TAXAT I O N

By Atty. Domondon
Analysis of previous Bar Questions shows that there are fundamental doctrines that are
rich sources of Bar Questions. It is for this reason why the author decided to craft some
sentences and phrases which the Bar candidate may cut and paste to his answers to the Bar
questions. This would also serve as a ready reference for objective type of questions such as
definitions, enumerations, distinctions, etc. The materials were culled from areas where previous
Bar Questions were sourced and from selected jurisprudence up to June 2003.
The user of these cut and paste materials should be warned that the sentences should be
adjusted to meet the actual requirements of specific Bar Questions, and not to be written verbatim
as the answers.
The user should concentrate on the items marked BAR because they are the doctrines
from where Bar questions were derived for the period 1993 to 2003.
WARNING: Some of the concepts involving the Court of Tax Appeals should be read in
relation to the provisions of Republic Act No. 9282 which took effect on April 23, 2004.
GENERAL PRINCIPLES OF TAXATION
Taxes are the lifeblood of the government for without taxes, the government can neither
exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its
source from the very existence of the state whose social contract with citizens obliges it to
promote public interest and common good. (National Power Corporation v. City of Cabanatuan,
G. R. No. 149110, April 9, 2003)
BAR: 1. The theory behind the exercise of the power to tax emanates from necessity,
without taxes, government cannot fulfill its mandate of promoting the general welfare and wellbeing of the people. (National Power Corporation v. City of Cabanatuan, G. R. No. 149110,
April 9, 2003)
The power to tax includes the power to destroy, where the tax law is valid because a
taxpayer could not seek the nullification of a valid tax law solely upon the premise that the
collection of the tax will impoverish him.
The exercise of the power to tax is not destructive of a taxpayers property where the
source is an invalid tax law, which violates the inherent or constitutional limitation because there
is a sympathetic court that shall come to the succor of the taxpayer and declare such tax law as
null and void. It would not thus be the source of the power to destroy.
In case of doubt, tax laws must be construed strictly against the State and liberally in favor
of the taxpayer because taxes, as burdens which must be endured by the taxpayer, should not be
presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine Life
Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
Tax exemptions are strictly construed against the taxpayer and liberally in favor of the
State and must be clearly shown and based on language in the law too plain to be mistaken
(Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, et al., 293 SCRA 76,
88), because taxes are necessary for the continued existence of the State.

A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual
exemption in his favor, for after all the government is never estopped from collecting taxes
because of mistakes or errors on the part of its agents. (Lincoln Philippine Life Insurance
Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
BAR: 2. As a general rule, the right of the government to collect taxes is imprescriptible
because the very existence of the state depends upon the exercise of this power.
However, statutes may provide for prescriptive periods for the collection of particular
kinds of taxes.
BAR: 3. As a general rule, No court shall have the authority to grant an injunction to
restrain the collection of any national internal revenue tax, fee or charge. (Sec. 218, NIRC)
However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through
administrative remedies when collection could jeopardize the interest of the government or
taxpayer. (Sec. 11, Rep. Act No. 1125)
BAR: 4. The power to tax is an inherent power of the state exercised through the
legislature imposing burdens upon subjects and objects within its jurisdiction to raise revenues in
order to meet the legitimate objects of government.
Its nature is that it is both an inherent power of government and an exercise of legislative
power.
The three purposes for the exercise of the taxing power are: (a) the revenue purpose; (b)
the sumptuary purpose; and (3) the compensatory purpose.
One of the purposes of taxation is to raise revenues to meet the recognized objects of
purposes of government.
The sumptuary purpose of taxation is to protect the health, safety or morals of the
inhabitants. This is in joint exercise of the power of taxation and police power where regulatory
taxes are collected.
The compensatory purpose of taxation is to implement the social justice provisions of the
constitution through the progressive system of taxation, which would result to equal distribution
of wealth, etc.
BAR: 5. In recent years, the increasing social challenges of the times expanded the scope
of state activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as public
welfare and similar objectives. (National Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)
The following are the distinctions between a tax and a license fee:
a. PURPOSE: A tax is imposed for revenue purposes WHILE a license fee is imposed for
regulatory purposes. (Unless it is a joint exercise of both the police power and the power of
taxation)

b. BASIS: A tax is imposed under the power of taxation WHILE a license fee is imposed
under police power.
c. AMOUNT: There is no limit as to the amount of a tax WHILE the amount of license
fee that could be collected is limited to the cost of the license and the expenses of police
surveillance and regulation.
d. TIME OF PAYMENT: Taxes are normally paid after the start of a business WHILE a
license fee before the commencement of business.
e. EFFECT OF NON-PAYMENT: Failure to pay a tax does not make the business
illegal WHILE failure to pay a license fee makes the business illegal.
f. SURRENDER: Taxes being the lifeblood of the state, cannot be surrendered except for
lawful consideration WHILE a license fee may be surrendered with or without consideration.
The Sugar Adjustment Act which increased existing taxes on sugar was enacted to
stabilize the sugar industry to prepare it for the loss of its quota in the U.S. market was levied for
a regulatory purpose to protect and promote the sugar industry which is also for a public purpose.
(Lutz v. Araneta, 98 Phil. 148)
The Philsugin fund, an imposition on sugar, to raise funds to conduct research for the
improvement of the sugar industry, is for the purpose of stabilizing the sugar industry which one
of the pillars of the Philippine economy which affects the welfare of the State. The levy is not so
much an exercise of the power of taxation, nor the imposition of a special levy, but the exercise of
police power which is for the general welfare of the entire country, therefore for a public purpose.
(Republic v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9, 1966)
Motor vehicle registration fees are now considered revenue or tax measures.
Consequently, entities enjoying tax exemptions are also exempt from paying motor vehicle
registration fees. (PAL v. Edu, G.R. No. L-41383, August 15, 1988)
The tax impost on videogram establishments is not only regulatory but a revenue measure
because the earnings of such establishments have not been subject to tax depriving the
government of an additional source of income. The is no over regulation as a result of the
imposition of the tax because of the need for regulating a new industry. (Tio v. Videogram
Regulatory Board, 151 SCRA 208)
The OPSF designed to reimburse gasoline companies for increases in the price of crude oil
resulting from world price movements and exchange fluctuations are taxes collected in the
exercise of the police power in order to stabilize prices of gasoline and other petroleum products.
(Osmena v. Orbos, G.R. No. 99886, March 31, 1993)
The inherent and constitutional limitations to the power of taxation are safeguards which
would prevent abuse in the exercise of this otherwise unlimited and plenary power.
BAR: 6. The inherent limitations are (a) public purpose; (b) no improper delegation of
legislative authority to tax; (c) territoriality; (d) recognition of government exemptions; and (e)
observance of the principle of comity.
Some authorities include no double taxation.

The tax revenues are for a public purpose if utilized for the benefit of the community in
general. An alternative meaning is that tax proceeds should be utilized only to attain the
objectives of government.
The power of taxation is exercised by the legislature whose members are the mere
delegates of the people hence the power could not therefore be delegated by the legislature to
other departments of government, like the executive.
Delegata potestas non potest delegari. A delegated power cannot be further delegated.
The power to tax should be exercised only within the territorial boundaries of the taxing
authority. In theory, it is only within a states territorial boundaries that a state could give
protection, hence it is only within that territory that it could demand support in the form of taxes.
In par parem, non habet imperium. As between equals there is no sovereign, hence
foreign sovereigns are not to be subject to the sovereign power of taxation.
Comity is the respect accorded to other sovereign nations. Thus, properties of other
sovereign nations within the territory of the taxing authority should not be subject to taxation as a
measure of respect to a co-equal.
Government exemption should be recognized in order to reduce the amount of money the
government is handling. There is verity in the maxim, For the government, exemption is the rule
and taxation is the exception.
BAR: 7. Situs of taxation is 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.
The situs of real property taxes is 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.
The situs of taxation of tangible personal property is the place where the owner is located
because it is that place that gives protection to the owner which protection extends to the
tangible personal property. The applicable concept is mobilia sequuntur personam.
Intangible personal property may have obtained a business situs in a particular place even
if located elsewhere. Thus, the dividends earned from domestic corporations are considered as
income from within, irrespective where the shares of stock of such domestic corporation is
located.
The situs of income taxation is determined by the nationality, residence of the taxpayer and
source of income. Please refer to general principles of income taxation under income taxation.
The situs of excise taxes is the place where the privilege is exercised because it is that
place that gives protection.
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The situs of transfer taxes, such as estate and donors taxes, is determined by the
nationality and residence of the taxpayer and the place where the property is located. Please refer
to estate and donors taxes.
The situs of taxation of a contract for a project which included the construction and
installation in the Philippines of equipment designed, fabricated and manufactured in Japan is the
Philippine for the construction and installation work and for the pieces of equipment and Japan
for supplies which were completely designed and engineered in Japan. (Commissioner of Internal
Revenue v. Marubeni Corporation, G.R. No. 137377, December 18, 2001)
The general or indirect constitutional limitations as well as the specific or direct
constitutional limitations.
BAR: 8. The general or indirect constitutional limitations are the following:
a. Due process clause;
b. Equal protection clause;
c. Freedom of the press;
d. Religious freedom;
e. Non-impairment clause;
f. Law-making process:
1) Bill should embrace only one subject expressed in the title
thereof;
2) Three (3) readings on three separate days;
3) Printed copies in final form distributed three (3) days before
passage.
g. Presidential power to grant reprieves, commutations and pardons and remittal of fines
and forfeiture after conviction by final judgment.
BAR: 9. The specific or direct constitutional limitations are the following:
a. No imprisonment for non-payment of a poll tax;
b. Taxation shall be uniform and equitable;
c. Congress shall evolve a progressive system of taxation;
d. All appropriation, revenue or tariff bills shall originate exclusively in the House of
Representatives, but the Senate may propose and concur with amendments;
e. The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he
does not object;
f. Delegated power of the President to impose tariff rates, import and export quotas,
tonnage and wharfage dues:
1) Delegation by Congress
2) Through a law
3) Subject to Congressional limits and restrictions
4) Within the framework of national development program.
g. Tax exemption of charitable institutions, churches, parsonages and convents
appurtenant thereto, mosques, and all lands, buildings and improvements of all kinds actually,
directly and exclusively used for religious, charitable or educational purposes;

h. No tax exemption without the concurrence of majority vote of all members of

Congress;
i. No use of public money or property for religious purposes except if priest is assigned to
the armed forces, penal institutions, government orphanage or leprosarium;
j. Money collected on tax levied for a special purpose to be used only for such purpose,
balance if any, to general funds;
k. The Supreme Court's power to review judgments or orders of lower courts in all cases
involving the legality of any tax, impose, assessment or toll or the legality of any penalty imposed
in relation to the above;
l. Authority of local government units to create their own sources of revenue, to levy
taxes, fees and other charges subject to guidelines and limitations imposed by Congress consistent
with the basic policy of local autonomy;
m. Automatic release of local government's just share in national taxes;
n. Tax exemption of all revenues and assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative educational
institutions subject to limitations provided by law including restrictions on dividends and
provisions for reinvestment of profits;
p. Tax exemption of grants, endowments, donations or contributions used actually,
directly and exclusively for educational purposes subject to conditions prescribed by law.
BAR: 10. Equal protection of the law clause is subject to reasonable classification. If
the groupings are characterized by substantial distinctions that make real differences, one class
may be treated and regulated differently from another. The classification must also be germane to
the purpose of the law and must apply to all those belonging to the same class. (Tiu, et al., v.
Court of Appeals, et al., G.R. No. 127410, January 20, 1999)
BAR: 11. Classification, to be valid, must (a) rest on substantial distinctions, (b) be
germane to the purpose of the law, (c) not be limited to existing conditions only, and (d) apply
equally to all members of the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410,
January 20, 1999)
A legislative rule which is in the nature of subordinate legislation, designed to implement a
primary legislation by providing the details thereof. In the same way that laws must have the
benefit of public hearing, it is generally required that before a legislative rule is adopted there must
be a hearing and publication as required under the Administrative Code. (Commissioner of
Internal Revenue v. Court of Appeals, et al., 261 SCRA 236 )
In case of an interpretative rule no hearing or publication is required since an interpretative
rule is designed merely to provide guidelines of the law which the administrative agency is in
charge of enforcing. (Commissioner of Internal Revenue v. Court of Appeals, et al., 261 SCRA
236 )
BAR: 12. Equality and uniformity of taxation may mean the same as equal protection.
In such a case, the terms would mean that all subjects and objects of taxation which are similarly
situated shall be subject to the same burdens and granted the same privileges without any
discrimination whatsoever.

