
of the bill of sale, the corporation, company or association shall make
the corresponding entry in its books, transfer the stocks or other
securities sold in the name of the buyer, and issue, if required to do
so, the corresponding certificates of stock or other securities.

Any residue over and above what is required to pay the entire
claim, including expenses, shall be returned to the owner of the
property sold. The expenses chargeable upon each seizure and sale
shall embrace only the actual expenses of seizure and preservation of
the property pending ;the sale, and no charge shall be imposed for the
services of the local internal revenue officer or his deputy.582

(a) Release of
distrained property
upon payment prior to
sale

If at any time prior to the consummation of the sale all proper

charges are paid to the officer conducting the sale, the goods or
effects distrained shall be restored to the owner.583

(3)Purchase by the
government at sale upon
distraint

582

Sec. 209

583

Sec. 210

264
 When the amount bid for the property under distraint is not
equal to the amount of the tax or is very much less than the actual
market value of the articles offered for sale, the Commissioner or his
deputy may purchase the same in behalf of the national Government
for the amount of taxes, penalties and costs due thereon.

Property so purchased may be resold by the Commissioner or

his deputy, subject to the rules and regulations prescribed by the
Secretary of Finance, the net proceeds therefrom shall be remitted to
the National Treasury and accounted for as internal revenue.584

(4) Report of sale to BIR

Within two (2) days after the sale, the officer making the same
shall make a report of his proceedings in writing to the Commissioner
and shall himself preserve a copy of such report as an official record.585
(5) Constructive distraint to
protect the interest of the
government

To safeguard the interest of the Government, the Commissioner

may place under constructive distraint the property of a delinquent
taxpayer or any taxpayer who, in his opinion, is retiring from any
business subject to tax, or is intending to leave the Philippines or to
remove his property therefrom or to hide or conceal his property or to
perform any act tending to obstruct the proceedings for collecting the
tax due or which may be due from him.

The constructive distraint of personal property shall be affected

by requiring the taxpayer or any person having possession or control
of such property to sign a receipt covering the property distrained and
obligate himself to preserve the same intact and unaltered and not to
dispose of the same ;in any manner whatever, without the express
authority of the Commissioner.

584

Sec. 212

585

Sec. 211

265
 In case the taxpayer or the person having the possession and
control of the property sought to be placed under constructive
distraint refuses or fails to sign the receipt herein referred to, the
revenue officer effecting the constructive distraint shall proceed to
prepare a list of such property and, in the presence of two (2)
witnessed, leave a copy thereof in the premises where the property
distrained is located, after which the said property shall be deemed to
have been placed under constructive distraint.586

4) Summary remedy of levy on real

property

a) Advertisement and sale

Within twenty (20) days after levy, the officer conducting the
proceedings shall proceed to advertise the property or a usable
portion thereof as may be necessary to satisfy the claim and cost of
sale; and such advertisement shall cover a period of a least thirty (30)
days. It shall be effectuated by posting a notice at the main entrance
of the municipal building or city hall and in public and conspicuous
place in the barrio or district in which the real estate lies and ;by
publication once a week for three (3) weeks in a newspaper of general
circulation in the municipality or city where the property is located.
The advertisement shall contain a statement of the amount of taxes
and penalties so due and the time and place of sale, the name of the
taxpayer against whom taxes are levied, and a short description of the
property to be sold. At any time before the day fixed for the sale, the
taxpayer may discontinue all proceedings by paying the taxes,
penalties and interest. If he does not do so, the sale shall proceed and
shall be held either at the main entrance of the municipal building or
city hall, or on the premises to be sold, as the officer conducting the
proceedings shall determine and as the notice of sale shall specify.

Within five (5) days after the sale, a return by the distraining or
levying officer of the proceedings shall be entered upon the records of
the Revenue Collection Officer, the Revenue District officer and the

586

Sec. 206

266
Revenue Regional Director. The Revenue Collection Officer, in
consultation with the Revenue district Officer, shall then make out and
deliver to the purchaser a certificate from his records, showing the
proceedings of the sale, describing the property sold stating the name
of the purchaser and setting out the exact amount of all taxes,
penalties and interest: Provided, however, That in case the proceeds
of the sale exceeds the claim and cost of sale, the excess shall be
turned over to the owner of the property.

The Revenue Collection Officer, upon approval by the Revenue

District Officer may, out of his collection, advance an amount
sufficient to defray the costs of collection by means of the summary
remedies provided for in this Code, including ;the preservation or
transportation in case of personal property, and the advertisement
and subsequent sale, both in cases of personal and real property
including improvements found on the latter. In his monthly collection
reports, such advances shall be reflected and supported by receipts. 587

b) Redemption of property sold

Within one (1) year from the date of sale, the delinquent
taxpayer, or any one for him, shall have the right of paying to the
Revenue District Officer the amount of the public taxes, penalties, and
interest thereon from the date of delinquency to the date of sale,
together with interest on said purchase price at the rate of fifteen
percent (15%) per annum from the date of purchase to the date of
redemption, and such payment shall entitle the person paying to the
delivery of the certificate issued to the purchaser and a certificate
from the said Revenue District Officer that he has thus redeemed the
property, and the Revenue District Officer shall forthwith pay over to
the purchaser the amount by which such property has thus been
redeemed, and said property thereafter shall be free form the lien of
such taxes and penalties.

The owner shall not, however, be deprived of the possession of

the said property and shall be entitled to the rents and other income
thereof until the expiration of the time allowed for its redemption.588

587

Sec. 213

588

Sec. 214

267
 c) Final deed of purchaser

In case the taxpayer shall not redeem the property as herein

provided the Revenue District Officer shall, as grantor, execute a deed
conveying to the purchaser so much of the property as has been sold,
free from all liens of any kind whatsoever, and the deed shall succintly
recite all the proceedings upon which the validity of the sale
depends.589

5) Forfeiture to government for want of

bidder

a) Remedy of enforcement of
forfeitures

(1)Action to contest
forfeiture of chattel

In case of the seizure of personal property under claim of

forfeiture, the owner desiring to contest the validity of the forfeiture
may, at any time before sale or destruction of the property, bring an
action against the person seizing the property or having possession
thereof to recover the same, and upon giving proper bond, may enjoin
the sale; or after the sale and within six (6) months, he may bring an
action to recover the net proceeds realized at the sale.590

b) Resale of real estate taken for

taxes

The Commissioner shall have charge of any real estate obtained

by the Government of the Philippines in payment or satisfaction of
taxes, penalties or costs arising under this Code or in compromise or
adjustment of any claim therefore, and said Commissioner may, upon

589

Sec. 202

590

Sec. 231

268
the giving of not less than twenty (20) days notice, sell and dispose of
the same of public auction or with prior approval of the Secretary of
Finance, dispose of the same at private sale. In either case, the
proceeds of the sale shall be deposited with the National Treasury,
and an accounting of the same shall rendered to the Chairman of the
Commission on Audit.591

c) When property to be sold or

destroyed

Sales of forfeited chattels and removable fixtures shall be

effected, so far as practicable, in the same manner and under the
same conditions as the public notice and the time and manner of sale
as are prescribed for sales of personal property distrained for the non-
payment of taxes.

Distilled spirits, liquors, cigars, cigarettes, other manufactured

products of tobacco, and all apparatus used I or about the illicit
production of such articles may, upon forfeiture, be destroyed by
order of the Commissioner, when the sale of the same for consumption
or use would be injurious to public health or prejudicial to the
enforcement of the law.

All other articles subject to excise tax, which have been

manufactured or removed in violation of this Code, as well as dies for
the printing or making of internal revenue stamps and labels which
are in imitation of or purport to be lawful stamps, or labels may, upon
forfeiture, be sold or destroyed in the discretion of the Commissioner.

Forfeited property shall not be destroyed until at least twenty

(20) days after seizure.592

d) Disposition of funds recovered

in legal proceedings or obtained
from forfeiture

591

Sec. 216

592

Sec. 225

269
 All judgments and monies recovered and received for taxes,
costs, forfeitures, fines and penalties shall be paid to the
Commissioner or his authorized deputies as the taxes themselves are
required to be paid, and except as specially provided, shall be
accounted for and dealt with the same way.593

6) Further distraint or levy

The remedy by distraint of personal property and levy on realty

may be repeated if necessary until the full amount due, including all
expenses, is collected.594

7) Tax lien

A legal claim or charge on property, either real or personal,

established by law as a security in default of the payment of taxes.

1. Nature:

A lien in favor of the government of the Philippines when a

person liable to pay a tax neglects or fails to do so upon demand.

2. Duration:

Exists from time assessment is made by the CIR until paid, with
interests, penalties and costs.

593

Sec. 226

594

Sec. 217

Otherwise, a clever taxpayer who is also able to conceal most of the valuable part of
his property would escape payment of his tax liability by sacrificing an insignificant portion of his
holdings.

270
 1. Extent:
Upon all property and rights to property belonging to the taxpayer.

2. Effectivity against third persons:

Only when notice of such lien is filed by the CIR in the Register of
Deeds concerned.

8) Compromise

a) Authority of the Commissioner

to compromise and abate taxes

(A) Compromise the payment of any internal revenue tax, when:

(1) A reasonable doubt as to the validity of the claim

against the taxpayer exists; or
(2) The financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax.

The compromise settlement of any tax liability shall be subject

to the following minimum amounts:

For cases of financial incapacity, a minimum compromise rate

equivalent to ten percent (10%) of the basic assessed tax; and

For other cases, a minimum compromise rate equivalent to forty

percent (40%) of the basic assessed tax.

Where the basic tax involved exceeds One million pesos

(P1,000.000) or where the settlement offered is less than the
prescribed minimum rates, the compromise shall be subject to the
approval of the Evaluation Board which shall be composed of the
Commissioner and the four (4) Deputy Commissioners

(B) Abate or cancel a tax liability, when:

(1) The tax or any portion thereof appears to be unjustly

or excessively assessed; or

(2) The administration and collection costs involved do not

justify the collection of the amount due.

All criminal violations may be compromised except: (a) those

already filed in court, or (b) those involving fraud.595

595

271
 9) Civil and criminal actions

a) Suit to recover tax based on

false or fraudulent returns

If tax is collected under an assessment that the list, statement

or return is false/fraudulently made, it cannot be recovered by any
suit unless it is proved that the said list, statement or return was not
false nor fraudulent & did not contain any understatement or
undervaluation

Not applicable to statements or returns made or to be made in

good faith regarding annual depreciation of oil or gas wells & mines.

c. Refund596

1) Grounds and requisites for refund

a) Taxes erroneously or illegally received

b) Penalties imposed without authority
c) Any sum alleged to have been excessively or in any manner
wrongfully collected
d) Refund the value of internal revenue stamps when returned
in good condition
by the purchaser

Sec. 204 (A)(B)

596

A suit or proceedings for tax refund may be maintained whether or not such tax, penalty
or sum has been paid under protest or duress (Sec. 229)

Similarly, payment under protest is not necessary in refund for local taxes. (Sec. 196
LGC),

however, under protest is necessary to claim for

(a)real property taxes (Sec. 252 LGC)

(b)custom duties (Sec 2308 TCC

272
 e) Redeem or change unused stamps rendered unfit for use and
refund their value upon proof of destruction, in the discretion of the
Commission

2) Requirements for refund as laid down

by cases

a) Necessity of written claim for

refund

This requirement is mandatory.597

Except:

Tax credit or tax refund where on the face of the return upon
which payment is made, such payment appears clearly to have been
erroneous.598

b) Claim containing a categorical

demand for reimbursement

Categorical demand for reimbursement.

c) Filing of administrative claim for

refund and the suit/proceeding
before the CTA within 2 years from

597

Reasons:

a) to afford the commissioner an opportunity to correct the action of subordinate

officer and

(b) to notify the government that the taxes sought to be refunded are under question
and that, therefore, such notice should then be borne in mind in estimating the revenue
available for expenditure(Bermejo vs. CIR 87 Phil 96)

598

Sec. 229

273
 date of payment regardless of any
supervening cause599

Requirement a condition precedent and non-compliance

therewith bars recovery.600

Refers not only to the administrative claim that the taxpayer

should file within 2years from date of payments with the BIR, but also
the judicial claim or the action for refund the taxpayer should
commence with the CTA.601

3) Legal basis of tax refunds

Legal principle of quasi-contracts or solutio indebiti.602

The Government is within the scope of the principle of solutio
indebiti.603

4) Statutory basis for tax refund under

the Tax Code

599

Secs.204 (c) & 229

600

Phil. Acetylene Co. Inc, vs. Commissioner, CTA Case No. 1321, Nov. 7, 1962

601

see Gibbs vs.. Collector of Internal Revenue, 107 Phil 232

602

see Art. 2142 & 2154, CC

603

CIR vs. Firemans Fund Insurance Co

274
 a) Scope of claims for refund

The Commissioner may credit or refund taxes:

a) Erroneously or illegally assessed or collected internal

revenue taxes
b) Penalties imposed without authority
c) Any sum alleged to have been excessive or in any manner
wrongfully collected.604

b) Necessity of proof for claim or

refund

Refund claim partakes of the nature of an exemption which

cannot be allowed unless granted in the most explicit and
categorical language.605

Failure to discharge burden of giving proof is fatal to claim.

It must be shown that payment was an independent single act

of voluntary payment of a tax believed to be due, collectible and
accepted by the government, and which therefore, become part of
the state moneys subject to expenditure and perhaps already spent
or appropriated.606

c) Burden of proof for claim of

refund

604

Secs. 204 and 209

605

CIR vs. Johnson and Sons

606

CIR vs. Li Yao, L-11875,Dec. 28, 1963

275
 Written claim for refund or tax credit filed by the taxpayer with
the Commissioner.

d) Nature of erroneously paid

tax/illegally assessed collected

Taxpayer pays under the mistake of fact, as for instance in a

case where he is not aware of the existing exemption in his favor at
the time payments were made.

A tax is illegally collected if payments are made under duress.

e) Tax refund vis--vis tax credit607

A tax refund requires a physical return of the sum erroneously

paid by the taxpayer.

The taxpayer to whom the tax is refunded would have the

option, among others, to invest for profit the returned sum, an option
not proximately available if the taxpayer chooses instead to receive a
tax credit.608

Tax credit generally refers to an amount that is subtracted

directly from ones total tax liability, an allowance against the tax
itself, or a deduction from what is owned.

607

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

608

Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, ibid.

276
 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.609

f) Essential requisites for claim of

refund

a. The claim is filed with the Commissioner of Internal Revenue

within the two-year period from the date of the payment of the tax.
b. It is shown on the return of the recipient that the income
payment received was declared as part of the gross income; and
c. The fact of withholding is established by a copy of a
statement duly issued by the payee showing the amount paid and the
amount of tax withheld therefrom.610

5) Who may claim/apply for tax

refund/tax credit

a) Taxpayer/withholding agents of
non-resident foreign corporation

A withholding agent is subject to and liable for deficiency

assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have
been withheld under the law. A person liable for tax has been held
to be a person subject to tax and properly considered a taxpayer.
xxx By any reasonable standard, such a person should be regarded as
a party in interest, or as a person having sufficient legal interest, to
bring a suit for refund of taxes.611

609

Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647,

April 15,2005

610

Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682,
March 27, 2007

611

CIR vs. Procter and Gamble PMC, 204 SCRA 377

277
 6) Prescriptive period for recovery of tax
erroneously or illegally collected

Two (2) years from the date of payment of the tax or penalty.

7) Other consideration affecting tax

refunds

a) Taxpayer may file an action for refund in the CTA even before
the Commissioner decides his pending claim in the BIR.612

b) Suspension of the 2-year prescriptive period may be had

when:

i. there is a pending litigation between the two parties

(government and taxpayer) as to the proper tax to be paid and of the
proper interpretation of the taxpayers charter in relation to the
disputed tax; and

ii. the commissioner in that litigated case agreed to abide by

the decision of the Supreme Court as to the collection of taxes relative
thereto.613

c) Even if the 2-year period has lapsed the same is not

jurisdictional and may be suspended for reasons of equity and other
special circumstances.614

612

Commissioner of Internal Revenue vs. Palanca, Jr., L-16626, Oct. 29, 1966

613

Panay Electric Co., Inc. vs. Collector of Internal Revenue, 103 Phil. 819

614

CIR vs. Phil. American Life Ins. Co., G.R. No. 105208, May 29, 1995

278
 d) 2-year prescriptive period for filing of tax refund or credit
claim computed from date of payment of tax of penalty except in the
following:

i. Corporations:

2-year prescriptive period for overpaid quarterly income

tax is counted not from the date the corporation files its
quarterly income tax return, but from the date the final
adjusted return is filed after the taxable year.615

ii. Taxes payable in installment:

2-year period is counted form the payment of the last

installment.616

iii. Withholding Taxes

Prescriptive period counted not from the date the tax is

withheld and remitted to the BIR, but from the end of the
taxable year.617

iv. VAT Registered Person whose sales are zero-rated or

effectively zero-rated

2-year period computed from the end of the taxable

quarter when the sales transactions were made.618

615

Commissioner of Internal Revenue vs. TMX Sales, Inc., G.R. No.83736, Jan. 15, 1992

616

CIR vs. Palanca, Jr., supra

617

Gibbs vs. Commissioner of Internal Revenue, supra

618

279
 e) Interest on Tax Refund:

The Government cannot be required to pay interest on taxes

refunded to the taxpayer unless:

i. The Commissioner acted with patent arbitrariness 619

ii. In case of Income Tax withheld on the wages of employees. 620

2. Government Remedies

a. Administrative remedies

1) Tax lien621

Sec. 112 (A)

619

Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions (CIR

vs.Victorias Milling Corp., Inc. L-19607, Nov. 29,1966)

620

Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or
credited within 3 months from the fifteenth (15th) day of April. Refund or credit after such time
earn interest at the rate of 6% per annum, starting after the lapse of the 3-month period to the
date the refund or credit is made (Sec 79 (c) (2))

621

280
 2) Levy and sale of real property

Levy Act of seizure of real property in order to enforce the

payment of taxes. The property may be sold at public sale, if after
seizure; the taxes are not voluntarily paid.

The requisites are the same as that of distraint.

Procedure:

1. International Revenue officer shall prepare a duly authenticated certificate

showing
a. Name of taxpayer
b. Amount of tax and
c. Penalty due.
- enforceable throughout the Philippines
2. Officer shall write upon the certificate a description of the property upon
which levy is made.
3. Service of written notice to:
a. The taxpayer, and
b. RD where property is located.
4. Advertisement of the time and place of sale.
5. Sale at public auction to highest bidder.
6. Disposition of proceeds of sale.
The excess shall be turned over to owner

3) Forfeiture of real property to the

government for want of bidder

Forfeiture: Implies a divestiture of property without

compensation, in consequence of a default or offense.

Includes the idea of not only losing but also having the property
transferred to another without the consent of the owner and
wrongdoer.

1. Effect: Transfer the title to the specific thing from the owner to the
government.
2. When available:
a. No bidder for the real property exposed for sale.
b. If highest bid is for an amount insufficient to pay the taxes,
penalties and costs.
- Within two days thereafter, a return of the proceeding is duly
made.
3. How enforced:
a. In case of personal property by seizure and sale or destruction
of the specific forfeited property.
See (F)(1)(b)(7), supra

281
 b. In case of real property by a judgment of condemnation and
sale in a legal action or proceeding, civil or criminal, as the
case may require.

4) Further distraint and levy622

5) Suspension of business operation623

6) Non-availability of injunction to
restrain collection of tax

No court shall have the authority to grant an injunction to

restrain the collection of any national internal revenue tax, fee or
charge imposed by this Code.624

Exception:

Injunction may be issued by the CTA in aid of its appellate

jurisdiction.625

b. Judicial remedies
622

See (F)(1)(b)(6), supra

623

See (E)(1)(a)(6), supra

624

Sec. 218

625

under Sec. 11 of RA 1125, as amended by RA 9282 (when in the opinion of the Court
the collection may jeopardize the interest of the Government and/or the taxpayer, the Court
any stage of the proceeding may suspend the said collection and require the taxpayer either to
deposit the amount claimed or to file a surety bond for not more than double the amount with
the Court).

282
 Civil and Criminal Actions:

1. Brought in the name of the Government of the Philippines.

2. Conducted by Legal Officer of BIR
3. Must be with the approval of the CIR, in case of action, for
recovery of taxes, or enforcement of a fine, penalty or
forfeiture.

A. Civil Action

Actions instituted by the government to collect internal

revenue taxes in regular courts (RTC or MTCs, depending on
the amount involved)
When assessment made has become final and executory
for failure or taxpayer to:
a. Dispute same by filing protest with CIR
b. Appeal adverse decision of CIR to CTA

B. Criminal Action
A direct mode of collection of taxes, the judgment of which
shall not only impose the penalty but also order payment of
taxes.
An assessment of a tax deficiency is not necessary to a
criminal prosecution for tax evasion, provided there is a prima
facie showing of willful attempt to evade.

3. Statutory Offenses and Penalties

a. Civil penalties

1) Surcharge

A civil penalty imposed by law as an addition to the main tax

required to be paid. It is not a criminal penalty but a civil
administrative sanction provided primarily as safeguard for the
protection of the State revenue and to reimburse the government for
the expenses of investigation and the loss resulting from the
taxpayers fraud. A surcharge added to the main tax is subject to
interest.

2) Interest

a) In General

283
 There shall be assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per annum, or such
higher rate as may be prescribed by rules and regulations, from the
date prescribed for payment until the amount is fully paid.626

b) Deficiency interest

Any deficiency in the tax due, as the term is defined in this

Code, shall be subject to the interest prescribed in Subsection (A)
hereof, which interest shall be assessed and collected from the date
prescribed for its payment until the full payment thereof.627

c) Delinquency interest

In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon on the

due date appearing in the notice and demand of the Commissioner,
there shall be assessed and collected on the unpaid amount, interest
at the rate prescribed in Subsection (A) hereof until the amount is
fully paid, which interest shall form part of the tax.628

d) Interest on extended payment

626

Sec. 249 (A)

627

Id., (B)

628

Id., (C)

284
 If any person required to pay the tax is qualified and elects to
pay the tax on installment under the provisions of this Code, but fails
to pay the tax or any installment hereof, or any part of such amount or
installment on or before the date prescribed for its payment, or where
the Commissioner has authorized an extension of time within which to
pay a tax or a deficiency tax or any part thereof, there shall be
assessed and collected interest at the rate hereinabove prescribed on
the tax or deficiency tax or any part thereof unpaid from the date of
notice and demand until it is paid.629

4. Compromise and Abatement of taxes

a. Compromise630

Involves a mere reduction of the tax.

b. Abatement

There is a cancelation of the entire liability.

G. Organization and Function of the Bureau of Internal

Revenue

1. Rule-making authority of the Secretary of Finance

a. Authority of secretary of finance to

promulgate rules and regulations

The Secretary of Finance, upon recommendation of the

Commissioner, shall promulgate all needful rules and regulations for
the effective enforcement of the provisions of this Code.631

629

Id., (D)

630

See I. (A)(7), under General Principles of Taxation, supra

631

Sec. 244

285
 b. Specific provisions to be contained in rules
and regulations

The rules and regulations of the Bureau of Internal Revenue shall,

among other things, contain provisions specifying, prescribing or defining:

(a) The time and manner in which Revenue Regional Director shall
canvass their respective Revenue Regions for the purpose of discovering
persons and property liable to national internal revenue taxes, and the
manner in which their lists and records of taxable persons and taxable
objects shall be made and kept;

(b) The forms of labels, brands or marks to be required on goods

subject to an excise tax, and the manner in which the labelling, branding or
marking shall be effected;

(c) The conditions under which and the manner in which goods
intended for export, which if not exported would be subject to an excise tax,
shall be labelled, branded or marked;

(d) The conditions to be observed by revenue officers respecting the

institutions and conduct of legal actions and proceedings;

(e) The conditions under which goods intended for storage in bonded
warehouses shall be conveyed thither, their manner of storage and the
method of keeping the entries and records in connection therewith, also the
books to be kept by Revenue Inspectors and the reports to be made by them
in connection with their supervision of such houses;

(f) The conditions under which denatured alcohol may be removed

and dealt in, the character and quantity of the denaturing material to be
used, the manner in which the process of denaturing shall be effected, so as
to render the alcohol suitably denatured and unfit for oral intake, the bonds
to be given, the books and records to be kept, the entries to be made
therein, the reports to be made to the Commissioner, and the signs to be
displayed in the business ort by the person for whom such denaturing is
done or by whom, such alcohol is dealt in;

(g) The manner in which revenue shall be collected and paid, the
instrument, document or object to which revenue stamps shall be affixed,
the mode of cancellation of the same, the manner in which the proper books,
records, invoices and other papers shall be kept and entries therein made by
the person subject to the tax, as well as the manner in which licenses and
stamps shall be gathered up and returned after serving their purposes;

(h) The conditions to be observed by revenue officers respecting the

enforcement of Title III imposing a tax on estate of a decedent, and other
transfers mortis causa, as well as on gifts and such other rules and

286
regulations which the Commissioner may consider suitable for the
enforcement of the said Title III;

(i) The manner in which tax returns, information and reports shall be
prepared and reported and the tax collected and paid, as well as the
conditions under which evidence of payment shall be furnished the taxpayer,
and the preparation and publication of tax statistics;

(j) The manner in which internal revenue taxes, such as income tax,
including withholding tax, estate and donor's taxes, value-added tax, other
percentage taxes, excise taxes and documentary stamp taxes shall be paid
through the collection officers of the Bureau of Internal Revenue or through
duly authorized agent banks which are hereby deputized to receive
payments of such taxes and the returns, papers and statements that may be
filed by the taxpayers in connection with the payment of the tax: Provided,
however, That notwithstanding the other provisions of this Code prescribing
the place of filing of returns and payment of taxes, the Commissioner may,
by rules and regulations, require that the tax returns, papers and statements
that may be filed by the taxpayers in connection with the payment of the tax.
Provided, however, That notwithstanding the other provisions of this Code
prescribing the place of filing of returns and payment of taxes, the
Commissioner may, by rules and regulations require that the tax returns,
papers and statements and taxes of large taxpayers be filed and paid,
respectively, through collection officers or through duly authorized agent
banks: Provided, further, That the Commissioner can exercise this power
within six (6) years from the approval of Republic Act No. 7646 or the
completion of its comprehensive computerization program, whichever comes
earlier: Provided, finally, That separate venues for the Luzon, Visayas and
Mindanao areas may be designated for the filing of tax returns and payment
of taxes by said large taxpayers.

c. Non-retroactivity of rulings

Any revocation, modification or reversal of any of the rules and

regulations promulgated in accordance with the preceding Sections or
any of the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers, except in the following
cases:

(a) Where the taxpayer deliberately misstates or omits material

facts from his return or any document required of him by the Bureau
of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of

Internal Revenue are materially different from the facts on which the
ruling is based; or

287
 (c) Where the taxpayer acted in bad faith.632

2. Power of the Commissioner to suspend the

business operation of a taxpayer633

III. Local Government Code of 1991, as amended

A. Local Government Taxation634

1. Fundamental principles

1. Taxation shall be uniform635 in each LGU

2. Taxes, fees, charges and other impositions shall be:

a. Equitable and based on the taxpayers ability to pay.

632

Sec. 246

633

See (E)(1)(a)(6), under Compliance Requirements (Internal Revenue Taxes), supra

634

The power to tax which may be exercised by local legislative bodies is no longer merely
by nature of a valid delegation as before but pursuant to direct authority conferred by Sec. 5, Art
X of the Constitution (Mactan Ceby Intnl Airport vs Marcos, G.R. No. 120082, Sept 11, 1996)

Where there is neither a grant nor a prohibition by statute, the tax power must be
deemed to exist although Congress may provide statutory limitations and guidelines. The basic
rationale for the current rule is to safeguard the viability and self-sufficiency of local government
units by directly granting them general and broad tax power (MERALCO vs Prov. of Laguna, G.R.
No 131359, May 5, 1999

635

Uniformity of Taxation Equality and uniformity of local taxation is that all taxable articles of the
same class shall be taxed at the same rate within the same territorial jurisdiction of the taxing authority.

288
 b. For public purpose.636
c. Not unjust, excessive, oppressive or confiscatory.
d. Not contrary to law, public policy, national economic
policy, or in restraint of trade.

3. Not let to any private person

4. Not inure solely to the local government levying
5. Each LGU shall, as far as practicable, evolve a progressive
system of taxation.

Just Taxation Municipal corporations are allowed a wide range

in determining tax rates of imposable taxes and license fees.

2. Nature and source of taxing power

a. Grant of local taxing power under the Local

Government Code

Each local government unit shall exercise its power to create its
own sources of revenue and to levy taxes, fees, and charges subject to
the provisions herein, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue exclusively to
the local government units.637

b. Authority to prescribe penalties for tax

violations

The sanggunian of a local government unit is authorized to

prescribe fines or other penalties for violation of tax ordinances but in
no case shall such fines be less than One thousand pesos (P1,000.00)
nor more than Five thousand pesos (P5,000.00), nor shall
imprisonment be less than one (1) month nor more than six (6)

636

Public Purpose Proceeds obtained are to be used to support the existence of the

LGU.

637

Sec. 129

289
months. Such fine or other penalty, or both, shall be imposed at the
discretion of the court. The sangguniang barangay may prescribe a
fine of not less than One hundred pesos (P100.00) nor more than One
thousand pesos (P1,000.00).638

c. Authority to grant local tax exemptions

Local government units may, through ordinances duly approved,

grant tax exemptions, incentives or reliefs under such terms and
conditions as they may deem necessary.639

d. Withdrawal of exemptions

Unless otherwise provided in this Code, tax exemptions or

incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or -controlled
corporations, except local water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of
this Code.640

e. Authority to adjust local tax rates

LGUs are given authority to adjust the tax rates, but the
adjustment should be made not oftener than once every 5 years but in

638

Sec. 516

639

Sec. 192, LGC

640

Sec. 193

290
no case shall the adjustment exceed 10% of the rates fixed under the
LGC 10% of the rates fixed under the LGC.641

f. Residual taxing power of local governments

The power to tax which may be exercised by local legislative

bodies is no longer merely by nature of a valid delegation as before
but pursuant to direct authority conferred by Sec. 5, Art X of the
Constitution.642
Where there is neither a grant nor a prohibition by statute, the
tax power must be deemed to exist although Congress may provide
statutory limitations and guidelines. The basic rationale for the
current rule is to safeguard the viability and self-sufficiency of local
government units by directly granting them general and broad tax
power.643

g. Authority to issue local tax ordinances

The power to impose a tax, fee, or charge or to generate

revenue under this Code shall be exercised by the sanggunian of the
local government unit concerned through an appropriate ordinance.644

3. Local taxing authority

641

Sec 191

642

Mactan Ceby Intnl Airport vs Marcos, G.R. No. 120082, Sept 11, 1996

643

MERALCO vs Prov. of Laguna, G.R. No 131359, May 5, 1999

644

Sec. 132

291
 a. Power to create revenues exercised thru
LGUs

Local governments are authorized to impose and collect the

following charges:

1. Reasonable fees and charges for services rendered.645

2. Public Utility Charges if:

a. Owned, operated and maintained

b. Within their jurisdiction646

3. Tools, Fees or Charges for:

a. Use of public road, pier or wharf, waterway bridge,

ferry or telecommunicatio system
b. Funded and constructed by the local government647

b. Procedure for approval and effectivity of tax

ordinances

The procedure for approval of local tax ordinances and revenue

measures shall be in accordance with the provisions of this Code:
Provided, That public hearings shall be conducted for the purpose
prior to the enactment thereof: Provided, further, That any question
on the constitutionality or legality of tax ordinances or revenue
measures may be raised on appeal within thirty (30) days from the
effectivity thereof to the Secretary of Justice who shall render a
decision within sixty (60) days from the date of receipt of the appeal:

645

Sec. 153

646

Sec. 154

647

Sec. 155

292
Provided, however, That such appeal shall not have the effect of
suspending the effectivity of the ordinance and the accrual and
payment of the tax, fee, or charge levied therein: Provided, finally,
That within thirty (30) days after receipt of the decision or the lapse of
the sixty-day period without the Secretary of Justice acting upon the
appeal, the aggrieved party may file appropriate proceedings with a
court of competent jurisdiction.648

4. Scope of taxing power

Not Inherent Unlike a sovereign state, municipal corporations

have no inherent power to tax. Being mere creatures of law, they may
exercise the power only if delegated to them by the national
legislature or conferred by the Constitution itself.

Limitations of Local Tax Power Sec. 5, Art X of the Constitution

sought to safeguard the viability and self-sufficiency of local
government units. It expressly provides the power to be subject to
such limitations and guidelines as the Congress may provide.

1. The taxpayer will not be over-burdened with unreasonable

impositions
2. Local taxation is to be fair, uniform and just.
3. Each LGU will have its fair share of available

5. Specific taxing power of local government unit

(LGUs)

a. Taxing powers of provinces

1) Tax on transfer of real property

ownership

Real Property Refers only to lands, buildings, and machineries

intended by the owner of the land or building for an industry or works
which may by carried on in a building or on a piece of land and which
tend directly to meet the needs
of the industry or works.

Transaction taxed - sale, barter, or any other mode of

transferring ownership of, or title to, real property.

648

Sec. 187

293
 Rate At not more than 50% of 1% total consideration.

Tax base
1) total consideration or
2) fair market value, whichever is higher

Exception from tax The sale, transfer or other disposition of

real property pursuant to RA 6657649 is exempt from tax.

2) Tax on business of printing and

publication

Transaction taxed business of printing and publication of

books, cards, posters, leaflets, handbills, certificates, receipts,
pamphlets, and other similar nature

Tax Rate Not exceeding 50% of 1% of the gross annual

receipts for the preceding calendar year, in the case of newly started
business, not to exceed 1/20 of 1% of the capital investment

Exception The receipts from the printing and/ or publishing of

books or other reading materials prescribed by the DECS as school
text or references are not subject to the tax imposed

3) Franchise tax

Franchise Generally refers to a privilege conferred by the

government on an individual or corporation, which does not belong to
the citizens by common right

Purpose of Franchise Tax to be in addition to the franchise tax

imposed by the national government on business which are holders of
franchise except when otherwise prohibited by law.650

649

Comprehensive Agrarian Reform Law

650

Sec 267 (b), NIRC

294
 Tax Rate not exceeding 50% of 1% , if newly started business,
1/20 of 1 %

Tax base gross annual receipts of preceding calendar year

based on:

a) Incoming receipts, or
b) Realized within territorial jurisdiction.

4) Tax on sand, gravel and other quarry

services

Tax Rate not more than 10% of fair market value

Issuance of Permit To permit to extract the sand, gravel and

other quarry resources shall be issued exclusively by the provincial
governor pursuant to the ordinance of the sangguniang panlalawigan

Distribution of the Proceeds The proceeds of the tax shall be

distributed as follows

a) Province 30%
b) Component city or municipality where the sand, etc are
extracted 30%
c) Barangay where the sand, etc. are extracted 40%

5) Professional tax

Tax rate in such as Sanggunian may determine in no case to

exceed P300

Profession a calling w/c requires the passing of an appropriate

government board or bar examination, such as the practice of law,
medicine, public accounting, engineering, etc.

Nature of Tax Professional tax applies only to natural or

physical persons and not to juridical entities. Said tax is fixed on the
privilege of exercising or engaging in a profession. The tax is not
based on the amount of earnings of the taxpayer .

When paid on or before Jan. 20

Where: paid on the place where you practice your profession.651

651

295
 6) Amusement tax

Amusement Pleasurable diversion and entertainment

Amusement Place Includes theaters, cinemas, concert halls,

circuses and other places of amusement where one seeks admission to
entertain himself by seeing or viewing the show or performance.652

Tax Rate not more than 30% of the gross receipt from
admission fees
Exemption operas, concerts, dramas, recitals, painting and art
exhibitions, flower shows, musical programs, literary and oratorical
presentation.

Exceptions to exemption pop, rock, or similar concert.

7) Tax on delivery truck/van

Transaction taxed use of truck, van vehicle in the delivery or

distribution of distilled spirits, fermented liquors, softdrinks, cigar and
cigarettes and other products, determined by the Sanggunian to sales
outlets or consumers.

Tax rate not exceeding P500 for every truck, van or any
vehicle used

Exemption exempt from tax on peddlers.

b. Taxing powers of cities

Cities are authorized specifically to impose taxes, fees and

charges that provinces and municipalities may levy.

Rate: That may be above the maximum established for provinces

and municipalities but not exceeding 50% of such maximum rates
except the rates of professional and amusement taxes

government employees are exempted from paying PT

652

Sec 131 (c)

296
 c. Taxing powers of municipalities

Municipality may levy taxes, fees and charges not otherwise

levied by provinces and cities

1) Tax on various types of businesses

Municipal Taxes Municipalities may impose taxes on the following

business653

1. Manufacturers, assemblers, repackers of liquors, distilled spirits and

wines

2. Rate: At graduated annual fixed tax based on gross sales or receipts

for the preceding calendar year in an amount not to exceed P6.5 M or
more, a rate not exceeding 37 of 1% is imposed

3. Wholesalers, distributors or dealers in any article of Commerce

Rate: Graduated annual fixed rate based on gross sales or receipts not
exceeding P2M or more, the rate not exceeding 50% of 1%

4. Exporters, manufacturers, millers, producers of essential commodities

Rate: Not exceeding of the rates prescribed in (a) and (b)

5. Contractors and other independent contractors

Rate: Graduated annual fixed rate when the gross receipts exceeds
P2M the rate is not exceeding 50% of 1%

6. Banks and other financial institutions

Rate: Not exceeding 50% of 1% on the gross receipts of preceding

calendar year

7. Peddlers

Rate: Not exceeding 50% per peddler annually

8. Any business not otherwise specified

653

Sec 143, LGC

297
 Rate: As the Sanggunian may deem proper. When subject to
excise, VAT or percentage tax, it shall not exceed 2% of gross
receipts of the preceding calendar year

2) Ceiling on business tax impossible on

municipalities within Metro Manila

The municipalities within the Metropolitan Manila Area may

levy taxes at rates which shall not exceed by fifty percent (50%) the
maximum rates prescribed in the preceding Section.654

3) Tax on retirement on business

A business subject to tax pursuant to the preceding sections

shall, upon termination thereof, submit a sworn statement of its gross
sales or receipts for the current year. If the tax paid during the year
be less than the tax due on said gross sales or receipts of the current
year, the difference shall be paid before the business is considered
officially retired.655

4) Rules on payment of business tax

a. It shall be payable for every separate or distinct

establishment or place where the business subject to the tax is
conducted and one line of business does not become exempt by being
conducted with some other business for which such tax has been paid.

b. The tax on a business must be paid by the person conducting

the same.

c. In cases where a person conducts or operates 2 or more of

the businesses mentioned in Section 143656 of LGC:

654

Sec. 144

655

Sec. 145

656

See Reference

298
 a. Which are subject to the same rate of tax, the tax shall
be computed on the combined total gross sales or receipts of the
said 2 or more related businesses.

b. Which are subject to different rates of tax, the gross

sales or receipts of each business shall be separately reported
for the purpose of computing the tax due from each business.

5) Fees and charges for regulation &

licensing

(a) Municipalities shall have the exclusive authority to grant

fishery privileges in the municipal waters and impose rentals, fees or
charges therefor in accordance with the provisions of this Section.

(b) The sangguniang bayan may:

(1) Grant fishery privileges to erect fish corrals, oysters,

mussels or other aquatic beds or bangus fry areas, within a definite
zone of the municipal waters, as determined by it: Provided, however,
That duly registered organizations and cooperatives of marginal
fishermen shall have the preferential right to such fishery privileges:
Provided, further, That the sangguniang bayan may require a public
bidding in conformity with and pursuant to an ordinance for the grant
of such privileges: Provided, finally, That in the absence of such
organizations and cooperatives or their failure to exercise their
preferential right, other parties may participate in the public bidding
in conformity with the above cited procedure.

(2) Grant the privilege to gather, take or catch bangus fry,

prawn fry or kawag-kawag or fry of other species and fish from the
municipal waters by nets, traps or other fishing gears to marginal
fishermen free of any rental, fee, charge or any other imposition
whatsoever.

(3) Issue licenses for the operation of fishing vessels of three (3)
tons or less for which purpose the sangguniang bayan shall
promulgate rules and regulations regarding the issuances of such
licenses to qualified applicants under existing laws.

299
 Provided, however, That the sanggunian concerned shall, by
appropriate ordinance, penalize the use of explosives, noxious or
poisonous substances, electricity, muro-ami, and other deleterious
methods of fishing and prescribe a criminal penalty therefor in
accordance with the provisions of this Code: Provided, finally, That the
sanggunian concerned shall have the authority to prosecute any
violation of the provisions of applicable fishery laws.657

6) Situs of tax collected

Rule 1: For purposes of collection of the taxes under Section

143 (tax on business),
businesses maintaining or operating branch or sales outlet elsewhere
shall record the sale in the branch or sales outlet making the sale or
transaction, and the tax thereon shall accrue and shall be paid to the
municipality where such branch or sales outlet is located.

Rule 2: In case there is no branch or sales outlet in the city or

municipality where the sale is made, the sale shall be recorded in the
principal office and the taxes due shall accrue and be paid to such city
or municipality.

Rule 3: The following sales allocation for sales recorded in the

principal office of businesses with factories, project offices, plants,
and plantations:

30% of all sales recorded in the principal office shall be

taxable by the city or municipality where the principal office is
located; and 70% of all sales recorded in the principal office
shall be taxable by the city or municipality where the factory,
project office, plant, or plantation is located.

Rule 4: Where the plantation located at a place other than the

place where the factory is located, the above mentioned 70% shall be
divided as follows:

60% - to the city or municipality where the factory is located;

and
40% - to the city or municipality where the plantation is located .