Uniformity may have a restrictive meaning different from equality and equal protection. It
would mean then that the same rate shall be imposed for the same subjects and objects within the
territorial boundaries of a taxing authority.
A trial court is not the proper forum for the ventilation of the issues where it is the
legislature to which relief must be sought, because with the legislature primarily lies the discretion
to determine (a) the nature (kind), (b) object (purpose), (c) extent (rate), (d) coverage (subjects)
and (e) situs (place) of taxation. (Commissioner of Internal Revenue, et al., v. Santos, et al., 277
SCRA 617)
It is inherent in the power to tax that the State be free to select the subjects of taxation,
and it has been repeatedly held that, "inequalities which result from a singling out of one particular
class of taxation, or exemption, infringe no constitutional limitation." (Commissioner of Internal
Revenue, et al., v. Santos, et al., 277 SCRA 617)
BAR: 13. A fixed annual license fee on those engaged in the business of general
enterprise which also imposed on the sale of bibles by a religious sect. is this valid violates the
constitutionally guaranteed freedom of the press, and of religion..
As a license fee is fixed in amount and unrelated to the receipts of the taxpayer, such a
license fee, when applied to a religious sect is actually imposed as a condition for the free exercise
of religion. A license fee restrains in advance those constitutional liberties of press and religion
and inevitably tends to suppress their exercise.
The P1,000.00 VAT registration fee imposed on non-VAT enterprises which includes
among others, religious sects which sells and distributes religious literature is not violative of
religious freedom, although a fixed amount is not imposed for the exercise of a privilege but only
for the purpose of defraying part of the cost of registration.
The registration fee is thus more of an administrative fee, one not imposed on the exercise
of a privilege, much less a constitutional right. (Tolentino v. Secretary of Finance, et al., and
companion cases, 235 SCRA 630)
Article XII, Sec. 11 of the Constitution provides that the grant of a franchise for the
operation of a public utility is subject to amendment. alteration or repeal by Congress when the
common good requires;
BAR: 14. A lawful tax on a new subject, or an increased tax on an old one, does not
interfere with a contract or impairs its obligation, within the meaning of the constitution. Even
though such taxation may affect particular contracts, as it may increase the debt of one person and
lessen the security of another, or may impose additional burdens upon one class and release the
burdens of another, still the tax must be paid unless prohibited by the constitution, nor can it be
said that it impairs the obligations of any existing contract in its true and legal sense. (Tolentino v.
Secretary of Finance, et al., and companion cases, 235 SCRA 630)
BAR: 15. While the Supreme Court has, not too infrequently, referred to tax exemptions
contained in special franchises as being in the nature of contracts and a part of the inducement for
carrying out the franchise, these exemptions, nevertheless are far from being strictly contractual in
nature.

Constitutional tax exemptions, in the real sense of the term and where the non-impairment
clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in its private capacity sheds its cloak
of authority and waives its government immunity. (Manila Electric Company v. Province of
Laguna, et al., G.R. No. 131359, May 5, 1999)
Double taxation in its generic sense, this means taxing the same subject or object twice
during the same taxable period.
In its particular sense, it may mean direct duplicate taxation, which is prohibited under the
constitution because it violates the concept of equal protection, uniformity and equitableness of
taxation. Indirect duplicate taxation is not anathematized by the above constitutional limitations.
BAR: 16. The elements of direct duplicate taxation are:
a. Same
1) Subject or object is taxed twice
2) Taxing authority
3) Taxing purpose
4) Taxing period
b. Taxing all of the subjects or objects for the first time without taxing all of them for the
second time.
If any of the elements are absent then there is indirect duplicate taxation which is not
prohibited by the constitution.
BAR: 17. Double taxation a valid defense against the legality of a tax measure if the
double taxation is direct duplicate taxation, because it would violate the equal protection clause of
the constitution.
When an item of income is taxed in the Philippines and the same income is taxed in
another country, this would be known as international juridical double taxation which is the
imposition of comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson and
Son, Inc., et al., G.R. No. 127105, June 25, 1999)
Double taxation usually takes place when a person is a resident of a contracting state and
derives income from or owns capital in, the other contracting state and both states impose tax on
that income or capital. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al.,
G.R. No. 127105, June 25, 1999)
BAR: 18. The following are the methods of avoiding double taxation:
a. Tax treaties which exempts foreign nationals from local taxation and local nationals
from foreign taxation under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as deductions from local taxes that are due
to be paid.
c. Allowing foreign taxes as a deduction from gross income.
Purpose of tax treaties. To reconcile the national fiscal legislation of the contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions.
8

More precisely, the tax conventions are drafted with a view towards the elimination of
international juridical double taxation. (Commissioner of Internal Revenue v. S.C. Johnson and
Son, Inc., et al., G.R. No. 127105, June 25, 1999)
Rationale for avoiding international juridical double taxation. To encourage the free flow
of goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate. (Commissioner of Internal Revenue v.
S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)
The mandate to Congress is not to prescribe but to evolve a progressive system of
taxation. Otherwise, sales taxes which perhaps are the oldest form of indirect taxes, would have
been prohibited with the proclamation of the constitutional provision. Sales taxes are also
regressive. (Tolentino v. Secretary of Finance and companion cases, 249 SCRA 628)
The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. The constitutional provision means simply that indirect taxes should be
minimized.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult,
if not impossible, to avoid imposing such taxes according to the taxpayers ability to pay.
(Tolentino v. Secretary of Finance and companion cases, 249 SCRA 628)
In the case of VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions while granting exemptions to other transactions.
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. (Tolentino v. Secretary of Finance and
companion cases, 249 SCRA 628)
The Constitution requires that all revenue bills shall originate exclusively from the House
of Representatives. The Constitution simply means that the initiative for filing revenue, tariff or
tax bills must come from the House of Representatives on the theory that, elected as they are from
the districts, the Members of the House can be expected to be more sensitive to the local needs
and problems. (Tolentino v. Secretary of Finance and companion cases, 249 SCRA 628)
It is not the law - but the revenue bill - which is required by the Constitution to originate
exclusively in the House of Representatives because a bill originating in the House may undergo
such extensive changes in the Senate that the result may be a rewriting of the whole, and a distinct
bill may be produced. (Tolentino v. Secretary of Finance and companion cases, 235 SCRA 630)
To insist that a revenue statute - not only the bill which initiated the legislative process
culminating in the enactment of the law - must substantially be the same as the House bill would
be to deny the Senates power not only to concur with amendments but also to propose
amendments. It would be to violate the coequality of legislative power of the two houses of
Congress and in fact make the House superior to the Senate.
Given the power of the Senate to propose amendments, it can propose its own version
even with respect to bills which are required by the Constitution to originate in the House.
(Tolentino v. Secretary of Finance and companion cases, 249 SCRA 628)
9

Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation
of its receipt of the bill from the House, so long as action by the Senate as a body is withheld
pending receipt of the House bill. (Tolentino v. Secretary of Finance and companion cases, 235
SCRA 630)
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.
An item in a revenue bill does not refer to an entire section imposing a particular kind
of tax, but rather to the subject of the tax and the tax rate. In the portion of a revenue bill which
actually imposes a tax, a section identifies the tax and enumerates the persons liable therefore with
the corresponding tax rate.
To construe the word item as referring to the whole section would tie the Presidents
hand in choosing either to approve the whole section at the expense of also approving a provision
therein which he deems unacceptable or veto the entire section at the expense of foregoing the
collection of the kind of tax altogether.
BAR: 19.
Tax exemptions shall be granted only upon majority vote of all the
members of Congress.
EXCEPTIONS:
a. Where the tax exemption is granted through a treaty;
b. Tax exemptions granted by local government units;
c. Tax exemptions granted when the President exercises his powers under the flexible
tariff clause when protective tariffs are removed.
BAR: 20. Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all ands, buildings and improvements that are
actually, directly and exclusively used for religious, charitable or educational purposes are exempt
from taxation. [Sec.28 (3) Article VI, 1987 Constitution)
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)
BAR: 21. All revenues and assets of non-stock, non-profit educational institutions that
are actually, directly and exclusively used for educational purposes shall be exempt from taxation.
Revenues and assets of proprietary educational institutions, including those which are
cooperatively owned, may be entitled to exemptions subject to limitations provided by law
including restrictions on dividends and provisions for reinvestments.
The NIRC recognizes the exemption from tax of the incomes of civic leagues or
organizations not organized for profit but operated exclusively for the promotion of social
welfare, as well as clubs organized and operated exclusively for pleasure, recreation, and other

10

non-profitable purposes where no part of the net income inures to the benefit of any private
stockholder or member.
The tax exemption so recognized does not flow to 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, which shall be
subject to income taxes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298
SCRA 83)
Tax amnesty distinguished from tax exemption:
a. Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising
from nonpayment of taxes (People v. Castaneda, G.R. No. L-46881, September 15, 1988)
WHILE a tax exemption is an immunity from civil liability only. It is an immunity or privilege, a
freedom from a charge or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28,
36 NE 365)
b. Tax amnesty applies only to past tax periods, hence of retroactive application
(Castaneda, supra) WHILE tax exemption has prospective application.
A tax amnesty is a general pardon or intentional overlooking by the State of its authority
to impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law.
(Commissioner of Internal Revenue v. Marubeni Corporation, G.R. No. 137377, December 18,
2001)
The purpose of tax amnesty is to (a) give tax evaders who wish to relent a chance to start
a clean slate, and to (b) give the government a chance to collect uncollected tax from tax evaders
without having to go through the tedious process of a tax case. (Banas, Jr. v. Court of Appeals, et
al., G.R. No. 102967, February 10, 2000)
BAR: 22. Tax avoidance is the use of legally permissible means to reduce the tax while
tax evasion is the use of illegal means to escape the payment of taxes.
BAR: 23. The differences between the tax avoidance and tax evasion are the following:
a. Tax avoidance is legal while tax evasion is illegal.
b. The objective of tax avoidance in most instances is merely to reduce the tax that is due
while is tax evasion the object is to entirely escape the payment of taxes.
BAR: 24. Reasons why national taxes cannot be the subject of compensation and set-off
with debts:
a. The lifeblood theory;
b. Taxes are not contractual obligations but arise out of a duty to, and are the positive
acts of government, to the making and enforcing of which the personal consent of the individual
taxpayer is not required. (Republic v. Mambulao Lumber Co., 4SCRA 622)
c. The government and the taxpayer are not mutually creditors and debtors of each other
and a claim for taxes is no such debt, demand, contract or judgment as is allowed to be set-off.
(Caltex Philippines, Inc. v. Commission on Audit, 208 SCRA 726, 756)
Compensation takes place by operation of law, where the local government and the
taxpayer are in their own right reciprocally debtors and creditors of each other, and that the debts
11