Rule 5: Where there are 2 or more factories, project offices,

plants, or plantations located in different localities, the above
657

Sec. 149

300
mentioned 70% shall be prorated among the localities where the
factories, project offices, plants, and plantations are located in
proportion to their respective volumes of production during the period
for which the tax is due.658

d. Taxing powers of barangays

1) Taxes on stores / retailers with fixed business establishment with

gross sales or receipts of the preceeding calendar year of P50,000 or
less in the cities & municipalities

Rate: Not exceeding 1% on such gross sales or receipts

2) Service Fees/ Charges it may collect reasonable fees or charges for

services rendered in connection with the regulation or the use of
barangay owned property or service facilities

3) Barangay Clearance no city municipality may issue any license/

permit for any business / activity is located. For such clearance, the
sangguniang brgy. May impose reasonable fee.
4) Other fees & charges the brgy. May levy reasonable fees & charges

a) On commercials breeding of fighting cocks & cockpits;

b) On places of recreation w/c charge admission fees; and
c) On billboards, signs boards, neon signs and outdoor advertisement

e. Common revenue raising powers

1) Service fees and charges

Reasonable fees and charges for services rendered.659

2) Public utility charges

3) Public Utility Charges if:

i. Owned, operated and maintained

658

Sec. 150

659

Sec. 153

301
 ii. Within their jurisdiction660

4) Toll fess or charges

5) Tools, Fees or Charges for:

i. Use of public road, pier or wharf, Waterway Bridge, ferry or
telecommunication system
ii. Funded and constructed by the local government661

f. Community tax

Nature: The community tax, w/c replaced the residence tax, is essentially
a poll or capitalization tax. It is of fixed amount imposed upon certain
inhabitants of the Phil. Without regard to the property/ occupation in w/c
they may be engaged.

Who are authorized to levy cities or municipalities may levy a

community tax, as well as the rates & accrual of the proceeds thereof. 662

Persons liable to tax

1) Individuals
Rate: P5.00 an annual additional tax of P1.00 for every P1,000 income
regardless of whether from business, exercise of profession or from
property w/c in no case shall exceed P5,000

2) Corporations
Rate: Annual community tax of P500 and an annual additional tax w/c
in no case shall exceed P10,000

Exemptions from the Tax Community

1) Diplomatic and consular representatives and

660

Sec. 154

661

Sec. 155

662

Sec 156

302
 2) Transient visitors when their stay in the Phil. Does not exceed 3 mos.

Estates of deceased persons, being neither corporations nor individuals,

are not subject to the tax, but the heirs must declare their proportionate
shares of their income.

Community Tax Certificate shall be issued to every person or

corporation upon payment of the community tax. It may also be issued to
any corporation / person not subject to the community tax upon payment of
P1.00663

6. Common limitations on the taxing powers of

LGUs664

Unless otherwise provided herein, the exercise of the taxing

power of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:

1. Income tax
Exception: banks and other financial institutions

2. Documentary Stamp Tax

3. Tax on estates, inheritance, gifts, legacies and other acquisitions

mortis causa
Exception: tax on transfer of real property ownership

4. Excise taxes on articles enumerated under the NIRC, as amended,

and taxes, fees or charges on petroleum products.

Taxable Articles embodied in the NIRC are:

663

Sec 162

664

Sec 133

303
 1) Alcoholic products
2) Tobacco products
3) Petroleum products
4) Miscellaneous articles
5) Mineral products

Local governments can tax the selling of these finished products or

the raw materials.

5. Percentage or VAT on sales, barters or exchanges or similar

transactions on goods or services exchanges or similar transactions on
goods or services except as otherwise provided herein

Percentage of taxes imposed when there is set of ration between the

amount of tax and the volume of sales.

6. Taxes on the gross receipts of transportation of contractors and

persons engaged in the transportation of passengers or freight by hire and
common carriers by air, land or water except as provided by the code.

On the other hand, transportation contractors including persons who

transport passengers for hire and other domestic carriers by land, air or
water for transport of passengers, except owners of bancas and owners of
animal drawn two-wheeled vehicle are subject to 3% percentage tax on their
gross quarterly receipt.665

Sec 117 of NIRC, also, specifies that the gross receipt of common
carriers derived from their incoming and outgoing freight shall not be
subjected to local taxes imposed under LGC.

7. Taxes, fees and charges imposed under the Tariff and Customs
Code and other Special Laws

8. Customs duties, registration fees of vessels and wharfage on

wharves, tonnage dues and all other kinds of customs fees, charges and due
except wharfage on wharves constructed and maintained by LGU concerned.

9. Taxes, fees and charges and other Impositions which contravene

Existing Government Policies or which are Violative of the Fundamental
Principles of Taxation.

10.Taxes, fees, and charges and other impositions upon goods carried
into or out of, or passing through, the territorial jurisdiction of LGU in the

665

Sec 117, NIRC

304
guise of charges for wharfage, tolls for bridges or otherwise, or other taxes,
fees or charges in any form whatever upon such goods or merchandise.

11. Taxes, fees, or charges on agricultural and aquatic products when

sold by marginal farmers of\r fishermen.

12. Taxes on business enterprises certified to by the Board of

Investment as pioneer or non-pioneer who enjoy tax holidays for a period of
6 and 4 years, respectively from the date of registration

+tax holidays refer to exemption from income tax only.

13. Taxes on premiums paid by way of reinsurance or retrocession.

14. Taxes, fees or other charges on Philippine products actually

exported, excepted otherwise provided herein in the LGC.

15. Taxes, fees or charges on Countryside and Baranggay Business

Enterprises and Cooperative duly registered under RA No. 6810 and RA
6938 otherwise known as the Cooperative Code of the Phil. Respectively.

16. Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities and LGU.

17. Taxes, fees, and charges imposed under special laws.

18. Taxes, fees or charges for registration of motor vehicles.

Exception: Tricycles

7. Collection of business tax

a. Tax period and manner of payment

Unless otherwise provided in the LGC, the tax period of all local
taxes, fees and charges shall be the calendar year

Such, taxes, fees and charges may be paid in quarterly

installments.666

b. Accrual of tax

666

Sec. 165

305
 Unless otherwise provided in the Code, all local taxes, fees and
charges shall accrue on the 1st day of January of each year.

New taxes, fees or charges or changes in the rates thereof, shall

accrue on the 1st day of the quarter next following the effectively of
the ordinance imposing such new rates.667

c. Time of payment

Unless otherwise provided in the Code, all local taxes, fees &
charges shall be paid within the first 20 days of January or of each
subsequent quarter.

The sanggunian concerned may, for a justifiable reason or

cause, extend the time for payment of such charges but only for a
period not exceeding 6 months.668
d. Penalties on unpaid taxes, fees or charges

Surcharges & penalties on unpaid taxes, fees or charges

The Sanggunian may impose a surcharge not exceeding 27% of

the amount of taxes, fees or charges not paid on time and an interest
at the rate not exceeding 2% per month of unpaid taxes, fees or
charges including surcharges, until such amount is fully paid

In no case shall the total interest on the unpaid amount or

portion thereof exceed 36 months669
e. Authority of treasurer in collection and
inspection of books

667

Sec 166

668

Sec 167

669

Sec 168

306
 All local taxes, fees, and charges shall be collected by the provincial,
city, municipal, or barangay treasurer, or their duly authorized deputies. The
provincial, city or municipal treasurer may designate the barangay treasurer
as his deputy to collect local taxes, fees, or charges. In case a bond is
required for the purpose, the provincial, city or municipal government shall
pay the premiums thereon in addition to the premiums of bond that may be
required under this Code.670

The provincial, city, municipal or barangay treasurer may, by himself

or through any of his deputies duly authorized in writing, examine the
books, accounts, and other pertinent records of any person, partnership,
corporation, or association subject to local taxes, fees and charges in order
to ascertain, assess, and collect the correct amount of the tax, fee, or
charge. Such examination shall be made during regular business hours, only
once for every tax period, and shall be certified to by the examining official.
Such certificate shall be made of record in the books of accounts of the
taxpayer examined. In case the examination herein authorized is made by a
duly authorized deputy of the local treasurer, the written authority of the
deputy concerned shall specifically state the name, address, and business of
the taxpayer whose books, accounts, and pertinent records are to be
examined, the date and place of such examination, and the procedure to be
followed in conducting the same. For this purpose, the records of the
revenue district office of the Bureau of Internal Revenue shall be made
available to the local treasurer, his deputy or duly authorized
representative.671

8. Taxpayers remedies

a. Periods of assessment and collection of local

taxes, fees or charges672

670

Sec. 170

671

Sec. 171

672

Suspension of the running of the prescriptive Period -

a. Treasurer legally prevented from the making the assessment or collection
b. Taxpayer requests for reinvestigation and executes waiver in writing
c. Taxpayer out of the country
d. Taxpayer cannot be located

307
 1. Prescriptive period of assessment within five years from the
date they become due.
- in case of fraud of intent to evade payment within 10 years

2. Prescriptive period of collection within 5 years from the

date of assessment by administrative or judicial action

b. Protest of assessment

a. Assessment made by the local Treasurer

b. Taxpayer has 60 days from receipt to file written protest with

Treasurer, otherwise it shall become final and executory

c. Treasurer has 10 days within which to decide.

Treasurer cancels assessment

Treasurer denies protest
Taxpayer appeals within 30 days after receipt of denial
Treasurer does not act within 60 days
Taxpayer has 30 days from the lapse of 60 days to appeal

c. Claim for refund of tax credit for

erroneously or illegally collected tax, fee or
charge

A written claim for refund or credit is filed with the local

Treasurer within 2 years from the date of payment of such tax, fee, or
charge, or from the date the taxpayer is entitled to a refund or credit

9. Civil remedies by the LGU for collection of

revenues

a. Local governments lien for delinquent

taxes, fees or charges

1. Superior to all items, charges or encumbrances in favor of

any person, enforceable by the administrative of judicial action

308
 2. Covers not only property or rights subject to the lien but also
upon property used in business.

b. Civil remedies, in general

1) Administrative action

a. Distraint of goods, chattels or effects and other personal

property of whatever character
b. Levy upon real property and interest in or rights to real
property

2) Judicial action

Either of these remedies or all may be pursued concurrently or

simultaneously at the discretion of local government unit concerned.673

c. Procedure for administrative action

1) Distraint of personal property

(a) Seizure - Upon failure of the person owing any local tax, fee, or
charge to pay the same at the time required, the local treasurer or his
deputy may, upon written notice, seize or confiscate any personal property
belonging to that person or any personal property subject to the lien in
sufficient quantity to satisfy the tax, fee, or charge in question, together with
any increment thereto incident to delinquency and the expenses of seizure.
In such case, the local treasurer or his deputy shall issue a duly
authenticated certificate based upon the records of his office showing the
fact of delinquency and the amounts of the tax, fee, or charge and penalty
due. Such certificate shall serve as sufficient warrant for the distraint of
personal property aforementioned, subject to the taxpayer's right to claim
exemption under the provisions of existing laws. Distrained personal
property shall be sold at public auction in the manner hereon provided for.

(b) Accounting of distrained goods. - The officer executing the

distraint shall make or cause to be made an account of the goods, chattels or
effects distrained, a copy of which signed by himself shall be left either with
the owner or person from whose possession the goods, chattels or effects
are taken, or at the dwelling or place or business of that person and with
someone of suitable age and discretion, to which list shall be added a
statement of the sum demanded and a note of the time and place of sale.

673

Sec 174

309
 (c) Publication - The officer shall forthwith cause a notification to be
exhibited in not less than three (3) public and conspicuous places in the
territory of the local government unit where the distraint is made, specifying
the time and place of sale, and the articles distrained. The time of sale shall
not be less than twenty (20) days after the notice to the owner or possessor
of the property as above specified and the publication or posting of the
notice. One place for the posting of the notice shall be at the office of the
chief executive of the local government unit in which the property is
distrained.

(d) Release of distrained property upon payment prior to sale - If at

any time prior to the consummation of the sale, all the proper charges are
paid to the officer conducting the sale, the goods or effects distrained shall
be restored to the owner.

(e) Procedure of sale - At the time and place fixed in the notice, the
officer conducting the sale shall sell the goods or effects so distrained at
public auction to the highest bidder for cash. Within five (5) days after the
sale, the local treasurer shall make a report of the proceedings in writing to
the local chief executive concerned.

Should the property distrained be not disposed of within one hundred

and twenty (120) days from the date of distraint, the same shall be
considered as sold to the local government unit concerned for the amount of
the assessment made thereon by the Committee on Appraisal and to the
extent of the same amount, the tax delinquencies shall be cancelled.

Said Committee on Appraisal shall be composed of the city or

municipal treasurer as chairman, with a representative of the Commission
on Audit and the city or municipal assessor as members.

(f) Disposition of proceeds - The proceeds of the sale shall be applied

to satisfy the tax, including the surcharges, interest, and other penalties
incident to delinquency, and the expenses of the distraint and sale. The
balance over and above what is required to pay the entire claim shall be
returned to the owner of the property sold. The expenses chargeable upon
the seizure and sale shall embrace only the actual expenses of seizure and
preservation of the property pending the sale, and no charge shall be
imposed for the services of the local officer or his deputy. Where the
proceeds of the sale are insufficient to satisfy the claim, other property may,
in like manner, be distrained until the full amount due, including all
expenses, is collected.674

674

Sec. 165

310
 2) Levy of real property, procedure

After the expiration of the time required to pay the delinquent tax, fee,
or charge, real property may be levied on before, simultaneously, or after
the distraint of personal property belonging to the delinquent taxpayer. To
this end, the provincial, city or municipal treasurer, as the case may be, shall
prepare a duly authenticated certificate showing the name of the taxpayer
and the amount of the tax, fee, or charge, and penalty due from him. Said
certificate shall operate with the force of a legal execution throughout the
Philippines. Levy shall be effected by writing upon said certificate the
description of the property upon which levy is made. At the same time,
written notice of the levy shall be mailed to or served upon the assessor and
the Register of Deeds of the province or city where the property is located
who shall annotate the levy on the tax declaration and certificate of title of
the property, respectively, and the delinquent taxpayer or, if he be absent
from the Philippines, to his agent or the manager of the business in respect
to which the liability arose, or if there be none, to the occupant of the
property in question.

In case the levy on real property is not issued before or

simultaneously with the warrant of distraint on personal property, and the
personal property of the taxpayer is not sufficient to satisfy his delinquency,
the provincial, city or municipal treasurer, as the case may be, shall within
thirty (30) days after execution of the distraint, proceed with the levy on the
taxpayer's real property.

A report on any levy shall, within ten (10) days after receipt of the
warrant, be submitted by the levying officer to the sanggunian concerned. 675

3) Further distraint or levy

The remedies by distraint and levy may be repeated if necessary

until the full amount due, including all expenses, is collected.676

4) Exemption of personal property from

distraint or levy

675

Sec. 166

676

Sec. 184

311
 The following property shall be exempt from distraint and the
levy, attachment or execution thereof for delinquency in the payment
of any local tax, fee or charge, including the related surcharge and
interest:

(a) Tools and implements necessarily used by the delinquent taxpayer

in his trade or employment;

(b) One (1) horse, cow, carabao, or other beast of burden, such as the
delinquent taxpayer may select, and necessarily used by him in his ordinary
occupation;

(c) His necessary clothing, and that of all his family;

(d) Household furniture and utensils necessary for housekeeping and

used for that purpose by the delinquent taxpayer, such as he may select, of a
value not exceeding Ten thousand pesos (P10,000.00);

(e) Provisions, including crops, actually provided for individual or

family use sufficient for four (4) months;

(f) The professional libraries of doctors, engineers, lawyers and

judges;

(g) One fishing boat and net, not exceeding the total value of Ten
thousand pesos (P10,000.00), by the lawful use of which a fisherman earns
his livelihood; and

(h) Any material or article forming part of a house or improvement of

any real property.677

5) Penalty on local treasurer for failure

to issue and execute warrant of distraint
or levy

Without prejudice to criminal prosecution under the Revised

Penal Code and other applicable laws, any local treasurer who fails to
issue or execute the warrant of distraint or levy after the expiration of
the time prescribed, or who is found guilty of abusing the exercise
thereof by competent authority shall be automatically dismissed from
the service after due notice and hearing.678

677

Sec. 185

678

312
 d. Procedure for judicial action

1) In any court of competent jurisdiction

2) Filed by local Treasurer
3) Within 5 years from the date taxes, fees or charges become due

B. Real Property Taxation

1. Fundamental principles

a.) Real property shall be appraised at its current and fair market
value.
b.) Real property shall be classified for assessment purposes on the
basis of its actual use.
c.) Real property shall be assessed on the basis of a uniform
standard within each local government unit.
d.) The appraisal, assessment, and collection of real property tax
shall not be let to any private person; and
e. ) The appraisal and assessment of real property shall be
equitable679

2. Nature of real property tax

Property taxes are assessed on all property, or all property of a

certain class located within a certain territory on a specified date in
proportion to its value or in accordance with some other reasonable
method of apportionment.680

In the Philippines, a real property tax is an annual ad valorem tax

imposed by LGUs on real property within their jurisdiction,

Sec. 177

679

Sec. 198, id.

680

The function of a property tax is to raise revenue. Such tax does not impose any
condition nor does it place any restriction upon the use of the property taxed.

313
determined on the basis of a fixed proportion of the value of the
property.

3. Imposition of real property tax

a. Power to levy real property tax

A province or city or a municipality within the Metropolitan

Manila Area my levy an annual ad valorem tax on real property such
as land, building, machinery, and other improvement not hereinafter
specifically exempted.681

b. Exemption from real property tax682

1. Real property owned by the Republic of the Philippines or any of its

political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
2. Charitable institutions, churches, parsonages, or convents
appurtenant thereto, mosques, non profit or religious cemeteries, and all
lands, buildings, and improvements actually, directly and exclusively
used for religious, charitable, or educational purposes.

3. All pieces of machinery and equipment that are actually, directly,

and exclusively used by local water districts, and government owned or
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power.

4. All real property owned by duly registered cooperatives as provided

for under RA 6938, and

681

Sec. 232

682

Real properties of review schools are subject to tax (why? Considered an ordinary corporation)
Non-stock, nonprofit private schools are exempt.
Proprietary schools (stock and profit) duly accredited by DECS or CHED are exempt, if property
is actually, directly and exclusively used for educational purposes.
The term exclusively under the Constitution does not mean solely but only primarily
(Roman Catholic Church v. Hastings, 5 Phil 701, Province of Abra v. Hernando, 107 SCRA 104 & other
cases).

314
 5. Machinery and equipment used for pollution control and
environmental protection.

4. Appraisal and assessment of real property tax

a. Rule on appraisal of real property at fair

market value

All real property, whether taxable or exempt, shall be appraised

at the current and fair market value prevailing in the locality where
the property is situated. The Department of Finance shall promulgate
the necessary rules and regulations for the classification, appraisal,
and assessment of real property pursuant to the provisions of this
Code.683

b. Declaration of real property

It shall be the responsibility of the owner, administrator or their

representatives to declare, under oath, the true value of real property,
taxable or exempt, within 60 days after the acquisition. The sworn
declaration shall be filed once every 3 years before June 30 th of the
year commencing 1992. The failure or refusal to make that
declaration within the prescribed period would authorize the
provincial or city assessor to declare the property in the name of the
defaulting owner, if known, or against an unknown owner as the case
may be, and to assess the property for taxation.684

c. Listing of real property in assessment rolls

(a) In every province and city, including the municipalities within the
Metropolitan Manila Area, there shall be prepared and maintained by the
provincial, city or municipal assessor an assessment roll wherein shall be
listed all real property, whether taxable or exempt, located within the

683

Sec. 201

684

Secs. 201-204

315
territorial jurisdiction of the local government unit concerned. Real property
shall be listed, valued and assessed in the name of the owner or
administrator, or anyone having legal interest in the property.

(b) The undivided real property of a deceased person may be listed,

valued and assessed in the name of the estate or of the heirs and devisees
without designating them individually; and undivided real property other
than that owned by a deceased may be listed, valued and assessed in the
name of one or more co-owners: Provided, however, That such heir, devisee,
or co-owner shall be liable severally and proportionately for all obligations
imposed by this Title and the payment of the real property tax with respect
to the undivided property.

(c) The real property of a corporation, partnership, or association

shall be listed, valued and assessed in the same manner as that of an
individual.