are both due and demandable, in consequence of Articles 1278 and 1279 of the Civil Code.
(Domingo v. Garlitos, 8 SCRA 443)
In case of a tax overpayment, where the BIRs obligation to refund or set-off arises from
the moment the tax was paid under the principle of solutio indebeti. (Commissioner of Internal
Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001 which
held that in order for the rule on solutio indebeti to apply it is an essential condition that the
petitioner must first show that its payment of the customs duties was in excess of what was
required by the law at the time the subject 16 importations of milk and milk products were made.
Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in
favor of the Collector of Customs.
BAR: 25. Income tax, estate and donors taxes are direct taxes WHILE value-added tax,
excise tax, other percentage taxes and documentary stamp tax are indirect taxes.
The main difference between direct taxes and indirect taxes is that the burden of direct
taxes could not be shifted by the taxpayer to another while the burden of indirect taxes could be
shifted to another person, such the burden value-added taxes being shifted or transferred by the
taxpayer, the seller, to the buyer.
THE COURT OF TAX APPEALS AND TAX REMEDIES
The Court of Tax Appeals is the special tax court created under Republic Act No. 1125, as
amended by R. A. No. 9282, and is composed of a Presiding Justice and five Associate Justices,
organized into two divisions.
The Court of Tax Appeals was created:
a. To prevent delay in the disposition of tax cases by the then Courts of First Instance
(now RTCs), in view of the backlog of civil, criminal, and cadastral cases accumulating in the
dockets of such courts; and
b. To have a body with special knowledge which ordinary Judges of the then Courts of
First Instance (now RTCs), are not likely to possess, thus providing for an adequate remedy for a
speedy determination of tax cases.
The factual determination of the Court of Tax Appeals, when supported by substantial
evidence, will not be reversed on appeal unless it is clear that said court has committed gross error
in the process. (Republic of the Philippines represented by the Commissioner of Customs v. The
Court of Tax Appeals, et al., G.R. No. 139050, October 2, 2001)
The legal remedies under the NIRC of 1997 and other laws available to an aggrieved
taxpayer may be classified into the tax remedies with respect to assessment and collection, and
those with respect to refund of internal revenue taxes.
The remedies may also be classified into the administrative or the judicial remedies.
BAR: 26. The legal remedies under the NIRC of 1997 available to an aggrieved taxpayer
at the administrative and judicial levels with respect to assessment and collection of internal
revenue taxes are the following:
12

a. Upon receipt of a pre-assessment notice, the taxpayer shall respond to the same within
fifteen (15) days from receipt which is the period provided for by implementing rules and
regulations. [3rd par., Sec. 228 (e), NIRC of 1997]
b. Upon the issuance of an assessment notice, the taxpayer shall protest administratively
by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules and regulations.
c. Within sixty (60) days from the filing of the protest, all relevant supporting documents
shall be submitted; otherwise the assessment shall become final. (4th par., Ibid.)
d. If the protest is denied in whole or in part, or
e. is not acted upon within one hundred eighty (180) days from submission of documents,
f. the taxpayer adversely affected by the decision or inaction may appeal to the Court of
Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one
hundred eighty (180) day period; otherwise, the decision shall become final, executory and
demandable. [last par., Sec. 228 (e), NIRC of 1997]
g. On appeal, the taxpayer should apply for the issuance of a writ of preliminary
injunction to enjoin the BIR from collecting the tax subject of the appeal.
h. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the
government may be the subject of a motion for reconsideration or new trial, a denial of which is
appealable to the Court of Tax Appeals en banc by means of a petition for review. .
i. A decision of the Court of Tax Appeals en banc adverse to the taxpayer or the
government may be appealed to the Supreme Court through a petition for review on certiorari
filed with fifteen (15) days from notice, and extendible for justifiable reasons for thirty (30) days
only.
BAR: 27. The legal remedies under the NIRC of 1997 available to an aggrieved taxpayer
at the administrative and judicial levels with respect to refund or recovery of tax erroneously or
illegally collected, is to
a. file a claim for refund or credit with the Commissioner of Internal Revenue. (1 st par.,
Sec. 229, NIRC of 1997)
b. filing of a suit or proceeding with the Court of Tax Appeals
1) before the expiration of two (2) years from the date of payment of the tax
regardless of any supervening cause that may arise after payment (2 nd par., Sec. 229,
NIRC of 1997;), or
2) within thirty (30) days from receipt of the denial by the Commissioner of the
application for refund or credit. (Sec. 11, R.A. No. 1125)
The two (2) year period and the thirty (30) day period should be applied on a whichever
comes first basis. Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year
period is about to lapse but there is no decision yet by the Commissioner which would trigger the
30-day period, the taxpayer should file an appeal, despite the absence of a decision.
(Commissioners, etc. v. Court of Tax Appeals, et al., G.R.No. 82618, March 16, 1989, unrep.)
c. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the
government may be the subject of a motion for reconsideration or new trial, a denial of which is
appealable to the Court of Tax Appeals en banc by means of a petition for review. .
d. A decision of the Court of Tax Appeals en banc adverse to the taxpayer or the
government may be appealed to the Supreme Court through a petition for review on certiorari
filed with fifteen (15) days from notice, and extendible for justifiable reasons for thirty (30) days
only.
13

Where the taxpayer is a corporation the two year prescriptive period from date of
payment for refund of income taxes should be the date when the corporation filed its final
adjustment return not on the date when the taxes were paid on a quarterly basis. (Philippine
Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January
28, 1999)
Generally speaking it is the Final Adjustment Return, in which amounts of the gross
receipts and deductions have been audited and adjusted, which is reflective of the results of the
operations of a business enterprise. It is only when the return, covering the whole year, is filed
that the taxpayer will be able to ascertain whether a tax is still due or refund can be claimed based
on the adjusted and audited figures. (Bank of the Philippine Islands v. Commissioner of Internal
Revenue, G.R. No. 144653, August 28, 2001)
Outline of tax remedies of a taxpayer and the government relative to ASSESSMENT of
internal revenue taxes.
a. The taxpayer files his tax return.
b. A Letter of Authority is issued authorizing BIR examiner to audit or examine the tax
return and determines whether the full and complete taxes have been paid.
c. If the examiner is satisfied that the tax return is truly reflective of the taxable
transaction and all taxes have been paid, the process ends. However, if the examiner is not
satisfied that the tax return is truly reflective of the taxable transaction and that the taxes have not
been fully paid, a Notice of Informal Conference is issued inviting the taxpayer to explain why he
should not be subject to additional taxes.
d. If the taxpayer attends the informal conference and the examiner is satisfied with the
explanation of the taxpayer, the process is again ended.
If the taxpayer ignores the invitation to the informal conference, or if the examiner is not
satisfied with taxpayers explanation,, and he believes that proper taxes should be assessed, the
Commissioner of Internal Revenue or his duly authorized representative shall then notify the
taxpayer of the findings in the form of a pre-assessment notice. The pre-assessment notice
requires the taxpayer to explain within fifteen (15) days from receipt why no notice of assessment
and letter of demand for additional taxes should be directed to him.
e. If the Commissioner is satisfied with the explanation of the taxpayer, then the process is
again ended.
If the taxpayer ignores the pre-assessment notice by not responding or his explanations are
not accepted by the Commissioner, then a notice of assessment and a letter of demand is issued.
The notice of assessment must be issued by the Commissioner to the taxpayer within a
period of three (3) years from the time the tax return was filed or should have been filed
whichever is the later of the two events. Where the taxpayer did not file a tax return or where the
tax return filed is false or fraudulent, then the Commissioner has a period of ten (10) years from
discovery of the failure to file a tax return or from discovery of the fraud within which to issue an
assessment notice. The running of the above prescriptive periods may however be suspended
under certain instances.
The notice of assessment must be issued within the prescriptive period and must contain
the facts, law and jurisprudence relied upon by the Commissioner. Otherwise it would not be
valid.
f. The taxpayer should then file an administrative protest by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the assessment notice.
14

The taxpayer could not immediately interpose an appeal to the Court of Tax Appeals
because there is no decision yet of the Commissioner that could be the subject of a review.
To be valid the administrative protest must be filed within the prescriptive period, must
show the error of the Bureau of Internal Revenue and the correct computations supported by a
statement of facts, and the law and jurisprudence relied upon by the taxpayer. There is no need to
pay under protest. If the protest was not seasonably filed the assessment becomes final and
collectible and the Bureau of Internal Revenue could use its administrative and judicial remedies in
collecting the tax.
g. Within sixty (60) days from filing of the protest, all relevant supporting documents shall
be submitted, otherwise the assessment shall become final and collectible and the BIR could use
its administrative and judicial remedies to collect the tax.
Once an assessment has become final and collectible, not even the BIR Commissioner
could change the same. Thus, the taxpayer could not pay the tax, then apply for a refund, and if
denied appeal the same to the Court of Tax Appeals.
h. If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from the submission of documents, the taxpayer adversely affected by the
decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt
of the adverse decision, or from the lapse of the one hundred eighty (180-) day period, with an
application for the issuance of a writ of preliminary injunction to enjoin the BIR from collecting
the tax subject of the appeal.
If the taxpayer fails to so appeal, the denial of the Commissioner or the inaction of the
Commissioner would result to the notice of assessment becoming final and collectible and the BIR
could then utilize its administrative and judicial remedies to collect the tax.
i. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the
government may be the subject of a motion for reconsideration or new trial, a denial of which is
appealable to the Court of Tax Appeals en banc by means of a petition for review. .
The Court of Tax Appeals, has a period of twelve (12) months from submission of the case
for decision within which to decide.
j. If the decision of the Court of Tax Appeals en banc affirms the denial of the protest by
the Commissioner or the assessment in case of failure by the Commissioner to decide the taxpayer
must file a petition for review on certiorari with the Supreme Court within fifteen (15) days from
notice of the judgment on questions of law. An extension of thirty (30) days may for justifiable
reasons be granted. If the taxpayer does not so appeal, the decision of the Court of Tax Appeals
would become final and this has the effect of making the assessment also final and collectible. The
BIR could then use its administrative and judicial remedies to collect the tax
Jurisdiction of the Court of Tax Appeals:
a.

Exclusive appellate jurisdiction to review by appeal

b.

Jurisdiction over criminal offenses

c.

1)

Exclusive original jurisdiction

2)

Exclusive appellate jurisdiction

Jurisdiction over tax collection cases

1)

Exclusive original jurisdiction

2)

Exclusive appellate jurisdiction

15

Exclusive appellate jurisdiction of CTA to review by appeal

a.

Decisions of the Commissioner of Internal Revenue

b.

Inaction by the Commissioner of Internal Revenue

c.

Decisions, or resolutions of the Regional Trial Courts

d.

Decisions of the Commissioner of Customs

e.

Decisions of the Central Board of Assessment Appeals

f.

Decisions of the Secretary of Finance

g.
Decisions of the Secretary of Trade and Industry and the Secretary of Agriculture.
(Sec. 7, R. A. No. 1125, as amended by R. A. No. 9282)
BAR: 28. The jurisdiction of the Court of Tax Appeals:
a.

Exclusive appellate jurisdiction to review by appeal, as herein provided:

1.
Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties, in relation
thereto, or other matters arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;
2.
Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds or internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matter arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where the National Internal Revenue Code
provides a specific period of action, in which case the inaction shall be deemed a denial;
3.
Decisions, orders or resolutions of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the exercise of their original or appellate
jurisdiction;
4.
Decisions of the Commissioner of Customs in cases involving liability for customs
duties, fees or other money charges, seizure, detention or release of property affected, fines,
forfeitures or other penalties in relation thereto, or other matters arising under the Customs
Law or other laws administered by the Bureau of Customs;
5.
Decisions of the Central Board of Assessment Appeals in the exercise of its
appellate jurisdiction over cases involving the assessment and taxation of real property
originally decided by the provincial or city board of assessment appeals;
6.
Decisions of the Secretary of Finance on customs cases elevated to him
automatically for review from decisions of the Commissioner of Customs which are adverse
to the Government under Section 2315 of the Tariff and Customs Code;
7.
product,
product,
301 and

Decisions of the Secretary of Trade and Industry, in case of nonagricultural

commodity or article, and the Secretary of Agriculture in the case of agricultural
commodity or article, involving dumping and countervailing duties under Section
302, respectively, of the Tariff and Customs Code, and safeguard measures under

16

Republic Act No. 8800, where either party may appeal the decision to impose or not to
impose said duties.
b.

Jurisdiction over cases involving criminal offenses as herein provided:

1.
Exclusive original jurisdiction over all criminal cases arising from violations of the
national Internal Revenue Code or Tariff and Customs Code and other laws administered by
the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses
or felonies mentioned in this paragraph where the principal amount of taxes and fees,
exclusive of charges and penalties claimed, is less than One million pesos (P1,000,000.00) or
where there is no specified amount claimed shall be tried by the regular Courts and the
jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the
contrary notwithstanding, the criminal action and the corresponding civil action for the
recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted
with, and jointly determined in the same proceeding by the CTA, the filing of the criminal
action being deemed to necessarily carry with it the filing of the civil action, and no right to
reserve the filing of such civil action separately from the civil action will be recognized.
2.

Exclusive appellate jurisdiction in criminal offenses:

a. Over appeals from the judgments, resolutions or orders of the Regional Trial
Courts in tax cases originally decided by them, in their respective territorial jurisdiction.
b.
Over petitions for review of the judgments, resolutions orders of the
Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases
originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their respective jurisdiction.
c.

Jurisdiction over tax collection cases:

1.
Exclusive original jurisdiction in tax collection cases involving final and executory
assessments for taxes, fees, charges and penalties: Provided, however, That collection cases
where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is
less than One million pesos (P1,000,000) shall be tried by the proper Municipal Trial Court,
Metropolitan Trial Court and Regional Trial Court.
2.

Exclusive appellate jurisdiction in tax collection cases:

a.
Over appeals from judgments, resolutions, or orders of the Regional Trial
Courts in tax collection cases originally decided by them, in their respective territorial
jurisdiction.
b.
Over petitions for review of the judgments, resolutions or orders of the
Regional Trial Courts in the exercise of their appellate jurisdiction over tax collection
cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts, in their respective jurisdiction. (Sec. 7, R. A. No. 1125,
as amended by R. A. No. 9282, emphasis supplied)
Exclusive appellate jurisdiction of Court of Tax Appeals to review by appeal decisions of the
Commissioner of Internal Revenue.
a. Cases involving:
1) Disputed assessments;
1) Refunds of internal revenue taxes, fees or other charges;

17

2) Penalties imposed in relation thereto.

b. Other matters arising under:
1) The National Internal Revenue Code, or
2) Other laws administered by the Bureau of Internal Revenue. (Sec. 7, R. A. No.
1125, as amended by R. A. No. 9282).
The Court of Tax Appeals has jurisdiction over decisions of the Commissioner of Customs
over:
a. Cases involving:
1) Liability for customs duties, fees or other money charges,
2) Seizures, detention or release of property affected,
3) Fines, forfeitures and other penalties imposed in relation
thereto;
b. Other matters arising under:
1) the customs law, or
2) Other law or part of law administered by the Bureau of Customs
Exclusive appellate jurisdiction of Court of Tax Appeals to review by appeal decisions,
orders or resolutions of the Regional Trial Courts
a.
In local tax cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction. (Sec. 7, R. A. No. 1125, as amended by R. A. No. 9282)
b.
Over appeals from the judgments, resolutions or orders of the Regional Trial
Courts in tax collection cases decided by them, in their respective territorial jurisdiction. (Ibid.)
c.
Over petitions for review of the judgments, resolutions or orders of the Regional
Trial Courts in the exercise of their appellate jurisdiction over tax collection cases originally
decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial
Courts, in their respective jurisdiction. (Ibid.)
Exclusive original jurisdiction of Regional Trial Courts in tax collection cases. Civil actions
for tax collection where the principal amount of taxes and fees, exclusive of charges and penalties
claimed exceeds Two hundred thousand pesos (P200,000.00), or in Metro Manila where the
amount of the demand exceeds Four hundred thousand pesos (P400,000.00), provided that the
amount claimed is less than One million pesos (P1,000,000.00). (Sec. 19, B.P .Blg. 129,as
amended by R. A. No. 7691 in relation to Sec. 5, R.A. No. 7691 and Sec. 7, R. A. No. 1125 as
amended by R. A. No. 9282)
NOTE: Tax collection cases that are below the threshold amounts of P200,000.00 and
P400,000.00 fall within the jurisdiction of the Municipal Trial Courts, the Municipal Trial Courts
in Cities, the Municipal Circuit Trial Courts, or the Metropolitan Trial Courts. Where the amount
exceeds P1 million, exclusive original jurisdiction is vested with the Court of Tax Appeals.
Exclusive appellate jurisdiction of Regional Trial Courts in tax collection cases. Regional
Trial Courts shall exercise appellate jurisdiction over all cases decided by Metropolitan Trial
Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective territorial
jurisdiction. (Sec. 22, B. P. Blg. 129)

18

Exclusive appellate jurisdiction of the Court of Tax Appeals to review by appeal decisions of
Commissioner of Customs:
a. In cases involving:
1) Liability for customs duties, fees or other money charges;
2) Seizure, detention or release of property affected;
3) Fines, forfeitures or other penalties imposed in relation thereto;
b. Other matters arising under;
1) the Customs Law, or
2) Other laws administered by Bureau of Customs. (Sec. 7, R. A . No. 1125, as
amended by Sec. 7.a.4, R. A. No. 9282)
BAR: 29. The following are the acts of BIR Commissioner considered as denial of a
protest which serve as basis for appeal to the Court of Tax Appeals:
a. Filing by the BIR of a civil suit for collection of the deficiency tax is considered a denial
of the request for reconsideration. (Commissioner of Internal Revenue v. Union Shipping
Corporation, 185 SCRA 547)
b. An indication to the taxpayer by the Commissioner in clear and unequivocal language
of his final denial not the issuance of the warrant of distraint and levy. What is the subject of the
appeal is the final decision not the warrant of distraint. (Commissioner of Internal Revenue v.
Union Shipping Corporation, 185 SCRA 547)
c. A BIR demand letter sent to the taxpayer after his protest of the assessment notice is
considered as the final decision of the Commissioner on the protest. (Surigao Electric Co., Inc. v.
Court of Tax Appeals, et al., 57 SCRA 523)
A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to pay an
assessment is considered a denial of the request for reconsideration or protest and is appealable to
the Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204)
The actual issuance of a warrant of distraint and levy in certain cases cannot be
considered a final decision on a disputed assessment. The taxpayer should appeal, by way of a
petition for review, to the Court of Tax Appeals not on the ground of the denial of the protest but
on other matter arising under the provisions of the National Internal Revenue Code. Furthermore,
an application should likewise be made for the issuance of an injunctive writ to enjoin the BIR
from collecting during the pendency of the petition. (Commissioner of Internal Revenue v. Union
Shipping Corp., 185 SCRA 547)
Final notice before seizure considered as commissioners decision of taxpayers request for
reconsideration who received no other response. Commissioner of Internal Revenue v. Isabela
Cultural Corporation, G.R. No. 135210, July 11, 2001 held that not only is the Notice the only
response received: its content and tenor supports the theory that it was the CIRs final act
regarding the request for reconsideration. The very title expressly indicated that it was a final
notice prior to seizure of property. The letter itself clearly stated that the taxpayer was being
given this LAST OPPORTUNITY to pay; otherwise, its properties would be subjected to
distraint and levy.

19

To a valid decision on a disputed assessment, the decision of the Commissioner or his duly
authorized representative shall (a) state the facts, the applicable law, rules and regulations, or
jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case
the same shall not be considered a decision on the disputed assessment; and (b) that the same is
his final decision. (Sec. 3.1.6, Rev. Regs. 12-99)
As a general rule, there must always be a decision of the Commissioner of Internal
Revenue or Commissioner of Customs before the Court of Tax Appeals, would have jurisdiction.
If there is no such decision, the would be dismissed for lack of jurisdiction unless the case falls
under any of the following exceptions.
Instances where the Court of Tax Appeals would have jurisdiction even if there is no
decision yet by the Commissioner of Internal Revenue:
a. Where the Commissioner has not acted on the disputed assessment after a period of
180 days from submission of complete supporting documents, the taxpayer has a period of 30
days from the expiration of the 180 day period within which to appeal to the Court of Tax
Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela
Cultural Corporation, G.R. No. 135210, July 11, 2001)
b. Where the Commissioner has not acted on an application for refund or credit and the
two year period from the time of payment is about to expire, the taxpayer has to file his appeal
with the Court of Tax Appeals before the expiration of two years from the time the tax was paid.
It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the
ruling,. It would make matters more exasperating for the taxpayer if the doors of justice would be
closed for such a relief until after the Commissioner, would have, at his personal convenience,
given his go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No.
82618, March 16, 1989, unrep.)
Instances where the Court of Tax Appeals would have jurisdiction even if there is no
decision of the Commissioner of Customs:
a. Decisions of the Secretary of Trade and Industry or the Secretary of Agriculture in antidumping and countervailing duty cases are appealable to the Court of Tax Appeals within thirty
(30) days from receipt of such decisions.
b. In case of automatic review by the Secretary of Finance in seizure or forfeiture cases
where the value of the importation exceeds P5 million or where the decision of the Collector of
Customs which fully or partially releases the shipment seized is affirmed by the Commissioner of
Customs.
c. In case of automatic review by the Secretary of Finance of a decision of a Collector of
Customs acting favorably upon a customs protest.
The taxable income shall be computed upon the basis of the taxpayers annual accounting
period (fiscal year or calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer; but if no such method of
accounting has been so employed, or if the method employed does not clearly reflect the income,
the computation shall be in accordance with such method as in the opinion of the Commissioner
clearly reflects the income. (Sec. 43, NIRC of 1997)
When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or
20

when there is reason to believe that any such report is false, incomplete or erroneous, the
Commissioner shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by
law, or willfully or otherwise files a false or fraudulent return or other document, the
Commissioner shall make or amend the return from his own knowledge and from such
information as he can obtain through testimony or otherwise, which shall be prima facie correct
and sufficient for all legal purposes. [Sec. 6 (B), NIRC of 1997]
BAR: 30. The following are the general methods developed by the Bureau of Internal
Revenue for reconstructing a taxpayers income where the records do not show the true incomne
or where no return was filed or what was filed was a false and fraudulent return (a) Percentage
method; (b) Net worth method.; (c) Bank deposit method; (d) Cash expenditure method; (e)
Unit and value method; (f) Third party information or access to records method; (g)
Surveillance and assessment method. (Chapter XIII. Indirect Approach to Investigation,
Handbook on Audit Procedures and Techniques Volume I, pp. 68-74)
Under the percentage method, the computed amount of revenues based on the percentage
computation is compared to the amount of revenues reflected on the return. The percentages
used may be obtained from the taxpayer, industry publication, prior years audit results, or third
parties. The comparison will provide an indication on the possibility of revenue being
understated.
Among the significant ratios and trends to be analyzed are the percentage mark-up, gross
profits ratio or gross margin percentage, profit margin, total assets turnover, and inventory
turnover. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and
Techniques Volume I, pp. 68-74)
The net worth method is a method of reconstructing income which is based on the theory
that if the taxpayers net worth has increased in a given year in an amount larger than his reported
income, he has understated his income for that year. The net worth on a fixed starting date is
compared with the net worth on a fixed ending date. Any increase in net worth is presumed to be
income not declared for tax purposes. (Chapter XIII. Indirect Approach to Investigation,
Handbook on Audit Procedures and Techniques Volume I, pp. 68-74)
The difficulty of establishing the opening net worth of a tax payer has led to the Cohan
Rule which is the use of estimates or approximations of the amount of cash and other asserts
where the taxpayer lacks adequate records. (Chapter XIII. Indirect Approach to Investigation,
Handbook on Audit Procedures and Techniques Volume I, pp. 68-74)
Under the bank deposit method, the bank records of the taxpayer are analyzed and the
BIR estimates income on the basis of the total bank deposits after eliminating non-income items.
This method stands on the premise that deposits represent taxable income unless otherwise
explained as being non-taxable items. This method may be used only where the BIR has been
legally allowed access to the taxpayers bank records. (Chapter XIII. Indirect Approach to
Investigation, Handbook on Audit Procedures and Techniques Volume I, pp. 68-74)
The cash expenditure method assumes that the excess of a taxpayers expenditures during
the tax period over his reported income for that period is taxable to the extent not disproved