(d) Real property owned by the Republic of the Philippines, its

instrumentalities and political subdivisions, the beneficial use of which has
been granted, for consideration or otherwise, to a taxable person, shall be
listed, valued and assessed in the name of the possessor, grantee or of the
public entity if such property has been acquired or held for resale or lease. 685

d. Preparation of schedules of fair market

value

Before any general revision of property assessment is made

pursuant to the provisions of this Title, there shall be prepared a
schedule of fair market values by the provincial, city and municipal
assessor of the municipalities within the Metropolitan Manila Area for
the different classes of real property situated in their respective local
government units for enactment by ordinance of the sanggunian
concerned. The schedule of fair market values shall be published in a
newspaper of general circulation in the province, city or municipality
concerned or in the absence thereof, shall be posted in the provincial
capitol, city or municipal hall and in two other conspicuous public
places therein.686

685

Sec. 205

686

Sec. 212

316
 1) Authority of assessor to take evidence

For the purpose of obtaining information on which to base the

market value of any real property, the assessor of the province, city or
municipality or his deputy may summon the owners of the properties
to be affected or persons having legal interest therein and witnesses,
administer oaths, and take deposition concerning the property, its
ownership, amount, nature, and value.687

2) Amendment of schedule of fair market

value

The provincial, city or municipal assessor may recommend to

the sanggunian concerned amendments to correct errors in valuation
in the schedule of fair market values. The sanggunian concerned shall,
by ordinance, act upon the recommendation within ninety (90) days
from receipt thereof.688

e. Classes of real property

For purposes of assessment, real property shall be classified as

residential, agricultural, commercial, industrial, mineral, timberland
or special.

The city or municipality within the Metropolitan Manila Area,

through their respective sanggunian, shall have the power to classify
lands as residential, agricultural, commercial, industrial, mineral,
timberland, or special in accordance with their zoning ordinances.689

687

Sec. 213

688

Sec. 214

689

Sec. 215

317
 f. Actual use of property as basis of
assessment

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.690

g. Assessment of real property

1) Assessment levels

The assessment levels to be applied to the fair market value of

real property to determine its assessed value shall be fixed by
ordinances of the sangguniang panlalawigan, sangguniang
panlungsod or sangguniang bayan of a municipality within the
Metropolitan Manila Area, at the rates not exceeding the following:

(a) On Lands:

CLASS ASSESSMENT LEVELS

Residential 20%
Agricultural 40%
Commercial 50%
Industrial 50%
Mineral 50%
Timberland 20%

(b) On Buildings and Other Structures:

(1) Residential
Fair market Value

Over Not Over Assessment Levels

P175,000.00 0%
P175,000.00 300,000.00 10%

690

Sec. 217

318
300,000.00 500,000.00 20%
500,000.00 750,000.00 25%
750,000.00 1,000,000.00 30%
1,000,000.00 2,000,000.00 35%
2,000,000.00 5,000,000.00 40%
5,000,000.00 10,000,000.00 50%
10,000,000.00
60%

(2) Agricultural

Fair Market Value

Over Not Over Assessment Levels

P300,000.00 25%
P300,000.00 500,000.00 30%
500,000.00 750,000.00 35%
750,000.00 1,000,000.00 40%
1,000,000.00 2,000,000.00 45%
2,000,000.00 50%

(3) Commercial / Industrial

Fair Market Value

Over Not Over Assessment Levels

P300,000.00 30%
P300,000.00 500,000.00 35%
500,000.00 750,000.00 40%
750,000.00 1,000,000.00 50%
1,000,000.00 2,000,000.00 60%
2,000,000.00 5,000,000.00 70%
5,000,000.00 10,000,000.00 75%
10,000,000.00 80%

(4) Timberland

Fair Market Value

Over Not Over Assessment Levels

P300,000.00 45%
P300,000.00 500,000.00 50%
500,000.00 750,000.00 55%
750,000.00 1,000,000.00 60%
5,000,000.00 2,000,000.00 65%
2,000,000.00 70%

(c) On Machineries

ClassAssessment Levels

319
 Agricultural 40%
Residential 50%
Commercial 80%
Industrial 80%

(d) On Special Classes: The assessment

levels for all lands buildings,
machineries and other improvements;

Actual Use Assessment Level

Cultural 15%
Scientific 15%
Hospital 15%
Local water districts 10%
Government-owned or controlled corporations
engaged in the supply and distribution of water
and/or generation and transmission of electric
power 10%691

2) General revisions of assessments and

property classification

The provincial, city or municipal assessor shall undertake a

general revision of real property assessments within two (2) years
after the effectivity of this Code and every three (3) years thereafter.692

3) Date of effectivity of assessment or

reassessment

All assessments or reassessments made after the first (1st) day

of January of any year shall take effect on the first (1st) day of January
of the succeeding year: Provided, however, That the reassessment of
real property due to its partial or total destruction, or to a major
change in its actual use, or to any great and sudden inflation or
deflation of real property values, or to the gross illegality of the
691

Sec. 218

692

Sec. 219

320
assessment when made or to any other abnormal cause, shall be made
within ninety (90) days from the date any such cause or causes
occurred, and shall take effect at the beginning of the quarter next
following the reassessment.

4) Assessment of property subject to

back taxes

Real property declared for the first time shall be assessed for
taxes for the period during which it would have been liable but in no
case of more than ten (10) years prior to the date of initial
assessment: Provided, however, That such taxes shall be computed on
the basis of the applicable schedule of values in force during the
corresponding period.693

5) Notification of new or revised

assessment

When real property is assessed for the first time or when an

existing assessment is increased or decreased, the provincial, city or
municipal assessor shall within thirty (30) days give written notice of
such new or revised assessment to the person in whose name the
property is declared. The notice may be delivered personally or by
registered mail or through the assistance of the punong barangay to
the last known address of the person to be served.

h. Appraisal and assessment of machinery

(a) The fair market value of a brand-new machinery shall be the

acquisition cost. In all other cases, the fair market value shall be
determined by dividing the remaining economic life of the machinery
by its estimated economic life and multiplied by the replacement or
reproduction cost.

(b) If the machinery is imported, the acquisition cost includes

freight, insurance, bank and other charges, brokerage, arrastre and
handling, duties and taxes, plus charges at the present site. The cost
in foreign currency of imported machinery shall be converted to peso
cost on the basis of foreign currency exchange rates as fixed by the
Central Bank.

693

Sec. 222

321
 5. Collection of real property tax

a. Date of accrual of real property tax

The real property tax for any year shall accrue on the first day of
January and from that date it shall constitute a lien on the property
which shall be superior to any other lien, mortgage, or encumbrance
of any kind whatsoever, and shall be extinguished only upon the
payment of the delinquent tax.694

b. Collection of tax

1) Collecting authority

The collection of the real property tax with interest thereon and
related expenses, and the enforcement of the remedies provided for in
this Title or any applicable laws, shall be the responsibility of the city
or municipal treasurer concerned.

The city or municipal treasurer may deputize the barangay

treasurer to collect all taxes on real property located in the barangay:
Provided, That the barangay treasurer is properly bonded for the
purpose: Provided, further, That the premium on the bond shall be
paid by the city or municipal government concerned.695

2) Duty of assessor to furnish local

treasurer with assessment rolls

The provincial, city or municipal assessor shall prepare and

submit to the treasurer of the local government unit, on or before the
thirty-first (31st) day of December each year, an assessment roll
containing a list of all persons whose real properties have been newly
assessed or reassessed and the values of such properties.696
694

Sec. 246

695

Sec. 247

696

322
 3) Notice of time for collection of tax

The city or municipal treasurer shall, on or before the thirty-first

(31st) day of January each year, in the case of the basic real property
tax and the additional tax for the Special Education Fund (SEF) or any
other date to be prescribed by the sanggunian concerned in the case
of any other tax levied under this title, post the notice of the dates
when the tax may be paid without interest at a conspicuous and
publicly accessible place at the city or municipal hall. Said notice shall
likewise be published in a newspaper of general circulation in the
locality once a week for two (2) consecutive weeks.

c. Periods within which to collect real property

tax

The basic real property tax and any other tax levied under this
Title shall be collected within five (5) years from the date they become
due. No action for the collection of the tax, whether administrative or
judicial, shall be instituted after the expiration of such period. In case
of fraud or intent to evade payment of the tax, such action may be
instituted for the collection of the same within ten (10) years from the
discovery of such fraud or intent to evade payment.

The period of prescription within which to collect shall be

suspended for the time during which:

(1) The local treasurer is legally prevented from collecting the

tax;

(2) The owner of the property or the person having legal

interest therein requests for reinvestigation and executes a waiver in
writing before the expiration of the period within which to collect; and

(3) The owner of the property or the person having legal

interest therein is out of the country or otherwise cannot be located.697

Sec. 248

697

Sec. 270

323
 d. Special rules on payment

1) Payment of real property tax in

installments

The owner of the real property or the person having legal

interest therein may pay the basic real property tax and the additional
tax for Special Education Fund (SEF) due thereon without interest in
four (4) equal installments; the first installment to be due and payable
on or before March Thirty-first (31st); the second installment, on or
before June Thirty (30); the third installment, on or before September
Thirty (30); and the last installment on or before December Thirty-first
(31st), except the special levy the payment of which shall be governed
by ordinance of the sanggunian concerned.

The date for the payment of any other tax imposed under this
Title without interest shall be prescribed by the sanggunian
concerned.

Payments of real property taxes shall first be applied to prior

years delinquencies, interests, and penalties, if any, and only after
said delinquencies are settled may tax payments be credited for the
current period.698

2) Interests on unpaid real property tax

In case of failure to pay the basic real property tax or any other
tax levied under this Title upon the expiration of the periods as
provided in Section 250, or when due, as the case may be, shall
subject the taxpayer to the payment of interest at the rate of two
percent (2%) per month on the unpaid amount or a fraction thereof,
until the delinquent tax shall have been fully paid: Provided, however,
That in no case shall the total interest on the unpaid tax or portion
thereof exceed thirty-six (36) months.699

698

Sec. 250

699

Sec. 255

324
 3) Condonation of real property tax

In case of a general failure of crops or substantial decrease in

the price of agricultural or agri-based products, or calamity in any
province, city or municipality, the sanggunian concerned, by
ordinance passed prior to the first (1st) day of January of any year and
upon recommendation of the Local Disaster Coordinating Council,
may condone or reduce, wholly or partially, the taxes and interest
thereon for the succeeding year or years in the city or municipality
affected by the calamity.700

The President of the Philippines may, when public interest so

requires, condone or reduce the real property tax and interest for any
year in any province or city or a municipality within the Metropolitan
Manila Area.701

e. Remedies of LGUs for collection of real

property tax

1) Issuance of notice of delinquency for

real property tax payment

(a) When the real property tax or any other tax imposed under
this Title becomes delinquent, the provincial, city or municipal
treasurer shall immediately cause a notice of the delinquency to be
posted at the main hall and in a publicly accessible and conspicuous
place in each barangay of the local government unit concerned. The
notice of delinquency shall also be published once a week for two (2)
consecutive weeks, in a newspaper of general circulation in the
province, city, or municipality.

(b) Such notice shall specify the date upon which the tax
became delinquent and shall state that personal property may be

700

Sec. 276

701

Sec. 277

325
distrained to effect payment. It shall likewise state that any time
before the distraint of personal property, payment of the tax with
surcharges, interests and penalties may be made in accordance with
the next following Section, and unless the tax, surcharges and
penalties are paid before the expiration of the year for which the tax
is due except when the notice of assessment or special levy is
contested administratively or judicially pursuant to the provisions of
Chapter 3, Title II, Book II of this Code, the delinquent real property
will be sold at public auction, and the title to the property will be
vested in the purchaser, subject, however, to the right of the
delinquent owner of the property or any person having legal interest
therein to redeem the property within one (1) year from the date of
sale.702

2) Local governments lien

The basic real property tax and any other tax levied under this
Title constitutes a lien on the property subject to tax, superior to all
liens, charges or encumbrances in favor of any person, irrespective of
the owner or possessor thereof, enforceable by administrative or
judicial action, and may only be extinguished upon payment of the tax
and the related interests and expenses.703

3) Remedies in general

For the collection of the basic real property tax and any other
tax levied under this Title, the local government unit concerned may
avail of the remedies by administrative action thru levy on real
property or by judicial action.704

702

Sec. 254

703

Sec. 257

704

Sec. 256

326
 4) Resale of real estate taken for taxes,
fees or charges

The sanggunian concerned may, by ordinance duly approved,

and upon notice of not less than twenty (20) days, sell and dispose of
the real property acquired under the preceding section at public
auction. The proceeds of the sale shall accrue to the general fund of
the local government unit concerned.705

5) Further levy until full payment of

amount due

Levy may be repeated if necessary until the full amount due,

including all expenses, is collected.706

6. Refund or credit of real property tax

a. Payment under protest

(a) No protest shall be entertained unless the taxpayer first pays

the tax. There shall be annotated on the tax receipts the words "paid
under protest". The protest in writing must be filed within thirty (30)
days from payment of the tax to the provincial, city treasurer or
municipal treasurer, in the case of a municipality within Metropolitan
Manila Area, who shall decide the protest within sixty (60) days from
receipt.

(b) The tax or a portion thereof paid under protest, shall be held
in trust by the treasurer concerned.

(c) In the event that the protest is finally decided in favor of the
taxpayer, the amount or portion of the tax protested shall be refunded
to the protestant, or applied as tax credit against his existing or future
tax liability.

705

Sec. 264

706

Sec. 265

327
 (d) In the event that the protest is denied or upon the lapse of
the sixty day period prescribed in subparagraph (a), the taxpayer may
avail of the remedies as provided for in Chapter 3, Title II, Book II of
this Code.707

b. Repayment of excessive collections

When an assessment of basic real property tax, or any other tax

levied under this Title, is found to be illegal or erroneous and the tax
is accordingly reduced or adjusted, the taxpayer may file a written
claim for refund or credit for taxes and interests with the provincial or
city treasurer within two (2) years from the date the taxpayer is
entitled to such reduction or adjustment.

The provincial or city treasurer shall decide the claim for tax
refund or credit within sixty (60) days from receipt thereof. In case
the claim for tax refund or credit is denied, the taxpayer may avail of
the remedies as provided in Chapter 3, Title II, Book II of this Code.708

7. Taxpayers remedies

a. Contesting an assessment of value of real

property

1) Appeal to the Local Board of

Assessment Appeals (LBAA)

Any owner or person having legal interest in the property who is

not satisfied with the action of the provincial, city or municipal
assessor in the assessment of his property may, within sixty (60) days
from the date of receipt of the written notice of assessment, appeal to
the Board of Assessment Appeals of the provincial or city by filing a
petition under oath in the form prescribed for the purpose, together

707

Sec. 252

708

Sec. 253

328
with copies of the tax declarations and such affidavits or documents
submitted in support of the appeal.709

2) Appeal to the Central Board of

Assessment Appeals (CBAA)

The owner of the property or the person having legal interest

therein or the assessor who is not satisfied with the decision of the
Board, may, within thirty (30) days after receipt of the decision of said
Board, appeal to the Central Board of Assessment Appeals, as herein
provided. The decision of the Central Board shall be final and
executory.710

3) Effect of payment of tax

Appeal on assessments of real property made under the

provisions of this Code shall, in no case, suspend the collection of the
corresponding realty taxes on the property involved as assessed by
the provincial or city assessor, without prejudice to subsequent
adjustment depending upon the final outcome of the appeal.711

b. Payment of real property under protest

1) File protest with local treasurer712

709

Sec. 226

710

Sec. 229 (c), last par.

711

Sec. 231

712

See B. (6)(a), under Refund or credit of real property tax, supra

329
 2) Appeal to the LBSS713

3) Appeal to the CBAA714

4) Appeal to the CTA

Appeal shall be made by filing a petition for review 715 with the
CTA within thirty (30) days from the receipt of the decision or ruling
or in the case of inaction, from the expiration of the period fixed by
law to act thereon.716

5) Appeal to the SC
No judicial proceeding against the Government involving matters
arising under the National Internal Revenue Code, the Customs Law or the
Assessment Law shall be maintained, except as herein provided, until and
unless an appeal has been previously filed with the Court of Tax Appeals and
disposed of in accordance with the provisions of this Act.

Any party adversely affected by any ruling, order or decision of

the Court of tax Appeals may appeal therefrom to the Supreme Court
by filing with the said Court a notice of appeal and with the Supreme
Court a petition for review, within thirty days from the date he
receives notice of said ruling, order or decision. If, within the

713

See (a)(1), supra

714

See (a)(2), supra

715

under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of
Civil Procedure

716

Sec. 11, RA No. 1125

330
aforesaid period, he fails to perfect his appeal, the said ruling, order
or decision shall become final and conclusive against him
If no decision is rendered by the Court within thirty days from
the date a case is submitted for decision, the party adversely affected
by said ruling, order or decision may file with said Court a notice of
his intention to appeal to the Supreme Court, and if, within thirty days
from the filing of said notice of intention to appeal, no decision has as
yet been rendered by the Court, the aggrieved party may file directly
with the Supreme Court an appeal from said ruling, order or decision,
notwithstanding the foregoing provisions of this section.
If any ruling, order or decision of the Court of Tax Appeals be
adverse to the Government, the Collector of Internal Revenue, the
Commissioner of Customs, or the provincial or city Board of
Assessment Appeals concerned may likewise file an appeal therefrom
to the Supreme Court in the manner and within the same period as
above prescribed for private parties.
Any proceeding directly affecting any ruling, order or decision
of the Court of Tax Appeals shall have preference over all other civil
proceedings except habeas corpus, workmen's compensation and
election cases.

IV. Tariff and Customs Code of 1978, as amended (TCC)

A. Tariff and duties, defined

1. Custom duties:

Are duties which are one charged upon commodities on their

being imported into or exported out of a country.

2. Tariff:

Means a book of rates, a table or catalogue drawn usually in

alphabetical order containing the names of several kinds of
merchandise with the duties to be paid for the same as settled
or agreed upon between several states that holds commerce
together.

331
 B. General rule: All imported articles are subject to duty.
Importation by the government taxable.

All articles when imported from a foreign country including

those previously exported from the Philippines are subject to
duty unless otherwise specifically provided for in the Tariff and
Customs Code or other laws. (Sec. 100, TCS)

C. Purpose for imposition

For the protection of consumers and manufacturers, as well as

Phil. products from undue competition posed by foreign-made
products.

D. Flexible tariff clause

The flexible tariff clause is a provision in the Tariff and Customs

Code, which implements the constitutionally delegated power to the
717

Congress to further delegate to the President of the Philippines, in the

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

E. Requirements of importation

1. Beginning and ending of importation

717

Sec. 401

332
 Importation begins when the carrying vessel or aircraft enters
the jurisdiction of the Philippines with the intention to unload 718
therein.

Importation is deemed terminated upon payment of duties,

taxes and other charges due upon the articles or secured to be paid at
a port of entry and the legal permit for withdrawal shall gave been
granted or in case said articles are free of duties, taxes and other
charges, until they have legally left the jurisdiction of the customs.719

2. Obligations of importer

a. Cargo manifest

A cargo manifest shall in no case be changed or altered, except

after entry of the vessel, by means of an amendment by the master,
consignee, or agent thereof, under oath, and attached to the original
manifest.720

b. Import entry

It is a declaration to the BOC showing particulars of the

imported article that will enable the customs authorities to determine
the correct duties. An importer is required to file an import entry. It
must be accomplished from disembarking of last cargo from vessel.

c. Declaration of correct weight or value

The declaration, ascertainment or verification of the correct

weight of the cargo at the port of loading is the duty or obligation of

718

Even if not yet unloaded, and there is unmanifested cargo, forfeiture may take place
because importation has already begun.

719

Sec. 1202

720

Sec. 1228, 3rd par., Rev. Adm. Code

333
the master, pilot, owner, officer or employee of the vessel. 721 If he omits
or disregards this duty and a punishable discrepancy between the
declared weight and actual weight of the cargo exists, the inevitable
conclusion is that he is negligent or careless. 722 Similarly, if in the
exercise or performance of this duty, he is negligent or careless
resulting in the commission of excessive discrepancy in the weight of
the ship's cargo penalized under the law, carelessness or
incompetency is, nonetheless, imputable to him.

d. Liability for payment of duties

Unless relieved by laws or regulations, the liability for duties,
taxes, fees and other charges attaching on importation constitutes a
personal debt due from the importer to the government which can be
discharged only by payment in full of all duties, taxes, fees and other
charges legally accruing. It also constitutes a lien upon the articles
imported which may be enforced while such articles are in custody or
subject to the control of the government.723

e. Liquidation of duties

If the Collector shall approve the returns of the appraiser and

the report of the weights, gauge or quantity, the liquidation shall be
made on the face of the entry showing the particulars thereof,
initiated by the liquidating clerk, approved by the chief liquidator, and
recorded in the record of liquidations.

721

Sec. 2523

722

See Delgado Shipping Agencies, Inc. vs. Commissioner of Customs, C.T.A. Case No. 2685,
Feb. 15, 1977; Macondray & Co., Inc. vs. Commissioner of Customs, C.T.A. Case No. 274 1, Feb. 3,
1977; Macondray & Co., Inc, vs. Commissioner of Customs, C.T.A. Case No. 2656, January 21,
1977 and cases cited therein.