21

otherwise. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and
Techniques Volume I, pp. 68-74)
Under the unit and value method, the determination or verification of gross receipts may
be computed by applying price and profit figures to the known ascertainable quality of business of
the taxpayer. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures
and Techniques Volume I, pp. 68-74)
For example, in order to determine the gross receipts of a pizza parlor, multiply the
pounds of flour used by the number of pizzas per pound which in turn would then be multiplied by
the average price per pizza.
BAR: 31. Third party information or access to records method. The BIR may require
third parties, public or private to supply information to the BIR, and thus, obtain on a regular
basis from any person other than the person whose internal revenue tax liability is subject to audit
or investigation, or from any office or officer of the national and local governments, government
agencies and instrumentalities including the Bangko Sentral ng Pilipinas and government-owned
or controlled corporations, any information such as, but not limited to, costs and volume of
production, receipts or sales and gross incomes of taxpayers, and the names , addresses, and
financial statements of corporations, mutual fund companies, insurance companies, regional
operating headquarters or multinational companies, joint accounts, associations, joint ventures or
consortia and registered partnerships, and their members; xxx [Sec. 5 (B), NIRC of 1997)
A pre-assessment notice is a letter sent by the Bureau of Internal Revenue to a taxpayer
asking him to explain within a period of fifteen (15) days from receipt why he should not be the
subject of an assessment notice. It is part of the due process rights of a taxpayer.
As a general rule, the BIR could not issue an assessment notice without first issuing a preassessment notice because it is part of the due process rights of a taxpayer to be given notice in
the form of a pre-assessment notice, and for him to explain why he should not be the subject of an
assessment notice.
BAR: 32. Instances where a pre-assessment notice is not required before a notice of
assessment is sent to the taxpayer.
a. When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
b. When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or
c. When a taxpayer opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the
succeeding table year; or
d. When the excess tax due on excisable articles has not been paid; or
e. When an article locally purchased or imported by an exempt person, such as, but not
limited to vehicles, capital equipment, machineries and spare parts, has been sold, trade or
transferred to non-exempt persons. (Sec. 228, NIRC of 1997)
For internal revenue taxation assessment as laying a tax. The ultimate purpose of an
assessment to such a connection is to ascertain the amount that each taxpayer is to pay.
22

(Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R.
No. 128315, June 29, 1999)
The word assessment when used in connection with taxation, may have more than one
meaning.. More commonly the word assessment means the official valuation of a taxpayers
property for purpose of taxation. The above definition of assessment finds application under tariff
and customs taxation as well as local government taxation.
For real property taxation, there may be a special meaning to the burdens that are imposed
upon real properties that have been benefited by a public works expenditure of a local
government. It is sometimes called a special assessment or a special levy. (Commissioner of
Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June
29, 1999)
An assessment is a notice duly sent to the taxpayer which is deemed made only when the
BIR releases, mails or sends such notice to the taxpayer. (Commissioner of Internal Revenue v.
Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)
An affidavit-report of the examiners used to support a criminal complaint for tax evasion
does not constitute an assessment that may be the subject of a motion for
reconsideration/reinvestigation. The affidavit-report merely contains a computation of the
liabilities. It does not state a demand or a period for payment. It is not addressed to the taxpayers
but to the Department of Justice. Clearly, it was not meant to be a notice of the tax due and a
demand for the payment thereof. (Commissioner of Internal Revenue v. Pascor Realty and
Development Corporation, et al., G.R. No. 128315, June 29, 1999)
BAR: 33. The prescriptive periods for making assessments are:
a. three (3) years from the last day within which to file a return or when the return was
actually filed, whichever is later;
b. ten years from discovery of the failure to file the tax return or discovery of falsity or
fraud in the return; or
c. within the period agreed upon between the government and the taxpayer where there is
a waiver of the prescriptive period for assessment.
A jeopardy assessment is a delinquency tax assessment which was assessed without the
benefit of complete or partial audit by an authorized revenue officer, who has reason to believe
that the assessment and collection of a deficiency tax will be jeopardized by delay because of the
taxpayers failure to comply with the audit and investigation requirements to present his books of
accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or
credits claimed in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000)
Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it
may be subject to a compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000]
Requirements for validity of formal letter of demand and assessment notice:
a. There must have been previously issued a pre-assessment notice until excepted;
b. It must have been issued prior to the prescriptive period; and
c. The letter of demand calling for payment of the taxpayers deficiency tax or taxes shall
state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based,
23

otherwise, the formal letter of demand and assessment notice shall be void. (Sec. 3.1.4, Rev.
Regs. No. 12-99)
BAR: 34. The holding in Commissioner of Internal Revenue v. Court of Appeals, et al.,
G.R. No. 115712, February 25, 1999 (Carnation case) that the waiver of the period for
assessment must be in writing and have the written consent of the BIR Commissioner is still
doctrinal because of the provisions of Sec. 223, NIRC of 1997 which provides for the suspension
of the prescriptive period:
a. When the Commissioner is prohibited from making the assessment, or beginning
distraint, or levy or proceeding in court and for sixty (60) days thereafter;
b. When the taxpayer requests for and is granted a reinvestigation by the commissioner;
c. When the taxpayer could not be located in the address given by him in the return filed
upon which the tax is being assessed or collected;
d. When the warrant of distraint and levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient discretion, and no property could be
located; and
e. When the taxpayer is out of the Philippines.
The signatures of both the Commissioner and the taxpayer, are required for a waiver of
the prescriptive period, thus a unilateral waiver on the part of the taxpayer does not suspend the
prescriptive period. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No.
115712, February 25, 1999 (Carnation case)
BAR: 36. The following are the requirements for the validity of a taxpayers protest:
a. It must be filed within the reglementary period of thirty (30) days from receipt of the
notice of assessment.
b. The taxpayer must show the errors of the Bureau of Internal Revenue as well as the
correct computation through
1) A statement of the facts, the applicable law, rules and regulations, or
jurisprudence on which the taxpayers protest is based,
2) If there are several issues involved in the disputed assessment and the taxpayer
fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support
of his protest against some of the several issues on which the assessment is based, the
same shall be considered undisputed issue or issues, in which case, the taxpayer shall be
required to pay the corresponding deficiency tax or taxes attributable thereto. (Sec. 3.1.5,
Rev. Regs. 12-99)
c. Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant
supporting documents. [4th par., Sec. 228 (e), NIRC of 1997]
Laws on prescription should be liberally construed in favor of the taxpayer. For the
purpose of safeguarding taxpayers from an unreasonable examination, investigation or
assessment, our tax law provides a statute of limitation on the collection of taxes.
The prescriptive period was precisely intended to give the taxpayers peace of mind.
(Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171,
February 24, 1999)
Assessment and refund cases could not be consolidated. Reason: Lifeblood doctrine. If
there a pending assessment, refund should not be granted.
24

Assessment not necessary before a taxpayer may be prosecuted for willfully attempting in
any manner to evade or defeat any tax imposed by the Internal Revenue Code.
A criminal charge for tax evasion is different from a tax assessment:
a. Criminal charge need only be supported by a prima facie showing of failure to file a
required return WHILE the fact of failure to file a return need not be proven by an assessment.
b. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the
taxpayer WHILE such is not so with a criminal charge. The charge is filed directly with the
Department of Justice.
c. A criminal complaint is instituted not to demand payment, but to penalize the taxpayer
for violation of the Tax Code WHILE the purpose of the issuance of an assessment is to collect
the tax. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et
al., G.R. No. 128315, June 29, 1999)
The doctrines in Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No.
119322, June 4, 1996, Commissioner of Internal Revenue v. Pascor Realty and Development
Corporation, et al., G.R. No. 128315, June 29, 1999 and Ungab v. Cusi, 97 SCRA 877, are
different from one another.
In Ungab, there was a prima facie attempt to evade taxes because of the taxpayers failure
to declare in his income tax return his income derived from banana saplings hence the case was
filed despite the absence of a notice of assessment.
In the Fortune Tobacco case no criminal case was filed, because the registered wholesale
price of the goods, approved by the BIR is presumed to be the actual wholesale price, therefore,
not fraudulent and unless and until the BIR has made a final determination of what is supposed to
be the correct taxes, the taxpayer should not be placed in the crucible of criminal prosecution.
While it is true as stated on Commissioner v. Pascor Realty and Development
Corporation, that a criminal complaint is instituted not to demand payment, but to penalize the
taxpayer for violation of the Tax Code, The judgment in the criminal case shall not only impose
the penalty but shall also order payment of the taxes subject of the criminal case as finally decided
by the Commissioner. [3rd par., Sec. 205 (b), NIRC of 1997]
A compromise is a contract whereby the parties, through mutual agreement and by making
reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028,
Civil Code)
BAR: 37. A compromise penalty could not be imposed by the BIR, if the taxpayer did
not agree. A compromise being, by its nature, mutual in essence requires agreement. The
payment made under protest could only signify that there was not agreement that had effectively
been reached between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal
Revenue, G.R.No. 138485, September 10, 2001)
BAR: 38. The following cases may, upon taxpayers compliance with the basis for
compromise, be the subject matter of compromise settlement:
a. Delinquent accounts;
25

b. Cases under administrative protest after issuance of the Final Assessment Notice to the
taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service,
Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the
National Office;
c. Civil tax cases being disputed before the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than those already filed in court, or those involving criminal
tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)
57. Tax cases which could not be the subject of compromise:
a. Withholding tax cases unless the applicant-taxpayer invokes provisions of law that cast
doubt on the taxpayers obligation to withhold.;
b. Criminal tax fraud cases, confirmed as such by the Commissioner of Internal Revenue
or his duly authorized representative;
c. Criminal violations already filed in court;
d. Delinquent accounts with duly approved schedule of installment payments;
e. Cases where final reports of reinvestigation or reconsideration have been issued
resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by
signing the required agreement form for the purpose. On the other hand, other protested cases
shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board
(NEB) on a case to case basis;
f. Cases which become final and executory after final judgment of a court where
compromise is requested on the ground of doubtful validity of the assessment; and
g. Estate tax cases where compromise is requested on the ground of financial incapacity
of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)
58. The Commissioner may compromise the payment of any internal revenue tax when:
a. A reasonable doubt as to the validity of the claim against the taxpayer exists provided
that the minimum compromise entered into is equivalent to forty percent (40%) of the basic tax;
or
b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed
tax provided that the minimum compromise entered into is equivalent to ten percent (10%) of the
basic assessed tax
In the above instances the Commissioner is allowed to enter into a compromise only if the
basic tax involved does not exceed One million pesos (P1,000,000.00), and the settlement offered
is not less than the prescribed percentages. [Sec. 204 (A), NIRC of 1997]
In instances where the Commissioner is not authorized, the compromise shall be subject to
the approval of the Evaluation Board composed of the Commissioner and the four (4) Deputy
Commissioners.
BAR: 39. The Commissioner of Internal Revenue is authorized to abate or cancel a tax
liability, when:
a. The tax or any portion thereof appears to be unjustly or excessively assessed; or
b. The administration and collection costs involved do not justify the collection of the
amount due. [Sec. 204 (B), NIRC of 1997]
The offer to compromise a delinquent account or disputed assess-ment on the ground of
reasonable doubt as to the validity of the assessment may be accepted when it is shown that:
26