723

Sec. 1204

334
 A daily record of all entries liquidated shall be posted in the
public corridor of the customhouse, stating the name of the vessel or
aircraft, the port from which she arrived, the date of her arrival, the
name of the importer, and the serial number and date of the entry. A
daily record must also be kept by the Collector of all additional duties,
taxes and other charges found upon liquidation, and notice shall
promptly be sent to the interested parties.724

If to determine the exact amount due under the law in whole or

in part some future action is required, the liquidation shall be deemed
to be tentative as to the item or items affected and shall to that extent
be subject to future and final readjustment and settlement. The entry
in such case shall be stamped "Tentative liquidation".725

When articles have been entered and passed free of duty or final
adjustment of duties made, with subsequent delivery, such entry and
passage free of duty or settlement of duties will, after the expiration
of one year, from the date of the final payment of duties, in the
absence of fraud or protest, be final and conclusive upon all parties,
unless the liquidation of the import entry was merely tentative.726

In determining the total amount of duties, taxes, surcharges,

wharfage and/or other charges to be paid on entries, a fraction of a
peso less than fifty centavos shall be disregarded, and a fraction of a
peso amounting to fifty centavos or more shall be considered as one
peso. In case of overpayment or underpayment of duties, taxes,
surcharges, wharfage and/or other charges paid on entries, where the
amount involved is less than five pesos, no refund or collection shall
be made.727

724

Sec. 1601

725

Sec. 1602

726

Sec. 1603

335
 f. Keeping of records

F. Importation in violation of TCC

1. Smuggling

1. An act of any person who shall:

a. Fraudulently import any article contrary to law, or

b. Assist in so doing, or
c. Receive, conceal, buy, sell, facilitate, transport, conceal
or sell such article knowing its illegal importation.728
d. Export contrary to law.729

2. The Philippines is divided into various ports of entry entry

other than port of entry, will be smuggling.

2. Other fraudulent practices

Any person who makes or attempts to make any entry of

imported or exported article by means of any false or fraudulent
invoice, declaration, affidavit, letter, paper, or by means of any false
statement, written or verbal, or by means of any false or fraudulent
practice whatsoever, or shall be guilty of any willful act or omission by
means of whereof the Government might be deprived of the lawful
duties, taxes and other charges, or any portion thereof, accruing from
the article or any portion thereof, embraced or referred to in such

727

Sec. 1604

728

Sec. 3601

729

Sec. 3514

336
invoice, declaration, affidavit, letter, paper, or statement, or affected
by such act or omission, shall, for each offense, be punished by a fine
of not less than six hundred pesos nor more than five thousand pesos
and by imprisonment for not less than six months nor more than two
years and if the offender is an alien, he shall be deported after serving
the sentence.730

G. Classification of goods

1. Taxable importation

All articles, when imported from any foreign country into the
Philippines, shall be subject to duty upon each importation, even
though previously exported from the Philippines, except as otherwise
specifically provided for in this Code or in other laws.731

2. Prohibited importation
The importation into the Philippines of the following articles is
prohibited:
a. Dynamite, gunpowder, ammunitions and other explosives,
firearm and weapons of war, and detached parts thereof, except when
authorized by law.1awphil
b. Written or printed article in any form containing any matter
advocating or inciting treason, rebellion, insurrection or sedition
against the Government of the Philippines, of forcible resistance to
any law of the Philippines, or containing any threat to take the life of
or inflict bodily harm upon any person in the Philippines.
c. Written or printed articles, photographs, engravings,
lithographs, objects, paintings, drawings or other representation of an
obscene or immoral character.
d. Articles, instruments, drugs and substances designed,
intended or adapted for preventing human conception or producing
unlawful abortion, or any printed matter which advertises or
describes or gives directly or indirectly information where, how or by
whom human conception is prevented or unlawful abortion produced.

730

Sec. 3602

731

Sec. 101

337
 e. Roulette wheels, gambling outfits, loaded dice, marked cards,
machines, apparatus or mechanical devices used in gambling, or in
the distribution of money, cigars, cigarettes or other articles when
such distribution is dependent upon chance, including jackpot and
pinball machines or similar contrivances.
f. Lottery and sweepstakes tickets except those authorized by
the Philippine Government, advertisements thereof and lists of
drawings therein.
g. Any article manufactured in whole or in part of gold silver or
other precious metal, or alloys thereof, the stamps brands or marks of
which do not indicate the actual fineness or quality of said metals or
alloys.
h. Any adulterated or misbranded article of food or any
adulterated or misbranded drug in violation of the provisions of the
"Food and Drugs Act."
i. Marihuana, opium poppies, coca leaves, or any other narcotics
or synthetic drugs which are or may hereafter be declared habit
forming by the President of the Philippines, any compound,
manufactured salt, derivative, or preparation thereof, except when
imported by the Government of the Philippines or any person duly
authorized by the Collector of Internal Revenue, for medicinal
purposes only.
j. Opium pipes and parts thereof, of whatever material.
k. All other articles the importation of which is prohibited by
law.732

H. Classification of duties

1. Ordinary/Regular duties

These are duties imposed on imported articles that enter the

country of the Philippines in avoidance with the schedules and
classifications provided under the Tariff and Customs Code.

732

Sec. 102, id.

338
 a. Ad valorem; Methods of valuation

1) Transaction value

The price actually paid or payable for the goods when sold for export
to the Philippines, adjusted by adding:

(1) The following to the extent that they are incurred by the buyer but
are not included in the price actually paid or payable for the imported goods:

(a) Commissions and brokerage fees (except buying

commissions);

(b) Cost of containers;

(c) The cost of packing, whether for labour or materials;

(d) The value, apportioned as appropriate, of the following

goods and services: materials, components, parts and similar items
incorporated in the imported goods; tools; dies; moulds and similar
items used in the production of imported goods; materials consumed
in the production of the imported goods; and engineering,
development, artwork, design work and plans and sketches
undertaken elsewhere than in the Philippines and necessary for the
production of imported goods, where such goods and services are
supplied directly or indirectly by the buyer free of charge or at a
reduced cost for use in connection with the production and sale for
export of the imported goods;

(e) The amount of royalties and license fees related to the goods
being valued that the buyer must pay, either directly or indirectly, as a
condition of sale of the goods to the buyer;

(2) The value of any part of the proceeds of any subsequent resale,
disposal or use of the imported goods that accrues directly or indirectly to
the seller;

(3) The cost of transport of the imported goods from the port of
exportation to the port of entry in the Philippines;

(4) Loading, unloading and handling charges associated with the

transport of the imported goods from the country of exportation to the port
of entry in the Philippines; and

(5) The cost of insurance.733

733

Sec. 1 (A), R.A. 9135, amending Sec. 201 of TCC

339
 2) Transaction value of identical goods

Where the dutiable value cannot be determined under method

one, the dutiable value shall be the transaction value of identical
goods sold for export to the Philippines and exported at or about the
same time as the goods being valued. "Identical goods" shall mean
goods which are the same in all respects, including physical
characteristics, quality and reputation. Minor differences in
appearances shall not preclude goods otherwise conforming to the
definition from being regarded as identical.734

3) Transaction value of similar goods

Where the dutiable value cannot be determined under the
preceding method, the dutiable value shall be the transaction value of
similar goods sold for export to the Philippines and exported at or
about the same time as the goods being valued. "Similar goods" shall
mean goods which, although not alike in all respects, have like
characteristics and like component materials which enable them to
perform the same functions and to be commercially interchangeable.
The quality of the goods, their reputation and the existence of a
trademark shall be among the factors to be considered in determining
whether goods are similar.
If the dutiable value still cannot be determined through the
successive application of the two immediately preceding methods, the
dutiable value shall be determined under method four or, when the
dutiable value still cannot be determined under that method, under
method five, except that, at the request of the importer, the order of
application of methods four and five shall be reversed: Provided,
however, That if the Commissioner of Customs deems that he will
experience real difficulties in determining the dutiable value using
method five, the Commissioner of Customs may refuse such a request
in which event the dutiable value shall be determined under method
four, if it can be so determined.735

734

Sec. 1 (B), Id.

735

Sec. 1 (C), id.

340
 4) Deductive value
The dutiable value of the imported goods under this method shall be
the deductive value which shall be based on the unit price at which the
imported goods or identical or similar imported goods are sold in the
Philippines, in the same condition as when imported, in the greatest
aggregate quantity, at or about the time of the importation of the goods
being valued, to persons not related to the persons from whom they buy
such goods, subject to deductions for the following:
(1) Either the commissions usually paid or agreed to be paid or the
additions usually made for profit and general expenses in connection with
sales in such country of imported goods of the same class or kind;
(2) The usual costs of transport and insurance and associated costs
incurred within the Philippines; and
(3) Where appropriate, the costs and charges referred to in subsection
(A) (3), (4) and (5); and
(4) The customs duties and other national taxes payable in the
Philippines by reason of the importation or sale of the goods.
If neither the imported goods nor identical nor similar imported goods
are sold at or about the time of importation of the goods being valued in the
Philippines in the conditions as imported, the customs value shall, subject to
the conditions set forth in the preceding paragraph hereof, be based on the
unit price at which the imported goods or identical or similar imported
goods sold in the Philippines in the condition as imported at the earliest date
after the importation of the goods being valued but before the expiration of
ninety (90) days after such importation.
If neither the imported goods nor identical nor similar imported goods
are sold in the Philippines in the condition as imported, then, if the importer
so requests, the dutiable value shall be based on the unit price at which the
imported goods, after further processing, are sold in the greatest aggregate
quantity to persons in the Philippines who are not related to the persons
from whom they buy such goods, subject to allowance for the value added by
such processing and deductions provided under Subsections (D)(1), (2), (3)
and (4) hereof.736
5) Computed value
The dutiable value under this method shall be the computed value
which shall be the sum of:
(1) The cost or the value of materials and fabrication or other
processing employed in producing the imported goods;
(2) The amount for profit and general expenses equal to that usually
reflected in the sale of goods of the same class or kind as the goods being
valued which are made by producers in the country of exportation for export
to the Philippines;

736

Sec. 1 (D), id.

341
 (3) The freight, insurance fees and other transportation expenses for
the importation of the goods;
(4) Any assist, if its value is not included under paragraph (1) hereof;
and
(5) The cost of containers and packing, if their values are not included
under paragraph (1) hereof.
The Bureau of Customs shall not require or compel any person not
residing in the Philippines to produce for examination, or to allow access to,
any account or other record for the purpose of determining a computed
value. However, information supplied by the producer of the goods for the
purposes of determining the customs value may be verified in another
country with the agreement of the producer and provided they will give
sufficient advance notice to the government of the country in question and
the latter does not object to the investigation.737

6) Fallback value

If the dutiable value cannot be determined under the preceding

methods described above, it shall be determined by using other
reasonable means and on the basis of data available in the
Philippines.

If the importer so requests, the importer shall be informed in

writing of the dutiable value determined under Method Six and the
method used to determine such value.

No dutiable value shall be determined under Method Six on the

basis of:

(1) The selling price in the Philippines of goods produced in the

Philippines;
(2) A system that provides for the acceptance for customs
purposes of the higher of two alternative values;
(3) The price of goods in the domestic market of the country of
exportation;
(4) The cost of production, other than computed values, that
have been determined for identical or similar goods in accordance
with Method Five hereof;
(5) The price of goods for export to a country other than the
Philippines;
(6) Minimum customs values; or

737

Sec. 1 (E), id.

342
 (7) Arbitrary or fictitious values.738

b. Specific

Duty based on the dutiable weight of goods number or

measurement.

2. Special duties

Imposed in addition to regular or ordinary duties principally in

order to protect local industries against unfair competition from
foreign manufacturers or procedures; consumer against possible
deceptions; and national interest.

a. Dumping duties

Imposed by the Secretary of Finance upon the recommendation

of the Tariff Commission when:

a. The price of the imported article is deliberately or

continually fixed at less than the fair market value or cost
of production; and

b. Importation would cause or likely cause and injury

to local industries engaged in the manufacture or
production of the same or similar articles or prevent their
establishment.

Amount of special duty: extent of the underpricing.

b. Countervailing duties

Special duty imposed on imported articles which are granted

any kind or form of subsidy by the government in the country or origin
or exportation, the importation of which has caused or threatens to
cause material injury to a domestic industry or has materially relaided
the growth or, prevents the establishment of a domestic industry.739

738

Sec. 1 (F), id.

739

343
 c. Marking duties

Special duty of five percent (5%) ad valorem imposed or articles

properly marked, collected by the commissioner, except when such
article is exported or destroyed under the customs supervision and
prior to final liquidation of the corresponding entry.

Purpose: To prevent possible deception of the consumers.

d. Retaliatory/Discriminatory duties

Imposed on imported goods whenever it is found as a fact that

the country of origin discriminates against the commerce of the
Philippines in such a manner as to place the commerce of the
Philippines at a disadvantage compared with the commerce of any
foreign country.

e. Safeguard

Safeguard measures are emergency measures, including tariffs,

to protect domestic industries and producers from increased imports
which inflict or could inflict serious injury on them.740
The CTA is vested with jurisdiction to review decisions of the
Secretary of Trade and Industry imposing safeguard measures as
provided under Rep. Act No. 8800 the Safeguard Measures Act
(SMA).741

RA 8751

Requisites:

1. The levy of an excise tax or inland tax or local goods of the same or similar class as
the article imported or the grant of subsidy to the foreign exporter by his government; and

2. The importation is likely to insure materially established local industries or prevent

their establishments.

Amount of special duty: Equal to the bounty or subsidy or subvention.

740

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

741

344
 The DTI Secretary cannot impose the safeguard measures if the
Tariff Commission does not favorably recommend its imposition.

I. Drawbacks

A drawback is a device resorted to for enabling a commodity

affected by taxes to be exported and sold in foreign markets upon the
same terms as if it had not been taxed at all. It refers to duties or
taxes paid back or remitted by the government on the exportation of
that on which they were levied under the Tariff and Customs Code. It
refers to refund of duties on imported fuel used for provision of
vessels.

J. Remedies

1. Government

a. Administrative/Extrajudicial

1) Search, seizure, forfeiture, arrest

For the enforcement of the customs and tariff laws, the

following persons are authorized to effect searches, seizures and
arrests conformably with the provisions of said laws:

a. Officials of the Bureau of Customs, collectors, assistant collectors,

deputy collectors, surveyors, security and secret-service agents, inspectors,
port patrol officers and guards of the Bureau of Customs.

b. Officers of the Philippine Navy when authorized by the

Commissioner.

c. Any person especially authorized in writing by the Commissioner.

d. Officers generally empowered by law to effect arrests and execute

processes of courts, when acting under direction of the Collector.

e. Any person especially authorized by a Collector, subject to the

restrictions stated in the next succeeding section.

Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et

al., G. R. No. 158540, July 8, 2004

345
 Persons exercising the powers hereinabove conferred shall, in the
exercise thereof, have the same authority, be entitled to the proper
protection, and shall be governed by the same law, not inconsistent with the
provisions of this section, as other officers exercising police authority in
general.742

Place Where Authority May Be Exercised. Persons acting under

authority conferred pursuant to subsection (e) of the preceding section may
exercise their authority within the limits of the collection district only and in
or upon the particular vessel or aircraft, or in the particular place, or in
respect to the particular article specified in the appointment. All such
appointments shall be in writing, and the original shall be filed in the
customhouse of the district where made.

All other persons exercising the powers hereinabove conferred may

exercise the same at any place within the jurisdiction of the Bureau of
Customs.743

It shall be within the power of a customs official or person authorized

as aforesaid, and it shall be his duty, to make seizure of any vessel, aircraft,
cargo, articles, animal or other movable property when the same is subject
to forfeiture or liable for any fine imposed under customs and tariff laws,
and also to arrest any person subject to arrest for violation of any customs
and tariff laws, such power to be exercised in conformity with the law and
the provisions of this Code.744

It shall be the duty of any person exercising authority as aforesaid,

upon being questioned at the time of the exercise thereof, to make known
his official character as an officer or official of the Government, and if his
authority is derived from special authorization in writing to exhibit the same
for inspection, if demanded.745

742

Sec. 2203

743

Sec. 2204

744

Sec. 2205.

745

346
 Any person exercising police authority under the customs and tariff
laws may demand assistance of any police officer when such assistance shall
be necessary to effect any search, seizure or arrest which may be lawfully
made or attempted by him. It shall be the duty of any police officer upon
whom such requisition is made to give such lawful assistance in the matter
as may be required.746

For the more effective discharge of his official duties, any person
exercising the powers herein conferred, may at anytime enter, pass through,
or search any land or enclosure or any warehouse, store or other building,
not being a dwelling house.747

A warehouse, store or other building or enclosure used for the

keeping of storage of articles does not become a dwelling house within the
meaning hereof merely by reason of the fact that a person employed as
watchman lives in the place, nor will the fact that his family stays there with
him alter the case.

A dwelling house may be entered and searched only upon warrant

issued by a judge or justice of the peace, upon sworn application showing
probable case and particularly describing the place to be searched and
person or thing to be seized.748

It shall be lawful for any official or person exercising police authority

under the provisions of this Code to go abroad any vessel or aircraft within
the limits of any collection to go aboard any vessel or aircraft within the
limits of any collection district, and to inspect, search and examine said
vessel or aircraft and any trunk, package, box or envelope on board, and to

Sec. 2206

746

Sec. 2207.

747

Sec. 2208.

748

Sec. 2209

347
search any person on board the said vessel or aircraft and to this end to hail
and stop such vessel or aircraft if under way, to use all necessary force to
compel compliance; and if it shall appear that any breach or violation of the
customs and tariff laws of the Philippines has been committed, whereby or in
consequence of which such vessels or aircrafts, or the article, or any part
thereof, on board of or imported by such vessel or aircraft, is liable to
forfeiture, to make seizure of the same or any part thereof.

The power of search hereinabove given shall extend to the removal of

any false bottom, partition, bulkhead or other obstruction, so far as may be
necessary to enable the officer to discover whether any dutiable or
forfeitable articles may be concealed therein.

No proceeding herein shall give rise to any claim for the damage
thereby caused to article or vessel or aircraft.749

It shall also be lawful for a person exercising authority as aforesaid to

open and examine any box, trunk, envelope or other container, wherever
found where he has reasonable cause to suspect the presence therein of
dutiable or prohibited article or articles introduced into the Philippines
contrary to law, and likewise to stop, search and examine any vehicle, beast
or person reasonably suspected of holding or conveying such article as
aforesaid.750

All persons coming into the Philippines from foreign countries shall be
liable to detention and search by the customs authorities under such
regulations as may be prescribed relative thereto.

Female inspectors may be employed for the examination and search of

persons of their own sex.751

Upon making any seizure, the Collector shall issue a warrant for the
detention of the property; and if the owner or importer desires to secure the

749

Sec. 2210

750

Sec. 2211

751

Sec. 2212

348
release of the property for legitimate use, the Collector may surrender it
upon the filing of a sufficient bond, in an amount to be fixed by him,
conditioned for the payment of the appraised value of the article and/or any
fine, expenses and costs which may be adjudged in the case: Provided, That
articles the importation of which is prohibited by law shall not be released
under bond.752

When a seizure is made for any cause, the Collector of the district
wherein the seizure is effected shall immediately make report thereof to the
Commissioner and to the Auditor General. 753

The Collector shall give the owner or importer of the property or his
agent a written notice of the seizure and shall give him an opportunity to be
heard in reference to the delinquency which was the occasion of such
seizure.

For the purpose of giving such notice and of all other proceedings in
the matter of such seizure, the importer, consignee or person holding the bill
of lading shall be deemed to be the "owner" of the article included in the bill.

For the same purpose, "agent" shall be deemed to include not only any
agent in fact of the owner of the seized property but also any person having
responsible possession of the property at the (missing) of the seizure, if the
owner or his agent in fact is unknown or cannot be reached. 754

Notice to an unknown owner shall be effected by posting a notice for

fifteen days in the public corridor of the customhouse of the district in which
the seizure was made, and, in the discretion of the Commissioner, by
publication in a newspaper or by such other means as he shall consider
desirable.755

752

Sec. 2301

753

Sec. 2302

754

Sec. 2303

755

349
 The Collector shall also cause a list and particular description of the
property seized to be prepared and an appraisement or classification of the
same at its wholesale value in the local market in the usual wholesale
quantities to be made by at least two appraising officials, if there are such
officials at or near the place of seizure; in the absence of such officials, then
by two competent and disinterested citizens of the Philippines, to be
selected by him for that purpose, residing at or near the place of seizure,
which list and appraisement shall be properly attested to by such Collector
and the persons making the appraisal.756

If, within fifteen days after the notification prescribed in section

twenty-three hundred and four of this Code, no owner or agent can be found
or appears before the Collector, the latter shall declare the property
forfeited to the government to be sold at auction in accordance with law. 757

If, in any seizure case, the owner or agent shall, while the case is yet
before the Collector of the district of seizure, pay to such Collector the fine
imposed by him or, in case of forfeiture, shall pay the appraised value of the
property, or, if after appeal of the case, he shall pay to the Commissioner the
amount of the fine as finally determined by him, or, in case of forfeiture,
shall pay the appraised value of the property, such property shall be
forthwith surrendered, and all liability which may or might attach to the
property by virtue of the offense which was the occasion of the seizure and
all liability which might have been incurred under any bond given by the
owner or agent in respect to such property shall thereupon be deemed to be
discharged.