a. The delinquent account or disputed assessment is one resulting from a jeopardy

assessment. or
b. The assessment seems to be arbitrary in nature, appearing to be based on presumptions
and there is reason to believe that it is lacking in legal and/or factual basis; or
c. The taxpayer failed to file an administrative protest on account of the alleged failure to
receive notice of assessment and there is reason to believe that the assessment is lacking in legal
and/or factual basis; or
d. The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days
from receipt of final assessment notice and there is reason to believe that the assessment is lacking
in legal and/or factual basis; or
e. The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision
of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt
thereof and there is reason to believe that the assessment is lacking in legal and/or factual basis; or
f. The assessments were issued on or after January 1, 1998, where the demand notice
allegedly failed to comply with the formalities under Sec. 228 of the National Internal Revenue
Code of 1997; or
g. Assessments made based on the Best Evidence Obtainable Rule and there is reason to
believe that the same can be disputed by sufficient and competent evidence; or
h. The assessment was issued within the prescriptive period for assessment as extended by
the taxpayers execution of Waiver of the Statute of Limitations the validity or authenticity of
which is being questioned or at issue and there is strong reason to believe and evidence to prove
that it is not authentic. (Sec. 3, 1, Rev. Regs. No. 30-3002)
The offer to compromise based on financial incapacity may be accepted upon showing
that:
a. The corporation ceased operation or is already dissolved Provided, that tax liabilities
corresponding to the Subscription Receivable or Assets distributed/distributable to the
stockholders representing return of capital at the time of cessation of operation or dissolution of
business shall not be considered for compromise; or
b. The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the
Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in
the original capital by at least 50%, provided that amounts payable to due to stockholders other
than business-related transactions which are properly ineludible in the regular accounts payable
are by fiction of law considered as part of capital and not liability, and provided further that the
taxpayer has no sufficient liquid asset to satisfy the tax liability; or
c. The taxpayer is suffering from a networth deficit (total liabilities exceed total assets)
computed by deducting total liabilities (net of deferred credits and amounts payable to
stockholders/owners reflected as liabilities, except business-related transactions) from total assets
(net of prepaid expenses, deferred charges, pre-operating expenses, as well as appraisal increases
in fixed assets) taken from the latest audited financial statements, provided that in the case of an
individual taxpayer, he has no other leviable properties under the law other than his family home;
or
d. The taxpayer is a compensation income earner with no other source of income and the
familys gross monthly compensation income does not exceed, if single, P10,500 or less, or if
married, whose salary together with his spouse is P21,000 per month, or less, and it appears that
the taxpayer possesses no other leviable/distrainable assets other than his family home; or

27

e. The taxpayer has been declared by any competent tribunal/ authority/body/government

agency as bankrupt or insolvent. (Sec. 3. 2, Rev. in relation to Sec.4.1.1 both of Regs. No. 303002)
BAR: 40. The filing of an administrative claim for refund with the BIR, before filing a
case with the Court of Tax Appeals, is necessary for the following reasons:
a. To afford the Commissioner an opportunity to correct his errors or that of subordinate
officers. (Gonzales v. Court of Tax Appeals, et al., 14 SCRA 79)
b. To notify the Government that such taxes have been questioned and the notice should
be borne in mind in estimating the revenue available for expenditures. (Bermejo v. Collector, G.R.
No. L-3028, July 28, 1950)
BAR: 41. The failure to first file a written claim for refund or credit is not fatal to a
petition for review involving a disputed assessment.
To hold that the taxpayer has now lost the right to appeal from the ruling on the disputed
assessment and require him to file a claim for a refund of the taxes paid as a condition precedent
to his right to appeal, would in effect require of him to go through a useless and needless
ceremony that would only delay the disposition of the case, for the Commissioner would certainly
disallow the claim for refund in the same way as he disallowed the protest against the assessment.
The law, should not be interpreted as to result in absurdities. (vda. de San Agustin., etc.,v.
Commissioner of Internal Revenue, G.R. No. 138485, September 10, 2001 citing Roman
Catholic Archbishop of Cebu v. Collector of Internal Revenue, 4 SCRA 279)
Reconciliation between no. 40 and 41. An application for refund or credit under Sec. 229
of the NIRC of 1997 is required where the case filed before the CTA is a refund case, which is not
premised upon a disputed assessment. There is no need for a prior application for refund or
credit, if the refund is merely a consequence of the resolution of the BIRs denial of a protested
assessment.
Sec. 69 of the 1977 NIRC (now Sec. 76 of the NIRC of 1997) provides that any excess of
the total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year. To ease the administration of tax collection, these remedies are in the alternative and
the choice of one precludes the other. Since the Bank has chosen the tax credit approach it
cannot anymore avail of the tax refund. (Philippine Bank of Communications v. Commissioner of
Internal Revenue, et al., G.R. No. 112024, January 28, 1999)
The timely service of a warrant of distraint or levy suspends the running of the period to
collect the tax deficiency in the sense that the disposition of the attached properties might well
take time to accomplish, extending even after the lapse of the statutory period for collections.
(Advertising Associates, Inc., v. Court of Appeals, 133 SCRA 765; Palanca v. Commissioner of
Internal Revenue, 114 Phil. 203)
The enforcement of tax collection through summary proceedings may be carried out
beyond the statutory period. (Republic of the Philippines, etc. v. Hizon, G.R. No. 1304,
December 13, 1999) The statutory period for collection applies only where a court suit is availed
of for collection.
28

BAR: 42. Civil and criminal actions and proceedings instituted in behalf of the
Government under the authority of the NIRC of 1997 or other law enforced by the Bureau of
Internal Revenue shall be brought in the name of the Government of the Philippines and shall be
conducted by legal officers of the Bureau of Internal Revenue but no civil or criminal action for
the recovery of taxes or the enforcement of any fine, penalty or forfeiture under the NIRC of 1997
shall be filed in court without the approval of the Commissioner of Internal Revenue. (Sec. 220,
NIRC of 1997)
The two year period applies only to recovery of taxes or penalties NOT to tax credits
availment. Absent a specific provision in the Tax Code or special laws, the period would be 10
years. (Justice Vitug, concurring in Commissioner of Internal Revenue v. The Philippine Life
Insurance Co., et al. G.R. No. 105208, May 29, 1995 reiterating the TMX case)
Where a corporation is dissolved It becomes necessary for the bank to file its income tax
return within 30 days after approval by the SEC of its plan or resolution of dissolution. Indeed, it
would be absurd for the bank to wait until the fifteenth day of April, after it ceased its operations,
before filing its income tax return.
Thus, the two-year prescriptive period should be counted from 30 days after the approval
by the SEC of its plan for dissolution. There is no need to file a Final Adjustment Return because
there is nothing to adjust or to audit. After the corporation ceased operation its taxable year
would be shortened. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R.
No. 144653, August 28, 2001)
A simultaneous filing of the application with the BIR for refund/credit and the institution
of the court suit with the CTA is allowed. There is no need to wait for a BIR denial. REASONS:
a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997);
b. The doctrine that delay of the Commissioner in rendering decision does not extend the
peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for refund with the
Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for filing
suit in court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997), unlike in protests of
assessments under Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the period (thirty days
from receipt of decision) for appealing to the court, thus clearly implying that the prior decision of
the Commissioner is necessary to take cognizance of the case. (Commissioner of Internal
Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No. 34102, September 9, 1994;
Gibbs v. Collector of Internal Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101
Phil. 151)
The rule is that no interest on refund of tax can be awarded unless authorized by law or
the collection of the tax was attended by arbitrariness. An action is not arbitrary when exercised
honestly and upon due consideration where there is room for two opinions, however much it may
be believed that an erroneous conclusion was reached. Arbitrariness presupposes inexcusable or
obstinate disregard of legal provisions. (Philex Mining Corporation v. Commissioner of Internal
Revenue, et al., G.R. No. 120324, April 21, 1999)
The institution or commencement before a proper court of civil and criminal actions and
proceedings arising under the Tax Reform Act , such as recovery of taxes or the enforcement of
29

any fine, penalty or forfeiture, shall be conducted by legal officers of the Bureau of Internal
Revenue with the approval of the Commissioner.
On the other hand, it is the Solicitor General who has the primary responsibility to appeal
for the government in appellate proceedings. (Commissioner of Internal Revenue v. La Suerte
Cigar and Cigarette Factory, G. r. No. 144942, July 4, 2002)
NATIONAL INTERNAL REVENUE CODE
THE BUREAU OF INTERNAL REVENUE
Any internal revenue officer in the discharge of his official duties may enter any house,
building or place where articles subject to excise taxes are produced or kept, or are believed by
him upon reasonable grounds to be produced or kept so far as may be necessary to examine,
discover or seize the same. (1st par., Sec. 171, NIRC of 1997)
Internal revenue officers shall have authority to make arrests and seizures for violation of
any penal law or regulation administered by the Bureau of Internal Revenue. Any person so
arrested shall forthwith be brought before a court, there to be dealt with according to law. (Sec.
13, NIRC of 1997)
No search warrant or warrant of arrest is required under the doctrine of primary
jurisdiction which posits that in technical matters where the administrative bodies have obtained
expertise, the courts will defer. This is likewise premised on the lifeblood theory which mandates
the immediate collection of taxes to ensure the continued existence of the State.
There are two kinds of rulings the BIR may issue - interpretative rulings and legislative
rulings.
Interpretative rules are designed to provide guidelines to the law which the administrative
agency is in charge of enforcing. No notice, hearing or publication is required, as they are issued
merely for the guidance of administrative officers. Illustration: Revenue Memorandum Circular
No. 47-91 classifying copra as an agricultural non-food item declaring it exempt from VAT only if
the sale is made by the primary producer. (Misamis Oriental Association of Coco Traders, Inc. v.
Department of Finance Secretary, et al., 238 SCRA 63 [1994]
Legislative rules are in the nature of subordinate legislation, designed to implement a
primary legislation by providing the details thereof. They are issued under the quasi-legislative
authority of the BIR Commissioner. There is a requirement for notice, hearing and publication.
Illustration: Revenue Memorandum Circular No. 37-93 which placed Hope Luxury, Premium
More and Champion cigarettes within the scope of the amendatory law R.A. No. 7654 and
subjected them to the increased tax rate requires notice, hearing and publication. (Commissioner
of Internal Revenue v. Court of Appeals, et al., 261 SCRA 236)
The rulings and circulars promulgated by the Commissioner do not have retroactive
application if the revocation, modification, or reversal would be prejudicial to the taxpayers.
(Sec. 246, NIRC of 1997; Commissioner of Internal Revenue v. Court of Appeals, et al., 267
SCRA 557)

30

Instances when revenue rulings and regulations have retroactive effect even if prejudicial
to the taxpayer:
a. Where the taxpayer deliberately misstates or omits material facts from his return or in
any document required of him by the BIR;
b. Where the facts subsequently gathered by the BIR are materially different from the
facts on which the ruling is based, or
c. Where the taxpayer acted in bad faith. (Sec. 246, NIRC of 1997)
9. The Commissioner or his authorized representative is empowered to suspend the
business operations and temporarily close the business establishment of any person for any of the
following violations:
a. In case of a VAT-registered person:
1) Failure to issue receipts or invoices;
2) Failure to file a VAT return as required under the Tax Code;
3) Understatement of taxable sales or receipts by 30% or more of his correct
taxable sales or receipts for the taxable quarter.
b. Failure to register under the VAT provisions of the Tax Code. The temporary closure
of the establishment shall 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. (Atlas Consolidated Mining & Development Corporation v. Commissioner of Internal
Revenue, G.R. No. 134467, November 17, 1999)
The Commissioner of Internal Revenue is authorized under the Tax Code to delegate the
powers vested in him under the pertinent provisions of the Tax Code to any subordinate official
with the rank equivalent to a division chief or higher.
The following are some of the powers that the Commissioner of Internal Revenue could
not delegate:
a. The power to recommend the rules and regulations by the Secretary of Finance;
b. The power to issue rulings of first impression or to reverse, revoke, or modify any
existing ruling of the Bureau;
c. The power to compromise or abate, any tax deficiency, Provided, however, that
assessments issued by the Regional Offices involving basic deficiency taxes of P500,000.00 or
less, and minor criminal violations as may be determined by rules and regulations to be
promulgated by the Secretary of Finance, upon the recommendation of the Commissioner,
discovered by regional and district officials, may be compromised by a regional evaluation board
which shall be composed of the Regional Director as Chairman, the Assistant Regional Director,
heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having
jurisdiction over the taxpayer, as members; and
d. The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept. (Sec. 7, NIRC of 1997 cited in Republic of
the Philippines, etc. v. Hizon, G.R. No. 130430, December 13, 1999)
The Commissioner of Internal Revenue has the power to obtain on a regular basis from
any person other than the person whose internal revenue tax liability is subject to audit or
investigation, an information such as, but not limited to, costs and volume of production, receipts
or sales and gross income taxpayers, among others. [Sec. 5 (B), NIRC of 1997]

31

BAR: 43. Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits inquiry into
bank deposits. As exceptions to Rep. Act No. 1405, the Commissioner of Internal Revenue is
only authorized to inquire into the bank deposits of:
a. a decedent to determine his gross estate; and
b. any taxpayer who has filed an application for compromise of his tax liability by reason
of financial incapacity to pay his tax liability. [Sec. 5 (F), NIRC of 1997]
c. A taxpayer who authorizes the Commissioner to inquire into his bank deposits.
INCOME TAXATION
The Tax Code has included under the term corporation partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997]
In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing Mertens that the
term partnership includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried
on.
Certain business organizations do not fall under the category of corporations under the
Tax Code, and therefore not subject to tax as corporations, include:
a. General professional partnerships;
b. Joint venture or consortium formed for the purpose of undertaking construction
projects engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an
operation or consortium agreement under a service contract with the Government. [1 st sentence,
Sec. 22 (B), BIRC of 1997]
BAR: 44. Co-heirs who own inherited properties which produce income should not
automatically be considered as partners of an unregistered corporation subject to income tax for
the following reasons:
a. the sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived. There must be an unmistakable intention to form a partnership or joint
venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)
b. There is no contribution or investment of additional capital to increase or expand the
inherited properties, merely continuing the dedication of the property to the use to which it had
been put by their forebears. (Ibid.)
c. Persons who contribute property or funds to a common enterprise and agree to share
the gross returns of that enterprise in proportion to their contribution, but who severally retain the
title to their respective contribution, are not thereby rendered partners. They have no common
stock capital, and no community of interest as principal proprietors in the business itself from
which the proceeds were derived. (Elements of the Law of Partnership by Floyd R. Mechem, 2nd
Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
5. In order to constitute a partnership inter sese there must be:
a. an intent to form the same;
b. generally participating in both profits and losses;

32

c. and such a community of interest, as far as third persons are concerned as enables each
party to make a contract, manage the business, and dispose of the whole property. (Municipality
Paving Co. v. Herring, 150 O. 1067, 50 Ill. 470, cited in Pascual v. Commissioner of Internal
Revenue, 166 SCRA 560)
BAR: 45. The common ownership of property does not itself create a partnership
between the owners, though they may use it for purpose of making gains, and they may, without
becoming partners, are among themselves as to the management and use of such property and the
application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14,
cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
The income from the rental of the house, bought from the earnings of co-owned
properties, shall be treated as the income of an unregistered partnership to be taxable as a
corporation because of the clear intention of the brothers to join together in a venture for making
money out of rentals.
Where the plaintiff, his brother and, and another agreed to become owners of a single tract
of realty holding as tenants in common, and to divide the profits of disposing of it, the brother and
the other not being entitled to share in plaintiffs commissions, no partnership existed as between
the three parties, whatever their relation may have been as to third parties. (Magee v. Magee, 123
N.E. 673, 233 Mass. 341 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
Income is an amount of money coming to a person within a specified time, whether
payment for services, interest, or profit from investment. It means cash or its equivalent.
Income is gain derived and severed from capital, from labor or from both combined. For
example, to tax a stock dividend would be to tax a capital increase rather than the income.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20,
1999)
Distinctions between wealth and income.
a. Capital is wealth or fund, WHILE income is profit or gain from the flow of wealth.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20,
1999)
b. Capital is a fund of property existing at an instant of time WHILE income is that flow
of services rendered by that capital by the payment of money from it or any other benefit rendered
by a fund of capital in relation to such fund through a period of time.
c. Capital is wealth WHILE income is the service of wealth; and
d. Capital is the tree WHILE income is the fruit. (Madrigal v. Rafferty, 38 Phil. 414)
Realization is determinative of earning process resulting to income. Without realization,
there is no income.
The determining factor for the imposition of income tax is whether any gain or profit was
derived from the transaction. In the metaphor of Eisner v. Macomber, 252 U.S. 426, income is
not deemed realized until the fruit has been plucked from the tree.

33

BAR: 46. The term taxable income means the pertinent items of gross income specified
in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized
for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997)
BAR: 47. The cancellation and forgiveness of indebtedness may amount to (a) payment
of income; (b) gift; or to a (c) capital transaction depending upon the circumstances.
If an individual performs services for a creditor who, in consideration thereof, cancels the
debt, it is income to the extent of the amount realized by the debtor as compensation for his
services.
An insolvent debtor does not realize taxable income from the cancellation or forgiveness.
(Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10th)
The insolvent debtor realizes income resulting from the cancellation or forgiveness of
indebtedness when he becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F)
289)
If a creditor merely desires to benefit a debtor and without any consideration therefor
cancels the amount of the debt it is a gift from the creditor to the debtor and need not be included
in the latters income.
If a corporation to which a stockholder is indebted forgives the debt, the transaction has
the effect of payment of a dividend. (Sec. 50, Rev.Regs. No. 2)
The Global system of income taxation is a system employed where the tax system views
indifferently the tax base and generally treats in common all categories of taxable income of the
individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
The Schedular system of income taxation is a system employed where the income tax
treatment varies and is made to depend on the kind or category of taxable income of the taxpayer.
(Tan v. del Rosario, Jr., 237 SCRA 324, 331)
Under the National Internal Revenue Code the global system is applicable to taxable
corporations and the schedular to individuals.
BAR: 48. The general principles of income taxation in the Philippines OR the situs of
income taxation in the Philippines OR the source rule of income taxation as applied in the
Philippines.
a. A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.
b. A nonresident citizen is taxable only on income derived from sources within the
Philippines.
c. An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract worker.
34

d. An alien individual, whether resident or not of the Philippines, is taxable only on

income derived from sources within the Philippines.
e. A domestic corporation is taxable on all income derived from sources within and
without the Philippines.
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines. (Sec. 23, NIRC of 1997)
BAR: 49. Compensation income is considered as having been earned in the place where
the service was rendered and not considered as sourced from the place of origin of the money.
BAR: 50. Payment for services, other than compensation income, is considered as
having been earned at the place where the money originated and not at the place where the
activity or service was performed.
A non-resident alien, who has stayed in the Philippines for an aggregate period of more
than 180 days during the calendar year 2001, shall be considered as a non-resident alien doing
business in the Philippines. Consequently, he shall be subject to income tax on his income derived
from sources from within the Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized deductions including the personal and additional
exemptions subject to the rule on reciprocity.
Improperly accumulated earnings are the earnings or profits of a corporation which are
permitted to accumulate instead of being divided by a corporation to its shareholders for the
purpose of avoiding the income tax on dividends with respect to its shareholders or the
shareholders of another corporation. If the income were divided and distributed, they would have
been taxed as dividends.
In addition to other income taxes, there is imposed for each taxable year on the improperly
accumulated taxable income of each corporation, an improperly accumulated earnings tax equal to
10% of the improperly accumulated taxable income. [Sec. 29 (A), NIRC of 1997]
Every corporation formed or availed for the purpose of avoiding income tax with respect
to its shareholders or the shareholders of another corporation, by permitting earnings and profits
to accumulate instead of being divided or distributed. [Sec. 29 (B) (1), NIRC of 1997]
Corporations exempt from the improperly accumulated earnings tax:
a. Publicly-held corporations;
b. Banks and other nonbank financial intermediaries; and
c. nsurance companies. [Sec. 29 (B) (2), NIRC of 1997]
The fact that the earnings or profits of a corporation are permitted to accumulated beyond
the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon
its shareholders or members unless the corporation, by clear preponderance of evidence, shall
prove the contrary. [Sec. 29 (C) (2), NIRC of 1997]
Reasonable needs of business includes the reasonably anticipated needs of the business.
[Sec. 29 (E), NIRC of 1997]

35

In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon shareholders, it must be shown that the controlling intention of
the taxpayer is manifested at the time of the accumulation, not intentions declared subsequently,
which are mere afterthoughts. Furthermore, the accumulated profits must be used within a
reasonable time after the close of the taxable year. (Cyanamid Philippines, Inc. v. Court of
Appeals, et al., G.R. No. 108067, January 20, 2000)
The tests to determine justified accumulation of earnings, and not subject to tax are (a)
the immediacy test; (b) the 2 to 1 ratio; and the (c) the Bardahl formula.
Under the immediacy test, reasonable needs of the business means the immediate
needs of the business, and it was generally held that if the corporation did not prove an immediate
need for the accumulation of the earnings and profits, the accumulation was not for the reasonable
needs of the business and the penalty tax would apply. (Cyanamid Philippines, Inc. v. Court of
Appeals, et al., G.R. No. 108067, January 20, 2000 citing Manila Wine Merchants, Inc. v.
Commissioner of Internal Revenue in turn citing Mertens)
Under the 2 to 1 rule, the ratio of current assets to current liabilities is used to determine
the sufficiency of working capital. Ideally, the working capital should equal the current liabilities
and there must be 2 units of current assets for every unit of current liability, hence the so-called 2
to 1 Rule. (Cyanamid Philippines, Inc. v. Court of Appeals, et al., G.R. No. 108067, January
20, 2000 citing Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue in turn citing
Mertens)
The Bardahl formula allows retention as working capital reserve, sufficient amounts of
liquid assets to carry the company through one operating cycle. The formula requires an
examination of whether the taxpayer has sufficient liquid assets to pay all its current liabilities and
any extraordinary expenses reasonably anticipated, plus enough to operate the business during one
operating cycle. (Cyanamid Philippines, Inc. v. Court of Appeals, et al., G.R. No. 108067,
January 20, 2000 citing Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue in
turn citing Mertens)
Although the Bardahl formula is well-established and routinely applied by the courts, it
is not a precise rule. It is used only for administrative convenience. (Cyanamid Philippines, Inc.
v. Court of Appeals, et al., G.R. No. 108067, January 20, 2000 citing Manila Wine Merchants,
Inc. v. Commissioner of Internal Revenue in turn citing Mertens)
The operating cycle is the period of time it takes to convert cash into raw materials, raw
materials into inventory, and inventory into sales, including the time it takes to collect payment for
the sales. There are variations in the application of the Bardahl formula, such as average
operating cycle or peak operating cycle. In times when there is no recurrence of a business cycle,
the working capital needs cannot be predicted with accuracy. (Cyanamid Philippines, Inc. v.
Court of Appeals, et al., G.R. No. 108067, January 20, 2000 citing Manila Wine Merchants, Inc.
v. Commissioner of Internal Revenue in turn citing Mertens)
The two (2) principal accounting methods for recognition of income are the (a) accrual
method; and the (b) cash method.