Redemption of forfeited property shall not be allowed in any case

where the importation is absolutely prohibited or where the surrender of the
property to the person offering to redeem the same would be contrary to
law.758

Sec. 2304

756

Sec. 2305

757

Sec. 2306.

758

Sec. 2307

350
 b. Judicial

1) Rules on appeal including jurisdiction

The party aggrieved by a ruling of the Commissioner in any

matter brought before him upon protest or by his action or ruling in
any case of seizure may appeal to the Court of Tax Appeals, in the
manner and within the period prescribed by law and regulations.

Unless an appeal is made to the Court of Tax Appeals in the

manner and within the period prescribed by laws and regulations, the
action or ruling of the Commissioner shall be final and conclusive.759

2) Taxpayer

a. Protest

When a ruling or decision of the Collector is made whereby liability

for duties, fees, or other money charge is determined, except the fixing of
fines in seizure cases, the party adversely affected may protest such ruling
or decision by presenting to the Collector at the time when payment of the
amount claimed to be due the Government is made, or within thirty days
thereafter, a written protest setting forth his objections to the ruling or
decision in question, together with the reasons therefor. No protest shall be
considered unless payment of the amount due after final liquidation has first
been made.760

In all cases subject to protest, the interested party who desires to

have the action of the Collector reviewed, shall make a protest, otherwise,
the action of the Collector shall be final and conclusive against him, except
as to matters correctible for manifest error in the manner prescribed in
section one thousand seven hundred and seven hereof. 761

759

Sec. 2402

760

Sec. 2308

761

351
 Every protest shall be filed in accordance with the prescribed rules
and regulations promulgated under this section and shall point out the
particular decision or ruling of the Collector to which exception is taken or
objection made, and shall indicate with reasonable precision the particular
ground or grounds upon which the protesting party bases his claim for
relief.

The scope of a protest shall be limited to the subject matter of a single

adjustment or other independent transaction; but any number of issue may
be raised in a protest with reference to the particular item or items
constituting the subject matter of the protest.

"Single adjustment", as hereinabove used, refers to the entire content

of one liquidation, including all duties, fees, surcharges or fines incident
thereto.762

If the nature of the articles permit, importers filing protests involving

questions of fact must, upon demand, supply the Collector with samples of
the articles which are the subject matter of the protests. Such samples shall
be verified by the custom official who made the classification against which
the protest are filed.763

When a protest in proper form is presented in a case where protest in

required, the Collector shall reexamine the matter thus presented, and if the
protest is sustained, in whole or in part, he shall enter the appropriate order,
the entry reliquidated if necessary.

In seizure cases, the Collector, after a hearing, shall in writing make a

declaration of forfeiture or fix the amount of the fine or take such other
action as may be proper.764

Sec. 2309

762

Sec. 2310.

763

Sec. 2311

764

Sec. 2312

352
 The person aggrieved by the decision or action of the Collector in any
matter presented upon protest or by his action in any case of seizure may,
within fifteen days after notification in writing by the Collector of his action
or decision, give written notice to the Collector of his desire to have the
matter reviewed by the Commissioner. Thereupon the Collector shall
forthwith transmit all the records of the proceedings to the Commissioner,
who shall approve, modify or reverse the action or decision of the Collector
and take such steps and make such orders as may be necessary to give
effect to his decision.765

Notice of the decision of the Commissioner shall be given to the party

by whom the case was brought before him for review, and in seizure cases
such notice shall be effected by personal service if practicable. 766

If in any case involving the assessment of duties the importer shall fail
to protest the ruling of the Collector, and the Commissioner shall be of the
opinion that the ruling was erroneous and unfavorable to the Government,
the latter may order a reliquidation; and if the ruling of the Commissioner in
any unprotested case should, in the opinion of the department head, be
erroneous and unfavorable to the Government, the department head may
require the Commissioner to order a reliquidation.

Except as in the preceding paragraph provided, the supervisory

authority of the department head over the Bureau of Customs shall not
extend to the administrative review of the ruling of the Commissioner in
matters appealed to the Court of Tax Appeals.767

b. Abandonment

765

Sec. 2313

766

Sec. 2314

767

Sec. 2315

353
 Abandonment is express when it is made direct to the Collector
by the interested party in writing, and it is implied when, from the
action or omission of the interested party, an intention to abandon can
be clearly inferred. The failure of any interested party to file the
import entry within fifteen days or any extension thereof from the
discharge of the vessel or aircraft, shall be implied abandonment. An
implied abandonment shall not be effective until the article is
declared by the Collector to have been abandoned after notice thereof
is given to the interested party as in seizure cases.

Any person who abandons an imported article renounces all his

interests and property rights therein.768

The owner or importer of any articles may, within ten days after filing
of the import entry, abandon to the Government all or a part of the articles
included in an invoice, and, thereupon, he shall be relieved from the
payment of duties, taxes and all other charges and expenses due thereon:
Provided, That the portion so abandoned is not less than ten per cent of the
total invoice and is not less than one package, except in cases of articles
imported for personal or family use. The article so abandoned shall be
delivered by the owner or importer at such place within the port of arrival as
the Collector shall designate, and upon his failure to so comply, the owner or
importer shall be liable for all expenses that may be incurred in connection
with the disposition of the articles.

Nothing in this section shall be construed as relieving such owner or

importer from any criminal liability which may arise from any violation of
law committed in connection with the importation of the abandoned
article.769

The owner or importer of an article impliedly abandoned may, at any time

before it is sold or otherwise disposed of, reclaim such article provided all
legal requirements regarding its importation are complied with and the
corresponding duties, taxes and other charges as well as all expenses
incurred as a consequence of the abandonment, are paid. 770

768

Sec. 1801

769

Sec. 1802

770

354
 c. Abatement and refund
Except as herein specially provided, no abatement of duties shall be
made on account of damage incurred or deterioration suffered during the
voyage of importation; and duties will be assessed on the actual quantity
imported, as shown by the return of weighers, gaugers, measures,
examiners or appraisers, as the case may be. 771

When any package or packages appearing on the manifest or bill of

lading are missing, a remission or refund of the duty thereon shall be made
if it is shown by proof satisfactory to the Collector that the package or
packages in question have not been imported into the Philippines. 772
If, upon opening any package, a deficiency or absence of any article,
or of part of the contents thereof, as called for by the invoice shall be found
to exist, such deficiency shall be certified to the Collector by the appraiser;
and upon the production of proof satisfactory to the Collector showing that
the shortage occurred before the arrival of the article in the Philippines, the
proper abatement or refund of the duty shall be made.773
A Collector may abate or refund the amount of duties accruing or
paid, and may likewise make a corresponding allowance or credit on the
entry bond, or other document, upon satisfactory proof of the injury,
destruction, or loss by theft, fire or other causes of any article as
follows:
a. While within the limits of any port of entry prior to unlading under
customs supervision.
b. While remaining in customs custody after unlading.
c. While in transit under bond from the port of entry to any port in the
Philippines.

Sec. 1803

771

Sec. 1701

772

Sec. 1702

773

Sec. 1703

355
 d. While released under bond to export, except in case of loss by
theft.774
Where it is satisfactorily shown to the Collector that an animal which
is the subject of importation dies or suffers injury before arrival, or while in
customs custody, the duty shall be correspondingly abated by him, provided
the carcass of any dead animal remaining on board or in customs custody be
removed in the manner required by the Collector and at the expense of the
importer.775
The Collector shall in all cases of allowances, abatements or refunds
of duties, cause an examination and report in writing to be made as to any
fact discovered during such examination which tends to account for the
discrepancy or difference and cause the corresponding adjustment to be
made on the import entry.776
Manifest clerical errors made in an invoice or entry, errors in return
of weight, measure and gauge, when duly certified to by the surveyor or
examining official (when there are such officials at the port), and errors in
the distribution of charges on invoices not involving any question of law and
certified to by the examining official, may be corrected in the computation of
duties, if such errors be discovered before the payment of duties, or, if
discovered within one year after the final liquidation, upon written request
and notice of error from the importer, or upon statement of error certified by
the Collector.
For the purpose of correcting errors specified in the next preceding
paragraph the Collector is authorized to reliquidate entries and collect
additional charges, or to make refunds on statement of error within the
statutory time limit.777

774

Sec. 1704

775

Sec. 1705

776

Sec. 1706

777

Sec. 1707

356
 All claims for refund of duties shall be made in writing, and forwarded
to the Collector to whom such duties are paid, who upon receipt of such
claim shall verify the same by the records of his office, and if found to be
correct and in accordance with law, shall certify the same to the
Commissioner with his recommendation together with all necessary papers
and documents. Upon receipt by the Commissioner of such certified claim he
shall cause the same to be paid if found correct. 778
V. Judicial Remedies; Republic Act 1125 The Act that Created
the Court of Tax Appeals (CTA),779 as amended, and the Revised
Rules of the Court of Tax Appeals

A. Jurisdiction of the Court of Tax Appeals

1. Exclusive appellate jurisdiction over civil tax

cases

a. Cases within the jurisdiction of the Court en

banc

778

Sec. 1708

779

The Court of Tax Appeals is a court of special appellate jurisdiction and a part of our
judicial system. The proceedings therein are judicial in nature although the Court is not bound by
the technical rules of evidence. (Purakan Plantation Co. vs. Domingo L-18571, 29 Oct. 1966)

It is a regular court vested with exclusive appellate jurisdiction over cases arising
under the:

1.National Internal Revenue Code

2.Tariff and Customs Code

3.Assessment law

The CTA is a highly specialized body specially created for the purpose of reviewing tax
cases, its findings will not be ordinarily be reviewed absent a showing of gross error or abuse on
its part. These findings are binding upon the Supreme Court and in the absence of strong
reasons for the court to delve on fatcs, only questions of law are open for determination.

357
 The Court en banc shall exercise exclusive appellate jurisdiction to
review by appeal the following:

(a) Decisions or resolutions on motions for reconsideration or new

trial of the Court in Divisions in the exercise of its exclusive appellate
jurisdiction over:

(1) Cases arising from administrative agencies Bureau of

Internal Revenue, Bureau of Customs, Department of Finance,
Department of Trade and Industry, Department of Agriculture;

(2) Local tax cases decided by the Regional Trial Courts in the
exercise of their original jurisdiction; and

(3) Tax collection cases decided by the Regional Trial Courts in

the exercise of their original jurisdiction involving final and executory
assessments for taxes, fees, charges and penalties, where the
principal amount of taxes and penalties claimed is less than one
million pesos;

(b) Decisions, resolutions or orders of the Regional Trial Courts in

local tax cases decided or resolved by them in the exercise of their appellate
jurisdiction;

(c) Decisions, resolutions or orders of the Regional Trial Courts in tax

collection cases decided or resolved by them in the exercise of their
appellate jurisdiction;

(d) Decisions, resolutions or orders on motions for reconsideration or

new trial of the Court in Division in the exercise of its exclusive original
jurisdiction over tax collection cases;

(e) Decisions of the Central Board of Assessment Appeals (CBAA) in

the exercise of its appellate jurisdiction over cases involving the assessment
and taxation of real property originally decided by the provincial or city
board of assessment appeals;

(f) Decisions, resolutions or orders on motions for reconsideration or

new trial of the Court in Division in the exercise of its exclusive original
jurisdiction over cases involving criminal offenses arising from violations of
the National Internal Revenue Code or the Tariff and Customs Code and
other laws administered by the Bureau of Internal Revenue or Bureau of
Customs;

(g) Decisions, resolutions or orders on motions for reconsideration or

new trial of the Court in Division in the exercise of its exclusive appellate
jurisdiction over criminal offenses mentioned in the preceding
subparagraph; and

358
 (h) Decisions, resolutions or orders of the Regional trial Courts in the
exercise of their appellate jurisdiction over criminal offenses mentioned in
subparagraph (f).780

b. Cases within the jurisdiction of the Court in

divisions

(a) Exclusive original or appellate jurisdiction to review by appeal the

following:

(1) Decisions of the Commissioner of Internal Revenue in cases

involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases

involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where the National
Internal Revenue Code or other applicable law provides a specific
period for action: Provided, that in case of disputed assessments, the
inaction of the Commissioner of Internal Revenue within the one
hundred eighty day-period under Section 228 of the National Internal
revenue Code shall be deemed a denial for purposes of allowing the
taxpayer to appeal his case to the Court and does not necessarily
constitute a formal decision of the Commissioner of Internal Revenue
on the tax case; Provided, further, that should the taxpayer opt to
await the final decision of the Commissioner of Internal Revenue on
the disputed assessments beyond the one hundred eighty day-period
abovementioned, the taxpayer may appeal such final decision to the
Court under Section 3(a), Rule 8 of these Rules; and Provided, still
further, that in the case of claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a petition for review with the
Court prior to the expiration of the two-year period under Section 229
of the National Internal Revenue Code;

(3) Decisions, resolutions or orders of the Regional Trial Courts

in local tax cases decided or resolved by them in the exercise of their
original jurisdiction;

(4) Decisions of the Commissioner of Customs in cases involving

liability for customs duties, fees or other money charges, seizure,

780

Rule 4, Sec. 2, Revised Rules of the Court Of Tax Appeals

359
 detention or release of property affected, fines, forfeitures of other
penalties in relation thereto, or other matters arising under the
Customs Law or other laws administered by the Bureau of Customs;

(5) Decisions of the Secretary of Finance on customs cases

elevated to him automatically for review from decisions of the
Commissioner of Customs adverse to the Government under Section
2315 of the Tariff and Customs Code; and

(6) Decisions of the Secretary of Trade and Industry, in the case

of nonagricultural product, commodity or article, and the Secretary of
Agriculture, in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Section 301 and
302, respectively, of the Tariff and Customs Code, and safeguard
measures under Republic Act No. 8800, where either party may
appeal the decision to impose or not to impose said duties;

(b) Exclusive jurisdiction over cases involving criminal offenses, to

wit:

(1) Original jurisdiction over all criminal offenses arising from

violations of the National internal Revenue Code or Tariff and
Customs Code and other laws administered by the Bureau of Internal
Revenue of the Bureau of Customs, where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is one
million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments,

resolutions or orders of the Regional Trial Courts in their original
jurisdiction in criminal offenses arising from violations of the National
Internal Revenue Code or Tariff and Customs Code and other laws
administered by the Bureau of Internal Revenue or Bureau of
Customs, where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than one million pesos or where
there is no specified amount claimed;

(c) Exclusive jurisdiction over tax collections cases, to wit:

(1) Original jurisdiction in tax collection cases involving final

and executory assessments for taxes, fees, charges and penalties,
where the principal amount of taxes and fees, exclusive of charges
and penalties, claimed is one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments,

resolutions or orders of the Regional Trial Courts in tax collection
cases originally decided by them within their respective territorial
jurisdiction.781

781

360
 2. Criminal cases

a. Exclusive original jurisdiction

(a) Exclusive original jurisdiction over all criminal cases arising from
violations of the NIRC or Tariff and Customs Code and other laws
administered by the BIR or the Bureau of Customs

Provided however, where the principal amount of taxes and fees,

exclusive of charges and penalties claimed is less than one million pesos
(P1,000, 000. 00) or where there is no specified amount claimed - the
offenses or penalties shall be tried by the regular courts and the jurisdiction
of the CTA shall be appellate.

Any provision of law or the Rules of Court to the contrary

notwithstanding, the criminal action and the corresponding civil action for
the recovery of civil liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in the same
proceeding by the CTA, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no right to reserve
the filing of such civil action separately from the criminal action will be
recognized.

b. Exclusive appellate jurisdiction in criminal

cases

Over appeals from the judgments, resolutions or orders of the

RTC in tax cases originally decided by them, in their respective
territorial jurisdiction.

Over petitions for review of the judgments, resolutions, or

orders of the RTC in the exercise of their appellate jurisdiction over
tax cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts, and Municipal Circuit Trial Courts in their
respective jurisdiction.

B. Judicial Procedures

1. Judicial action for collection of taxes

a. Internal revenue taxes

Sec. 3, id.,

361
 Upon the issuance of any ruling, order or decision by the CTA
favorable to the national government, the CTA shall issue an order
authorizing the Bureau of Internal Revenue, through the
Commissioner to seize and distraint any goods, chattels, or effects,
and the personal property, including stocks and other securities,
debts, credits, bank accounts, and interests in and rights to personal
property and/or levy the real property of such persons in sufficient
quantity to satisfy the tax or charge together with any increment
thereto incident to delinquency. This remedy shall not be exclusive
and shall not preclude the Court from availing of other means under
the Rules of Court.782

b. Local taxes

1) Prescriptive period

Five (5) years from date of assessment.

2. Civil cases

a. Who may appeal, mode of appeal, effect of

appeal
Any party adversely affected by a decision, ruling or inaction of the
Commissioner of Internal Revenue, the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and Industry or the Secretary
of Agriculture or the Central Board of Assessment Appeals or the Regional
Trial Courts may file an appeal with the CTA within thirty (30) days after the
receipt of such decision or ruling or after the expiration of the period fixed
by law for action as referred to in Section 7(a)(2) herein.
Appeal shall be made by filing a petition for review under a procedure
analogous to that provided for under Rule 42 783 of the 1997 Rules of Civil
Procedure with the CTA within thirty (30) days from the receipt of the
decision or ruling or in the case of inaction as herein provided, from the

782

Sec. 13 of RA No. 1125, as amended by Sec. 9 of RA No. 9282

783

See Reference

362
expiration of the period fixed by law to act thereon. A Division of the CTA
shall hear the appeal: Provided, however, That with respect to decisions or
rulings of the Central Board of Assessment Appeals and the Regional Trial
Court in the exercise of its appellate jurisdiction appeal shall be made by
filing a petition for review under a procedure analogous to that provided for
under Rule 43 of the 1997 Rules of Civil Procedure with the CTA, which shall
hear the case en banc.
All other cases involving rulings, orders or decisions filed with the
CTA as provided for in Section 7 shall be raffled to its Divisions. A party
adversely affected by a ruling, order or decision of a Division of the CTA may
file a motion for reconsideration of new trial before the same Division of the
CTA within fifteens (15) days from notice thereof: Provide, however, That in
criminal cases, the general rule applicable in regular Courts on matters of
prosecution and appeal shall likewise apply.
No appeal taken to the CTA from the decision of the Commissioner of
Internal Revenue or the Commissioner of Customs or the Regional Trial
Court, provincial, city or municipal treasurer or the Secretary of Finance,
the Secretary of Trade and Industry and Secretary of Agriculture, as the
case may be shall suspend the payment, levy, distraint, and/or sale of any
property of the taxpayer for the satisfaction of his tax liability as provided by
existing law: Provided, however, That when in the opinion of the Court the
collection by the aforementioned government agencies may jeopardize the
interest of the Government and/or the taxpayer the Court any stage of the
proceeding may suspend the said collection and require the taxpayer either
to deposit the amount claimed or to file a surety bond for not more than
double the amount with the Court.
In criminal and collection cases covered respectively by Section 7(b)
and (c) of this Act, the Government may directly file the said cases with the
CTA covering amounts within its exclusive and original jurisdiction. 784

1) Suspension of collection of tax

a) Injunction not available to

restrain collection

Sec. 11 of RA No. 1125785 grants CTA power to suspend

collection of tax if such collection works to serious prejudice of either
taxpayer or government.
784

Sec. 11 of RA No. 1125, id.

785

as amended by Sec. 9 of RA No. 9282

363
 However, Sec. 218 of the Tax Code provides that no court may
grant injunction to restrain collection of any tax, fee or charge
imposed by Tax Code.

The provision in Tax Code refers to courts other than the CTA.786

Appeal to the CTA does not automatically suspend collection

unless CTA issues suspension order at any stage of proceedings.

2) Taking of evidence

The Court may, upon proper motion on or its initiative, direct

that a case, or any issue thereof, be assigned to one of its members
for the taking of evidence, when the determination of a question of
fact arises upon motion or otherwise in any stage of the proceedings,
or when the taking of an account is necessary, or when the
determination of an issue of fact requires the examination of a long
account. The hearing before such member shall proceed in all
respects as though the same had been made before the Court.

Upon the recommendation of such hearing such member, he

shall promptly submit to the Court his report in writing, stating his
findings and conclusions; and thereafter, the Court shall render its
decisions on the case, adopting, modifying, or rejecting the report in
whole or in part, as the case may be, or the Court may, in its
discretion recommit it with instructions, or receive further evidence.787

3) Motion for reconsideration or New

trial

A party adversely affected by a decision or resolution of a

Division of the Court on a motion for reconsideration or new trial may
appeal to the Court by filing before it a petition for review within
fifteen days from receipt of a copy of the questioned decision or

786

Blaquera vs. Rodriguez, GR No. L-11295, March 29, 1958

787

Sec. 12, R.A. 1125

364
resolution. Upon proper motion and the payment of the full amount of
the docket and other lawful fees and deposit for costs before the
expiration of the reglementary period herein fixed, the Court may
grant an additional period not exceeding fifteen days from the
expiration of the original period within which to file the petition for
review.788

An appeal from a decision or resolution of the Court in Division

on a motion for reconsideration or new trial shall be taken to the
Court by petition for review as provided in Rule 43 of the Rules of
Court. The Court en banc shall act on the appeal.789

b. Appeal to the CTA, en banc

No civil proceeding involving matter arising under the National
Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as herein provided,
until and unless an appeal has been previously filed with the CTA and
disposed of in accordance with the provisions of this Act.790
"A party adversely affected by a resolution of a Division of the
CTA on a motion for reconsideration or new trial, may file a petition
for review with the CTA en banc.
c. Petition for review on certiorari to the
Supreme Court

A party adversely affected by a decision or ruling of the CTA en

banc may file with the Supreme Court a verified petition for review on
certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure.791

788

Sec. 3 (b), Revised Rules of the CTA

789

Sec. 4 (b), id.

790

SEC. 18, id.

791

365
 3. Criminal cases

a. Institution and prosecution of criminal

actions

1) Institution on civil action in criminal

action

In cases within the jurisdiction of the Court, the criminal action

and the corresponding civil action for the recovery of civil liability for
taxes and penalties shall be deemed jointly instituted in the same
proceeding. The filing of the criminal action shall necessarily carry
with it the filing of the civil action. No right to reserve the filing of
such civil action separately from the criminal action shall be allowed
or recognized.792

b. Appeal and period to appeal

1) Solicitor General as counsel for the

People and government officials sued in
their official capacity

The Solicitor General shall represent the People of the

Philippines and government officials sued in their official capacity in
all cases brought to the Court in the exercise of its appellate
jurisdiction. He may deputized the legal officers of the Bureau of
Internal Revenue in cases brought under the National Internal
Revenue Code or other laws enforced by the Bureau of Internal
Revenue, or the legal officers of the Bureau of Customs in cases
brought under the Tariff and Customs Code of the Philippines or other
laws enforced by the Bureau of Customs, to appear in behalf of the
officials of said agencies sued in their official capacity: Provided,
however, such duly deputized legal officers shall remain at all times
under the direct control and supervision of the Solicitor General.793
Sec. 19.

792

Rule 9, Sec. 11, id.;, Rule 111, sec. 1[a], par. 1a; Rules of Court

793

Sec. 10, id.

366
 c. Petition for review on certiorari to the
Supreme Court

A party adversely affected by a decision or ruling of the Court en

banc may appeal therefrom by filing with the Supreme Court a
verified petition for review on certiorari within fifteen days from
receipt of a copy of the decision or resolution, as provided in Rule 45
of the Rules of Court. If such party has filed a motion for
reconsideration or for new trial, the period herein fixed shall run from
the partys receipt of a copy of the resolution denying the motion for
reconsideration or for new trial.794

C. Taxpayers suit impugning the validity of tax measures

or acts of taxing authorities

a. Taxpayers suit, defined

Taxpayers suit is a case where the act complained of directly

involves the illegal disbursement of public funds derived from
taxation.795

794

Rule 16, Sec. 1, id.

795

Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110

Requisites for a taxpayers petition:

1) That money is being extracted and spent in violation of specific constitutional

protections against abuses of legislative power

2) That public money is being deflected to any improper purpose

3) That the petitioner seeks to restrain respondents from wasting public funds

through the enforcement of an invalid or unconstitutional law.

The Supreme Court has discretion whether or not to entertain taxpayers

suit and could brush aside lack of locus standi (Kilos Bayan vs. Guingona)

367
 b. Distinguished from citizens suit

The plaintiff in a taxpayers suit is in a different category from

the plaintiff in a citizens suit. In the former, the plaintiff is affected by
the expenditure of public funds, while in the latter, he is but the mere
instrument of the public concern.796

As held by the New York Supreme Court in People ex rel Case v.

Collins: "In matter of mere public right, howeverthe people are the
real partiesIt is at least the right, if not the duty, of every citizen to
interfere and see that a public offence be properly pursued and
punished, and that a public grievance be remedied." With respect to
taxpayers suits, Terr v. Jordan held that "the right of a citizen and a
taxpayer to maintain an action in courts to restrain the unlawful use
of public funds to his injury cannot be denied."

c. Requisites for challenging the

constitutionality of a tax measure or act of
taxing authority

1) Concept of locus standi as applied in

taxation

It is a partys personal and substantial interest in the case, such

that the party has sustained or will sustain direct injury as a result of
the government act being challenged. It calls for more than just a
generalized grievance.797

A party need not be a party to the contract to challenge its

validity.798

796

Beauchamp v. Silk

797

Abaya v. Ebdane, G. R. No. 167919, February 14, 2007

798

368
 2) Doctrine of transcendental
importance

When paramount public interest is involved.

3) Ripeness for judicial determination

In our jurisdiction, the issue of ripeness is generally treated in

terms of actual injury to the plaintiff. Hence, a question is ripe for
adjudication when the act being challenged has had a direct adverse
effect on the individual challenging it.799 An alternative road to review
similarly taken would be to determine whether an action has already
been accomplished or performed by a branch of government before
the courts may step in.800
To be ripe for judicial adjudication, the petitioner must show a
personal stake in the outcome of the case or an injury to himself that
can be redressed by a favorable decision of the Court.801

Ibid.

799

Guingona, Jr. v. Court of Appeals, 354 Phil. 415, 427-428 (1998).

800

Francisco, Jr. v. House of Representatives, 460 Phil. 830, 901-902 (2003).

801

ABAKADA Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v. Secretary of
Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion

369
 Reference
Sec. 24

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements; royalties, except on books, as well as other literary works and musical
compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes
amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection
(A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto
winnings), derived from sources within the Philippines: Provided, however, That interest income
received by an individual taxpayer (except a nonresident individual) from a depository bank
under the expanded foreign currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should
the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the

370
depository bank from the proceeds of the long-term deposit or investment certificate based on the
remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon
the cash and/or property dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies, or on the share of an individual in
the distributable net income after tax of a partnership (except a general professional partnership)
of which he is a partner, or on the share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium taxable as a corporation of which he
is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999; and
Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after
January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not,
even if declared or distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed
of through the stock exchange.
Not over P100,000........ 5%

On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent
(6%) based on the gross selling price or current fair market value as determined in accordance
with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains
presumed to have been realized from the sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets, including pacto de retro sales and other
forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax
liability, if any, on gains from sales or other dispositions of real property to the government or any
of its political subdivisions or agencies or to government-owned or controlled corporations shall
be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.

Section 25

(A)
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or
Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a
General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or
Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends

371
from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund
company or from a regional operating headquarters of multinational company, or the share of a
nonresident alien individual in the distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or the share of a nonresident alien
individual in the net income after tax of an association, a joint account, or a joint venture taxable
as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and
prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to
tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on
the total amount thereof: Provided, however, that royalties on books as well as other literary
works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%)
on the total amount thereof: Provided, further, That cinematographic films and similar works shall
be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest
income from long-term deposit or investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt
from the tax imposed under this Subsection: Provided, finally, that should the holder of the
certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on the remaining maturity
thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock
in domestic corporations not traded through the local stock exchange, and real properties shall be
subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. -
There shall be levied, collected and paid for each taxable year upon the entire income received
from all sources within the Philippines by every nonresident alien individual not engaged in trade
or business within the Philippines as interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal
to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien
individual not engaged in trade or business in the Philippines from the sale of shares of stock in
any domestic corporation and real property shall be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. - There shall be levied, collected and paid for each
taxable year upon the gross income received by every alien individual employed by regional or
area headquarters and regional operating headquarters established in the Philippines by
multinational companies as salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such regional or area headquarters and
regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying

372
the same position as those of aliens employed by these multinational companies. For purposes of
this Chapter, the term 'multinational company' means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and
other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and
paid for each taxable year upon the gross income received by every alien individual employed by
offshore banking units established in the Philippines as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and allowances, from such off-shore
banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That
the same tax treatment shall apply to Filipinos employed and occupying the same positions as
those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien
individual who is a permanent resident of a foreign country but who is employed and assigned in
the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in
petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the
salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria
and allowances, received from such contractor or subcontractor: Provided, however, That the
same tax treatment shall apply to a Filipino employed and occupying the same position as an
alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees
referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax,
as the case may be, imposed under this Code.

Section 27
xxx
(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the
rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements received by domestic corporations, and royalties, derived from sources
within the Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest
income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A
final tax at the rates prescribed below shall be imposed on net capital gains realized during the
taxable year from the sale, exchange or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the stock exchange:

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

Amount in excess of P100,000.. 10%

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the expanded foreign currency deposit system from

373
foreign currency transactions with local commercial banks, including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign
currency depository system units and other depository banks under the expanded foreign currency
deposit system, including interest income from foreign currency loans granted by such depository
banks under said expanded foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with
depository banks under the expanded system shall be exempt from income tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A
final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the
sale, exchange or disposition of lands and/or buildings which are not actually used in the business
of a corporation and are treated as capital assets, based on the gross selling price of fair market
value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such
lands and/or buildings.

Section 28

(A) Tax on Resident Foreign Corporations. -

xxx

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding,
income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking units, including any interest income derived from foreign
currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent
(10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with said
offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head
office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof (except those
activities which are registered with the Philippine Economic Zone Authority). The tax shall be
collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided,
that interests, dividends, rents, royalties, including remuneration for technical services, salaries,
wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual
gains, profits, income and capital gains received by a foreign corporation during each taxable year
from all sources within the Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the Philippines.
xxx
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency
bank deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements and royalties derived from sources within the Philippines shall be
subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident foreign corporation from a depository bank
under the expanded foreign currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7 1/2%) of such interest income.

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 (b) Income Derived under the Expanded Foreign Currency Deposit System. - Income
derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks including branches of foreign banks that may
be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency
deposit system units, including interest income from foreign currency loans granted by such
depository banks under said expanded foreign currency deposit system to residents, shall be
subject to a final income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with
depository banks under the expanded system shall be exempt from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A
final tax at the rates prescribed below is hereby imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed of through the stock exchange:

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

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

(B) Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not
engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%)
of the gross income received during each taxable year from all sources within the Philippines,
such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d):
Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1,
2000 and thereafter, the rate shall be thirty-two percent (32%).

(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A

cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of
its gross income from all sources within the Philippines.

(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A

nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4
1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. -

Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent
(20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August
1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%)
is hereby imposed on the amount of cash and/or property dividends received from a domestic

375
corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject
to the condition that the country in which the nonresident foreign corporation is domiciled, shall
allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%)
for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which
represents the difference between the regular income tax of thirty-five percent (35%) in 1997,
thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent
(32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in
this subparagraph;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at
the rates prescribed below is hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange:
Not overP100,000............5%
On any amount in excess of P100,000 .10%

Sec. 32 (B)(6)(a)

Retirement benefits received under Republic Act No. 7641 and those received by officials
and employees of private firms, whether individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer: Provided, That the retiring official or employee
has been in the service of the same employer for at least ten (10) years and is not less than fifty
(50) years of age at the time of his retirement: Provided, further, That the benefits granted under
this subparagraph shall be availed of by an official or employee only once. For purposes of this
Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for the officials or employees, or
both, for the purpose of distributing to such officials and employees the earnings and principal of
the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part
of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said officials and employees.

SEC. 33. Special Treatment of Fringe Benefit.-

(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1,
1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective
January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee (except rank and file employees as defined herein)
by the employer, whether an individual or a corporation (unless the fringe benefit is required by
the nature of, or necessary to the trade, business or profession of the employer, or when the fringe
benefit is for the convenience or advantage of the employer). The tax herein imposed is payable
by the employer which tax shall be paid in the same manner as provided for under Section 57 (A)
of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing
the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1,

376
1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%)
effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to
employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the
applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe
benefit shall be determined by dividing the actual monetary value of the fringe benefit by the
difference between one hundred percent (100%) and the applicable rates of income tax under
Subsections (B), (C), (D), and (E) of Section 25.
(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit"
means any good, service or other benefit furnished or granted in cash or in kind by an employer
to an individual employee (except rank and file employees as defined herein) such as, but not
limited to, the following:
(1) Housing;
(2) Expenseaccount;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
SEC. 58. Returns and Payment of Taxes Withheld at Source. -
(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld
under Section 57 by withholding agents shall be covered by a return and paid to, except in cases
where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality
where the withholding agent has his legal residence or principal place of business, or where the
withholding agent is a corporation, where the principal office is located.
The taxes deducted and withheld by the withholding agent shall be held as a special fund
in trust for the government until paid to the collecting officers.
The return for final withholding tax shall be filed and the payment made within twenty-
five (25) days from the close of each calendar quarter, while the return for creditable withholding
taxes shall be filed and the payment made not later than the last day of the month following the
close of the quarter during which withholding was made: Provided, That the Commissioner, with
the approval of the Secretary of Finance, may require these withholding agents to pay or deposit
the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of
the government.

377
 (B) Statement of Income Payments Made and Taxes Withheld. - Every withholding
agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in
respect to his or its receipts during the calendar quarter or year, a written statement showing the
income or other payments made by the withholding agent during such quarter or year, and the
amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request
of the payee, but not late than the twentieth (20th) day following the close of the quarter in the
case of corporate payee, or not later than March 1 of the following year in the case of individual
payee for creditable withholding taxes. For final withholding taxes, the statement should be given
to the payee on or before January 31 of the succeeding year.
(C) Annual Information Return. - Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the Commissioner an annual information return
containing the list of payees and income payments, amount of taxes withheld from each payee
and such other pertinent information as may be required by the Commissioner. In the case of final
withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for
creditable withholding taxes, not later than March 1 of the year following the year for which the
annual report is being submitted. This return, if made and filed in accordance with the rules and
regulations approved by the Secretary of Finance, upon recommendation of the Commissioner,
shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the
income payments.
The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required in this Subsection.
(D) Income of Recipient. - Income upon which any creditable tax is required to be
withheld at source under Section 57 shall be included in the return of its recipient but the excess
of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to
the provisions of Section 204; if the income tax collected at source is less than the tax due on his
return, the difference shall be paid in accordance with the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its implementing rules and
regulations are hereby considered trust funds and shall be maintained in a separate account and
not commingled with any other funds of the withholding agent.
(E) Registration with Register of Deeds. - No registration of any document transferring
real property shall be effected by the Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been reported, and the capital gains
or creditable withholding tax, if any, has been paid: Provided, however, That the information as
may be required by rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer
Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of
transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and
where the law allows deferred recognition of income in accordance with Section 40, the
information as may be required by rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds
at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real
property involved: Provided, finally, That any violation of this provision by the Register of Deeds
shall be subject to the penalties imposed under Section 269 of this Code.

SEC. 75.
Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in
duplicate a quarterly summary declaration of its gross income and deductions on a cumulative
basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of
this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the
amount of tax previously paid or assessed during the preceding quarters and shall be paid not

378
later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal year.

Sec. 106

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);

(3) Sale of raw materials or packaging materials to export-oriented enterprise whose

export sales exceed seventy percent (70%) of total annual production;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Executive Order NO. 226, otherwise known as
the Omnibus Investment Code of 1987, and other special laws.

(b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated
sale" means sale to a nonresident of goods, except those mentioned in Sections 149 and 150,
assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).

(c) Sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

Sec. 108

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the
Philippines by VAT- registered persons shall be subject to zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

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 (2) Services other than those mentioned in the preceding paragraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of
such services to zero percent (0%) rate; `

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, of

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total
annual production.

SEC. 111. Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or
any person who elects to be a VAT-registered person shall, subject to the filing of an inventory
according to rules and regulations prescribed by the Secretary of finance, upon recommendation
of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent for eight percent (8%) of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher, which shall be
creditable against the output tax.

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable
against the output tax, equivalent to one and one-half percent (1 1/2%) of the gross value in
money of their purchases of primary agricultural products which are used as inputs to their
production.

As used in this Subsection, the term "processing" shall mean pasteurization, canning and
activities which through physical or chemical process alter the exterior texture or form or inner
substance of a product in such manner as to prepare it for special use to which it could not have
been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one
and one-half percent (1 1/2%) of the contract price with respect to government contracts only in
lieu of actual input taxes therefrom.

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-Rated or Effectively Zero-Rated Sales. - any VAT-registered person, whose
sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales, except transitional input tax,
to the extent that such input tax has not been applied against output tax: Provided, however, That
in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1)
and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in

380
taxable or exempt sale of goods of properties or services, and the amount of creditable input tax
due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales.
(B) Capital Goods. - A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to the
extent that such input taxes have not been applied against output taxes. The application may be
made only within two (2) years after the close of the taxable quarter when the importation or
purchase was made.
(C) Cancellation of VAT Registration. - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input tax which may be used in payment of his
other internal revenue taxes.

(D) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of compete documents
in support of the application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision denying the claim or after
the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals.-

(E) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative without the necessity of being
countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code
of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be
subject to post audit by the Commission on Audit.

SEC. 113.

Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an
invoice or receipt. In addition to the information required under Section 237, the following
information shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's
identification number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax.

(B) Accounting Requirements. - Notwithstanding the provisions of Section 233, all

persons subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular
accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal
on which the daily sales and purchases are recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of Finance.

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 Section 143. Tax on Business. - The municipality may impose taxes on the following
businesses:
(a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers,
and compounders of liquors, distilled spirits, and wines or manufacturers of any article
of commerce of whatever kind or nature, in accordance with the following schedule:
With gross sales or receipts for the Amount of Tax Per
preceding calendar year in the amount of: Annum
Less than 10,000.00 165.00
P 10,000.00 or more but less than 15,000.00 220.00
15,000.00 or more but less than 20,000.00 202.00
20,000.00 or more but less than 30,000.00 440.00
30,000.00 or more but less than 40,000.00 660.00
40,000.00 or more but less than 50,000.00 825.00
50,000.00 or more but less than 75,000.00 1,320.00
75,000.00 or more but less than 100,000.00 1,650.00
100,000.00 or more but less than 150,000.00 2,200.00
150,000.00 or more but less than 200,000.00 2,750.00
200,000.00 or more but less than 300,000.00 3,850.00
300,000.00 or more but less than 500,000.00 5,500.00
500,000.00 or more but less than 750,000.00 8,000.00
750,000.00 or more but less than 1,000,000.00 10,000.00
1,000,000.00 or more but less than 2,000,000.00 13,750.00
2,000,000.00 or more but less than 3,000,000.00 16,500.00
3,000,000.00 or more but less than 4,000,000.00 19,000.00
4,000,000.00 or more but less than 5,000,000.00 23,100.00
5,000,000.00 or more but less than 6,500,000.00 24,375.00
6,000,000.00 or more at a rate not
exceeding thirty-seven and a half
percent (37%) of one percent (1%)
(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind
or nature in accordance with the following schedule:
With gross sales or receipts for the preceding Amount of Tax
calendar year in the amount of: Per Annum
Less than 1,000.00 18.00
P 1,000.00 or more but less than 2,000.00 33.00
2,000.00 or more but less than 3,000.00 50.00
3,000.00 or more but less than 4,000.00 72.00

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 4,000.00 or more but less than 5,000.00 100.00
5,000.00 or more but less than 6,000.00 121.00
6,000.00 or more but less than 7,000.00 143.00
7,000.00 or more but less than 8,000.00 165.00
8,000.00 or more but less than 10,000.00 187.00
10,000.00 or more but less than 15,000.00 220.00
15,000.00 or more but less than 20,000.00 275.00
20,000.00 or more but less than 30,000.00 330.00
30,000.00 or more but less than 40,000.00 440.00
40,000.00 or more but less than 50,000.00 660.00
50,000.00 or more but less than 75,000.00 990.00
75,000.00 or more but less than 100,000.00 1,320.00
100,000.00 or more but less than 150,000.00 1,870.00
150,000.00 or more but less than 200,000.00 2,420.00
200,000.00 or more but less than 300,000.00 3,300.00
300,000.00 or more but less than 500,000.00 4,400.00
500,000.00 or more but less than 750,000.00 6,600.00
750,000.00 or more but less than 1,000,000.00 8,800.00
1,000,000.00 or more but less than 2,000,000.00 10,000.00
2,000,000.00 or more at a rate not
exceeding fifty percent (50%) of
one percent (1%).
(c) On exporters, and on manufacturers , millers, producers, wholesalers, distributors,
dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-
half () of the rates prescribed under subsection (a), (b) and (d) of this Section:
(1) Rice and corn;
(2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed
or preserved food, sugar, salt and other agricultural, marine, and fresh water
products, whether in their original state or not;
(3) Cooking oil and cooking gas;
(4) Laundry soap, detergents, and medicine;
(5) Agricultural implements. equipment and post-harvest facilities, fertilizers,
pesticides, insecticides, herbicides and other farm inputs;
(6) Poultry feeds and other animal feeds;
(7) School supplies; and
(8) Cement.
(d) On retailers.
With gross sales or receipts for the preceding Rate of Tax Per
calendar year in the amount of: Annum

383
 P400,000.00 or less 2%
more than P400,000.00 1%
Provided, however, That barangays shall have the exclusive power to levy taxes, as
provided under Section 152 hereof, on gross sales or receipts of the preceding calendar
year of Fifty thousand pesos (P50,000.00) or less, in the case of cities, and Thirty
thousand pesos (P30,000.00) or less, in the case of municipalities.
(e) On contractors and other independent contractors, in accordance with the following
schedule:
With gross sales or receipts for the preceding Amount of Tax Per
calendar year in the amount of: Annum
Less than 5,000.00 27.50
P 5,000.00 or more but less than P 10,000.00 61.60
10,000.00 or more but less than 15,000.00 104.50
15,000.00 or more but less than 20,000.00 165.00
20,000.00 or more but less than 30,000.00 275.00
30,000.00 or more but less than 40,000.00 385.00
40,000.00 or more but less than 50,000.00 550.00
50,000.00 or more but less than 75,000.00 880.00
75,000.00 or more but less than 100,000.00 1,320.00
100,000.00 or more but less than 150,000.00 1,980.00
150,000.00 or more but less than 200,000.00 2,640.00
200,000.00 or more but less than 250,000.00 3,630.00
250,000.00 or more but less than 300,000.00 4,620.00
300,000.00 or more but less than 400,000.00 6,160.00
400,000.00 or more but less than 500,000.00 8,250.00
500,000.00 or more but less than 750,000.00 9,250.00
750,000.00 or more but less than 1,000,000.00 10,250.00
1,000,000.00 or more but less than 2,000,000.00 11,500.00
2,000,000.00 or more at a rate not
exceeding fifty percent (50%) of
one percent (1%)
(f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of
one percent (1%) on the gross receipts of the preceding calendar year derived from
interest, commissions and discounts from lending activities, income from financial
leasing, dividends, rentals on property and profit from exchange or sale of property,
insurance premium.
(g) On peddlers engaged in the sale of any merchandise or article of commerce, at a rate
not exceeding Fifty pesos (P50.00) per peddler annually.

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 (h) On any business, not otherwise specified in the preceding paragraphs, which the
sanggunian concerned may deem proper to tax: Provided, That on any business subject to
the excise, value-added or percentage tax under the National Internal Revenue Code, as
amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of
the preceding calendar year.
The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to
exceed the rates prescribed herein.
SEC. 236. Registration Requirements. -
(A) Requirements. - Every person subject to any internal revenue tax shall register once with the
appropriate Revenue District Officer:

(1) Within ten (10) days from date of employment, or

(2) On or before the commencement of business,or

(3) Before payment of any tax due, or

(4) Upon filing of a return, statement or declaration as required in this Code.

The registration shall contain the taxpayer's name, style, place of residence, business and such
other information as may be required by the Commissioner in the form prescribed therefor.

A person maintaining a head office, branch or facility shall register with the Revenue District
Officer having jurisdiction over the head office, brand or facility. For purposes of this Section, the
term "facility" may include but not be limited to sales outlets, places of production, warehouses
or storage places.

(B) Annual Registration Fee. - An annual registration fee in the amount of Five hundred pesos
(P500) for every separate or distinct establishment or place of business, including facility types
where sales transactions occur, shall be paid upon registration and every year thereafter on or
before the last day of January: Provided, however, That cooperatives, individuals earning purely
compensation income, whether locally or abroad, and overseas workers are not liable to the
registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located within the revenue district,
or to the Revenue Collection Officer, or duly authorized Treasurer of the city of municipality
where each place of business or branch is registered.

(C) Registration of Each Type of Internal Revenue Tax. - Every person who is required to register
with the Bureau of Internal Revenue under Subsection (A) hereof, shall register each type of
internal revenue tax for which he is obligated, shall file a return and shall pay such taxes, and
shall updates such registration of any changes in accordance with Subsection (E) hereof.

(D) Transfer of Registration. - In case a registered person decides to transfer his place of business
or his head office or branches, it shall be his duty to update his registration status by filing an
application for registration information update in the form prescribed therefor.

(E) Other Updates. - Any person registered in accordance with this Section shall, whenever
applicable, update his registration information with the Revenue District Office where he is
registered, specifying therein any change in type and other taxpayer details.

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(F) Cancellation of Registration. - The registration of any person who ceases to be liable to a tax
type shall be cancelled upon filing with the Revenue District Office where he is registered an
application for registration information update in a form prescribed therefor.

(G) Persons Commencing Business. - Any person, who expects to realize gross sales or receipts
subject to value-added tax in excess of the amount prescribed under Section 109(z) of this Code
for the next 12-month period from the commencement of the business, shall register with the
Revenue District Office which has jurisdiction over the head office or branch and shall pay the
annual registration fee prescribed in Subsection (B) hereof.

(H) Persons Becoming Liable to the Value-added Tax. - Any person, whose gross sales or receipts
in any 12-month period exceeds the amount prescribed under Subsection 109(z) of this Code for
exemption from the value-added tax shall register in accordance with Subsection (A) hereof, and
shall pay the annual registration fee prescribed within ten (10) days after the end of the last month
of that period, and shall be liable to the value-added tax commencing from the first day of the
month following his registration.

(I) Optional Registration of Exempt Person. - Any person whose transactions are exempt from
value-added tax under Section 109(z) of this Code; or any person whose transactions are exempt
from the value-added tax under Section 109(a), (b), (c), and (d) of this Code, who opts to register
as a VAT taxpayer with respect to his export sales only, may update his registration information in
accordance with Subsection (E) hereof, not later than ten (10) days before the beginning of the
taxable quarter and shall pay the annual registration fee prescribed in Subsection (B) hereof.

In any case, the Commissioner may, for administrative reasons, deny any application for
registration including updates prescribed under Subsection (E) hereof.

For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type
in accordance with the provisions of Subsection (C) hereof shall be referred to as VAT-registered
person who shall be assigned only one Taxpayer Identification Number.

(J) Supplying of Taxpayer Identification Number (TIN). - Any person required under the
authority of this Code to make, render or file a return, statement or other document shall be
supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicate in such
return, statement or document filed with the Bureau of Internal Revenue for his proper
identification for tax purposes, and which he shall indicate in certain documents, such as, but not
limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments;

(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds of Assessor's Office;
(4) Registration certificate of transportation equipment by land, sea or air;
(5) Documents to be registered with the Securities and Exchange Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of Trade & Industry; and
(10) Such other documents which may hereafter be required under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

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 In cases where a registered taxpayer dies, the administrator or executor shall register the
estate of the decedent in accordance with Subsection (A) hereof and a new Taxpayer
Identification Number (TIN) shall be supplied in accordance with the provisions of this Section.

In the case of a nonresident decedent, the executor or administrator of the estate shall
register the estate with the Revenue District Office where he is registered: Provided, however,
That in case such executor or administrator is not registered, registration of the estate shall be
made with the Taxpayer Identification Number (TIN) supplied by the Revenue District Office
having jurisdiction over his legal residence.

Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any
person who shall secure more than one Taxpayer Identification Number shall be criminally liable
under the provision of Section 275 on 'Violation of Other Provisions of this Code or Regulations
in General'.

Section 237.

Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an internal

revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at
Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial
invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and
description of merchandise or nature of service: Provided, however, That in the case of sales,
receipts or transfers in the amount of One hundred pesos (P100.00) or more, or regardless of the
amount, where the sale or transfer is made by a person liable to value-added tax to another person
also liable to value-added tax; or where the receipt is issued to cover payment made as rentals,
commissions, compensations or fees, receipts or invoices shall be issued which shall show the
name, business style, if any, and address of the purchaser, customer or client: Provided, further,
That where the purchaser is a VAT-registered person, in addition to the information herein
required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of
the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client
at the time the transaction is effected, who, if engaged in business or in the exercise of profession,
shall keep and preserve the same in his place of business for a period of three (3) years from the
close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be
kept and preserved by the issuer, also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to internal
revenue tax from compliance with the provisions of this Section.

SEC. 248. Civil Penalties.

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(B) In case of willful neglect to file the return within the period prescribed by this Code
or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to
be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any payment
has been made on the basis of such return before the discovery of the falsity or fraud: Provided,
That a substantial underdeclaration of taxable sales, receipts or income, or a substantial

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overstatement of deductions, as determined by the Commissioner pursuant to the rules and
regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence
of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in
an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions
in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for
substantial underdeclaration of sales, receipts or income or for overstatement of deductions, as
mentioned herein.

SEC. 282.

Informer's Reward to Persons Instrumental in the Discovery of Violations of the National Internal
Revenue Code and in the Discovery and Seizure of Smuggled Goods. -

(A) For Violations of the National Internal Revenue Code. - Any person, except an
internal revenue official or employee, or other public official or employee, or his relative within
the sixth degree of consanguinity, who voluntarily gives definite and sworn information, not yet
in the possession of the Bureau of Internal Revenue, leading to the discovery of frauds upon the
internal revenue laws or violations of any of the provisions thereof, thereby resulting in the
recovery of revenues, surcharges and fees and/or the conviction of the guilty party and/or the
imposition of any of the fine or penalty, shall be rewarded in a sum equivalent to ten percent
(10%) of the revenues, surcharges or fees recovered and/or fine or penalty imposed and collected
or One Million Pesos (P1,000,000) per case, whichever is lower. The same amount of reward
shall also be given to an informer where the offender has offered to compromise the violation of
law committed by him and his offer has been accepted by the Commissioner and collected from
the offender: Provided, That should no revenue, surcharges or fees be actually recovered or
collected, such person shall not be entitled to a reward: Provided, further, That the information
mentioned herein shall not refer to a case already pending or previously investigated or examined
by the Commissioner or any of his deputies, agents or examiners, or the Secretary of Finance or
any of his deputies or agents: Provided, finally, That the reward provided herein shall be paid
under rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner.

(B) For Discovery and Seizure of Smuggled Goods. - To encourage the public to extend
full cooperation in eradicating smuggling, a cash reward equivalent to ten percent (10%) of the
fair market value of the smuggled and confiscated goods or One Million Pesos (P1,000,000) per
case, whichever is lower, shall be given to persons instrumental in the discovery and seizure of
such smuggled goods.

The cash rewards of informers shall be subject to income tax, collected as a final
withholding tax, at a rate of ten percent (10%).
The provisions of the foregoing Subsections notwithstanding, all public officials, whether
incumbent or retired, who acquired the information in the course of the performance of their
duties during their incumbency, are prohibited from claiming informer's reward.

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RULES OF COURT

RULE 42

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 Petition for Review From the Regional Trial Courts to the Court of Appeals

Section 1. How appeal taken; time for filing. A party desiring to appeal from a
decision of the Regional Trial Court rendered in the exercise of its appellate jurisdiction may file a
verified petition for review with the Court of Appeals, paying at the same time to the clerk of
said court the corresponding docket and other lawful fees, depositing the amount of P500.00 for
costs, and furnishing the Regional Trial Court and the adverse party with a copy of the petition.
The petition shall be filed and served within fifteen (15) days from notice of the decision sought
to be reviewed or of the denial of petitioner's motion for new trial or reconsideration filed in due
time after judgment. Upon proper motion and the payment of the full amount of the docket and
other lawful fees and the deposit for costs before the expiration of the reglementary period, the
Court of Appeals may grant an additional period of fifteen (15) days only within which to file the
petition for review. No further extension shall be granted except for the most compelling reason
and in no case to exceed fifteen (15) days. (n)

Section 2. Form and contents. The petition shall be filed in seven (7) legible copies,
with the original copy intended for the court being indicated as such by the petitioner, and shall
(a) state the full names of the parties to the case, without impleading the lower courts or judges
thereof either as petitioners or respondents; (b) indicate the specific material dates showing that
it was filed on time; (c) set forth concisely a statement of the matters involved, the issues raised,
the specification of errors of fact or law, or both, allegedly committed by the Regional Trial Court,
and the reasons or arguments relied upon for the allowance of the appeal; (d) be accompanied
by clearly legible duplicate originals or true copies of the judgments or final orders of both lower
courts, certified correct by the clerk of court of the Regional Trial Court, the requisite number of
plain copies thereof and of the pleadings and other material portions of the record as would
support the allegations of the petition.

The petitioner shall also submit together with the petition a certification under oath that
he has not theretofore commenced any other action involving the same issues in the Supreme
Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if
there is such other action or proceeding, he must state the status of the same; and if he should
thereafter learn that a similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or
agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency
thereof within five (5) days therefrom. (n)

Section 3. Effect of failure to comply with requirements. The failure of the petitioner
to comply with any of the foregoing requirements regarding the payment of the docket and
other lawful fees, the deposit for costs, proof of service of the petition, and the contents of and
the documents which should accompany the petition shall be sufficient ground for the dismissal
thereof. (n)

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 Section 4. Action on the petition. The Court of Appeals may require the respondent to
file a comment on the petition, not a motion to dismiss, within ten (10) days from notice, or
dismiss the petition if it finds the same to be patently without merit, prosecuted manifestly for
delay, or that the questions raised therein are too insubstantial to require consideration. (n)

Section 5. Contents of comment. The comment of the respondent shall be filed in

seven (7) legible copies, accompanied by certified true copies of such material portions of the
record referred to therein together with other supporting papers and shall (a) state whether or
not he accepts the statement of matters involved in the petition; (b) point out such
insufficiencies or inaccuracies as he believes exist in petitioner's statement of matters involved
but without repetition; and (c) state the reasons why the petition should not be given due
course. A copy thereof shall be served on the petitioner. (a)

Section 6. Due course. If upon the filing of the comment or such other pleadings as
the court may allow or require, or after the expiration of the period for the filing thereof without
such comment or pleading having been submitted, the Court of Appeals finds prima facie that
the lower court has committed an error of fact or law that will warrant a reversal or modification
of the appealed decision, it may accordingly give due course to the petition. (n)

Section 7. Elevation of record. Whenever the Court of Appeals deems it necessary, it

may order the clerk of court of the Regional Trial Court to elevate the original record of the case
including the oral and documentary evidence within fifteen (15) days from notice. (n)

Section 8. Perfection of appeal; effect thereof. (a) Upon the timely filing of a petition
for review and the payment of the corresponding docket and other lawful fees, the appeal is
deemed perfected as to the petitioner.

The Regional Trial Court loses jurisdiction over the case upon the perfection of the appeals filed
in due time and the expiration of the time to appeal of the other parties.

However, before the Court of Appeals gives due course to the petition, the Regional Trial Court
may issue orders for the protection and preservation of the rights of the parties which do not
involve any matter litigated by the appeal, approve compromises, permit appeals of indigent
litigants, order execution pending appeal in accordance with section 2 of Rule 39, and allow
withdrawal of the appeal. (9a, R41)

(b) Except in civil cases decided under the Rule on Summary Procedure, the appeal shall stay the
judgment or final order unless the Court of Appeals, the law, or these Rules shall provide
otherwise. (a)

Section 9. Submission for decision. If the petition is given due course, the Court of
Appeals may set the case for oral argument or require the parties to submit memoranda within a
period of fifteen (15) days from notice. The case shall be deemed submitted for decision upon
the filing of the last pleading or memorandum required by these Rules or by the court itself. (n)

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RULE 43

Appeals From the Court of Tax Appeals and Quasi-Judicial Agencies to the Court of Appeals

Section 1. Scope. This Rule shall apply to appeals from judgments or final orders of
the Court of Tax Appeals and from awards, judgments, final orders or resolutions of or
authorized by any quasi-judicial agency in the exercise of its quasi-judicial functions. Among
these agencies are the Civil Service Commission, Central Board of Assessment Appeals,
Securities and Exchange Commission, Office of the President, Land Registration Authority, Social
Security Commission, Civil Aeronautics Board, Bureau of Patents, Trademarks and Technology
Transfer, National Electrification Administration, Energy Regulatory Board, National
Telecommunications Commission, Department of Agrarian Reform under Republic Act No. 6657,
Government Service Insurance System, Employees Compensation Commission, Agricultural
Invention Board, Insurance Commission, Philippine Atomic Energy Commission, Board of
Investments, Construction Industry Arbitration Commission, and voluntary arbitrators authorized
by law. (n)

Section 2. Cases not covered. This Rule shall not apply to judgments or final orders
issued under the Labor Code of the Philippines. (n)

Section 3. Where to appeal. An appeal under this Rule may be taken to the Court of
Appeals within the period and in the manner herein provided, whether the appeal involves
questions of fact, of law, or mixed questions of fact and law. (n)

Section 4. Period of appeal. The appeal shall be taken within fifteen (15) days from
notice of the award, judgment, final order or resolution, or from the date of its last publication, if
publication is required by law for its effectivity, or of the denial of petitioner's motion for new
trial or reconsideration duly filed in accordance with the governing law of the court or agency a
quo. Only one (1) motion for reconsideration shall be allowed. Upon proper motion and the
payment of the full amount of the docket fee before the expiration of the reglementary period,
the Court of Appeals may grant an additional period of fifteen (15) days only within which to file
the petition for review. No further extension shall be granted except for the most compelling
reason and in no case to exceed fifteen (15) days. (n)

Section 5. How appeal taken. Appeal shall be taken by filing a verified petition for
review in seven (7) legible copies with the Court of Appeals, with proof of service of a copy
thereof on the adverse party and on the court or agency a quo. The original copy of the petition
intended for the Court of Appeals shall be indicated as such by the petitioner.

Upon the filing of the petition, the petitioner shall pay to the clerk of court of the Court of
Appeals the docketing and other lawful fees and deposit the sum of P500.00 for costs.
Exemption from payment of docketing and other lawful fees and the deposit for costs may be
granted by the Court of Appeals upon a verified motion setting forth valid grounds therefor. If

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the Court of Appeals denies the motion, the petitioner shall pay the docketing and other lawful
fees and deposit for costs within fifteen (15) days from notice of the denial. (n)

Section 6. Contents of the petition. The petition for review shall (a) state the full
names of the parties to the case, without impleading the court or agencies either as petitioners
or respondents; (b) contain a concise statement of the facts and issues involved and the grounds
relied upon for the review; (c) be accompanied by a clearly legible duplicate original or a
certified true copy of the award, judgment, final order or resolution appealed from, together
with certified true copies of such material portions of the record referred to therein and other
supporting papers; and (d) contain a sworn certification against forum shopping as provided in
the last paragraph of section 2, Rule 42. The petition shall state the specific material dates
showing that it was filed within the period fixed herein. (2a)

Section 7. Effect of failure to comply with requirements. The failure of the petitioner
to comply with any of the foregoing requirements regarding the payment of the docket and
other lawful fees, the deposit for costs, proof of service of the petition, and the contents of and
the documents which should accompany the petition shall be sufficient ground for the dismissal
thereof. (n)

Section 8. Action on the petition. The Court of Appeals may require the respondent to
file a comment on the petition not a motion to dismiss, within ten (10) days from notice, or
dismiss the petition if it finds the same to be patently without merit, prosecuted manifestly for
delay, or that the questions raised therein are too unsubstantial to require consideration. (6a)

Section 9. Contents of comment. The comment shall be filed within ten (10) days from
notice in seven (7) legible copies and accompanied by clearly legible certified true copies of such
material portions of the record referred to therein together with other supporting papers. The
comment shall (a) point out insufficiencies or inaccuracies in petitioner's statement of facts and
issues; and (b) state the reasons why the petition should be denied or dismissed. A copy thereof
shall be served on the petitioner, and proof of such service shall be filed with the Court of
Appeals. (9a)

Section 10. Due course. If upon the filing of the comment or such other pleadings or
documents as may be required or allowed by the Court of Appeals or upon the expiration of the
period for the filing thereof, and on the records the Court of Appeals finds prima facie that the
court or agency concerned has committed errors of fact or law that would warrant reversal or
modification of the award, judgment, final order or resolution sought to be reviewed, it may give
due course to the petition; otherwise, it shall dismiss the same. The findings of fact of the court
or agency concerned, when supported by substantial evidence, shall be binding on the Court of
Appeals. (n)

Section 11. Transmittal of record. Within fifteen (15) days from notice that the
petition has been given due course, the Court of Appeals may require the court or agency
concerned to transmit the original or a legible certified true copy of the entire record of the

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proceeding under review. The record to be transmitted may be abridged by agreement of all
parties to the proceeding. The Court of Appeals may require or permit subsequent correction of
or addition to the record. (8a)

Section 12. Effect of appeal. The appeal shall not stay the award, judgment, final
order or resolution sought to be reviewed unless the Court of Appeals shall direct otherwise
upon such .terms as it may deem just. (10a)

Section 13. Submission for decision. If the petition is given due course, the Court of
Appeals may set the case for oral argument or require the parties to submit memoranda within a
period of fifteen (15) days from notice. The case shall be deemed submitted for decision upon
the filing of the last pleading or memorandum required by these Rules or by the court of
Appeals. (n)

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