36

Under the accrual method of accounting, income is reportable when all the events have
occurred that fix the taxpayers right to receive the income, and the amount can be determined
with reasonable accuracy. Thus it is the right to receive income, and not the actual receipt, that
determines when to include the amount in gross income. (Filipinas Fiber Corporation v. Court of
Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 1999)
The requisites of the accrual method of income recognition:
a. That the right to receive the income must be valid, unconditional and enforceable, i.e.
not contingent upon future time;
b. The amount must be reasonably susceptible of accurate estimate; and
c. There must be a reasonable expectation that the amount will be paid in due course.
(Filipinas Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October
12, 1999)
Under the cash method income is to be construed as income for tax purposes only upon
actual receipt of the cash payment. It is also referred to as the cash receipts and disbursements
method because both the receipt and disbursements are considered. Thus, income is recognized
only upon actual receipt of the cash payment but no deductions are allowed from the cash income
unless actually disbursed through an actual payment in cash.
The other methods of accounting are (a) the completion of contract basis (not recognized
under the NIRC of 1997); (b) the percentage of completion method; and (c) the installment
method.
The installment basis is a method considered when collections extend over relatively long
periods of time and there is a strong possibility that full collection will not be made. As customers
make installment payments, the seller recognizes the gross profit on sale in proportion to the cash
collected. (Chapter II, Accounting Methods, Handbook on Audit Procedures and Techniques
Volume I, Revision 2000, pp. 3-4)
BAR: 51. The fringe benefits tax is a final withholding tax imposed on the grossed-up
monetary value of fringe benefits furnished, granted or paid by the employer to the employee,
except rank and file employees. [1 st par., Sec. 2.33 (A), Rev. Regs. No. 3-98] It is the employer
that pays the tax.
For purposes of taxation, fringe benefit means any good, service, or other benefit
furnished or granted in cash or in kind by an employer to an individual employee (except rank and
file employees), such as but not limited to:
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and others;
e. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
f. Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
37

i. Educational assistance to the employee or his dependents; and

j. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1 st par., Sec. 2.33 (B), Rev. Regs.
No. 3-98]
BAR: 52. Fringe benefits that are not subject to the fringe benefits tax:
a. When the fringe benefit is required by the nature of, or necessary to the trade, business
or profession of the employer; or
b. When the fringe benefit is for the convenience or advantage of the employer. [Sec.
32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c. Fringe benefits which are authorized and exempted from income tax under the Tax
Code or under any special law;
d. Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans;
e. Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
f. De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. [1 st par.,
Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]
De minimis benefits are facilities and privileges (such as entertainment, medical services, or
so-called courtesy discounts on purchases), furnished or offered by an employer to his
employees. They are not considered as compensation subject to income tax and consequently to
withholding tax, if such facilities are offered or furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3),
Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
BAR: 53. The following shall be considered as de minimis benefits not subject to
withholding tax on compensation income of both managerial and rank and file employees:
a. Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year;
b. Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;
c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not
more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g. for length of service or safety achievement, which
must be in the form of a tangible persona property other than cash or gift certificate, with an
annual monetary value not exceeding P10,000.00 received by an employee under an established
written plan which does not discriminate in favor of highly paid employees;
h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000
per employee per annum;
i. Flowers, fruits, books, or similar items given to employees under special circumstances,
e.g. on account of illness, marriage, birth of a baby, etc.; and
j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the
basic minimum wage.
38

The amount of de minimis benefits conforming to the ceiling herein prescribed shall not
be considered in determining the P30,000 ceiling of other benefits provided under Section 32
(B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these
regulations, the excess shall be taxable to the employee receiving the benefits only if such excess
is beyond the P30,000.00 ceiling, provided, further, that any amount given by the employer as
benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall
constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as
amended by Rev. Regs. No. 8-2000]
51. Income subject to final tax refers to an income collected through the withholding
tax system.
The payor of the income withholds the tax and remits it to the government as a final
settlement of the income tax as a final settlement of the income tax due on said income. The
recipient is no longer required to include the income subjected to a final tax as part of his gross
income in his income tax return.
Two examples of income subject to final tax are interest from bank deposits and royalties.
BAR: 54. Royalties subject to final tax includes technical advice, assistance or services
rendered in connection with technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme, such as consultancy and technical services
rendered incidental to the distribution, support and use of computer systems.
BAR: 55. Stock dividends are unrealized gains and cannot be subject to income tax until
the gains have been realized. Before realization, stock dividends are nothing but a representation
of an interest in the corporate properties. As capital, it is not yet subject to income tax.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20,
1999)
An example of realization would be sales of the stock dividends, or where the issuance
results to a proportionate change in ownership.
Exclusions distinguished from deductions:
a. Exclusions from gross income refer to a flow of wealth to the taxpayer which are not
treated as part of gross income for purposes of computing the taxpayers taxable income, due to
the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute;
and (3) It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2) WHILE
deductions are the amounts which the law allows to be subtracted from gross income in order to
arrive at net income.
b. Exclusions pertain to the computation of gross income WHILE deductions pertain to
the computation of net income.
c. Exclusions are something received or earned by the taxpayer which do not form part of
gross income WHILE deductions are something spent or paid in earning gross income.
An example of an exclusion from gross income are life insurance proceeds, and an
example of a deduction are losses.
BAR: 56. The following are excluded from gross income:
a. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of
the insured whether in a single sum or otherwise.

39

b. Amounts received by the insured as a return of premiums paid by him under life
insurance, endowment or annuity contracts either during the term, or at maturity of the term
mentioned in the contract, or upon surrender of the contract.
c. Value of property acquired by gift, bequest, devise, or descent.
d. Amounts received, through accident or health insurance or Workmens Compensation
Acts as compensation for personal injuries or sickness, plus the amounts of any damages received
on whether by suit or agreement on account of such injuries or sickness.
e. Income of any kind to the extent required by any treaty obligation binding upon the
Government of the Philippines.
f. Retirement benefits received under Republic Act No. 7641. Retirement received from
reasonable private benefit plan after compliance with certain conditions. Amounts received for
beyond control separation. Foreign social security, retirement gratuities, pensions, etc. USVA
benefits, SSS benefits and GSIS benefits.
BAR: 57. Conditions for excluding retirement benefits from gross income, hence taxexempt:
a. Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, in accordance with the
employers reasonable private benefit plan approved by the BIR.
b. Retiring official or employee
1) In the service of the same employer for at least ten (10) years;
2) Not less than fifty (50) years of age at time of retirement;
3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of
1997] The retiring official or employee should not have previously availed of the privilege
under the retirement plan of the same or another employer. [1 st par., Sec. 2.78 (B) (1),
Rev. Regs. No. 2-98]
BAR: 58. Separation (retirement) pay excluded from gross income, hence tax-exempt:
a. Any amount received by an official, employee or by his heirs,
b. From the employer
c. As a consequence of separation of such official or employee from the service of the
employer because of
1) Death, sickness or other physical disability; or
2) For any cause beyond the control of said official or employee [Sec. 32 (B) (6)
(b), NIRC of 1997], such as retrenchment, redundancy and cessation of business. [1 st par.,
Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]
BAR: 59. Prizes that are excluded from gross income, hence not taxable:
a. Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if
1) The recipient was selected without any action on his part to enter the contest or
proceeding; and
2) The recipient is not required to render substantial future services as a condition
to receiving the prize or award. [Sec. 32 (B) {7} {c}, NIRC of 1997]
b. All prizes and awards
1) Granted to athletes
2) In local and international sports tournaments and competitions
3) Whether held in the Philippines or abroad, and
40

4) Sanctioned by their national sports associations [Sec. 32(B) {7} {d}, NIRC of
1997], which per BIR ruling is accreditation with the Philippine Olympic Committee. Note
that the exemption refers only to amateur sports. For professional boxing, a special law
grants the exemption not the NIRC.
Only resident citizens and resident alien individuals are allowed to deduct the optional
standard deduction on their gross income other than passive or compensation income.
Nonresident individuals, estates, trusts or corporations are not allowed to avail of this
deduction.
BAR: 60. Itemized deductions from gross income and who may avail:
a. Ordinary and necessary trade, business or professional expenses.
b. The amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayers profession, trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with the taxpayers
profession.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
e. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off
within the taxable year, connected with profession, trade or business, not sustained between
related parties.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
41

f. Depreciation or a reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
g. Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually
a natural resource.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
h. Charitable and other contributions. Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and business, on their gross incomes other
from compensation income are allowed to deduct these expenses. Domestic corporations, estates
and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
i. Research and development expenditures treated as deferred expenses paid or incurred
by the taxpayer in connection with his trade, business or profession, not deducted as expenses and
chargeable to capital account but not chargeable to property of a character which is subject to
depreciation or depletion.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
j. Contributions to pension trusts. Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and business, on their gross incomes other
from compensation income are allowed to deduct these expenses. Domestic corporations, estates
and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
k. Insurance premiums for health and hospitalization. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and business, on their
gross incomes other from compensation income are allowed to deduct these expenses.
Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine
on their gross incomes from within may also deduct these premiums.
42

Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and resident alien on their
gross incomes and from compensation income are allowed to deduct these premiums. Nonresident
citizens on their gross incomes from within may also deduct this expense. Nonresident alien
individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions
under reciprocity.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
Extraordinary deductions
a. Those allowed to insurance companies
b. Deductions allowed to estates and trusts availing of itemized deductions of income
currently distributed to beneficiaries.
c. Losses from wash sales of stocks or securities.
d. Certain capital losses but only from capital gains.
Ordinary expenses are those which are common to incur in the trade or business of the
taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more
than one taxable year. Ordinary expenses are usually incurred during a taxable year and benefits
such taxable year. Necessary expenses are those which are appropriate or helpful to the business.
BAR: 61. The following are the requisites for deductibility of business expenses:
a. Compliance with the business test:
1) Must be ordinary and necessary;
2) Must be paid or incurred within the taxable year;
3) Must be paid or incurred in carrying on a trade or business.
4) Must not be bribes, kickbacks or other illegal expenditures
b. Compliance with the substantiation test. Proof by evidence or records of the
deductions allowed by law including compliance with the business test.
BAR: 62. Advertising expenses not designed to stimulate the future sale of merchandise
are not deductible These are expenditures in order to create or maintain some form of goodwill.
These expenditures are to be spread over a reasonable period of time because they are considered
that a capital asset which has a determinable life has been acquired. (General Foods [Phils.], Inc.
v. Commissioner of Internal Revenue, CTA Case No. 4386, February 8, 1994)
Expenses incurred to create a favorable image for the corporation to generate sales of its
shares of stock constitute capital investment because the particular advertising expense was
incurred in relation to the capital asset or equity of the company (Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue, 102 SCRA 246), and are tobe
capitalized or spread over a reasonable period.
Requisites of deductibility of Entertainment, Amusement and Recreation Expenses:
a. It must be a reasonable allowance for entertainment, amusement and recreation
expenses [Sec. 34 (A) (1) (iv), NIRC of 1997];
b. It must be paid or incurred during the taxable year;
c. It must be
43

1) directly connected to the development, management and operation of the trade,

business or profession of the taxpayer, or
2) directly related to or in furtherance of the conduct of its trade, business or
exercise of a profession;
d. It must not be contrary to law, morals, good customs, public policy or public order;
e. It must not have been paid, directly or indirectly, to an official or employee of the
national government, or any local government unit, or of any government-owned or controlled
corporation (GOCC), or of a foreign government, or to a private individual, or corporation, or
general professional partnership (GPP), or a similar entity, if it constitutes a bribe, kickback or
other similar payment;
f. It must be duly substantiated by adequate proof. The official receipts, or invoices, or
bills or statements of accounts should be in the name of the taxpayer claiming the deduction; and
g. The appropriate amount of withholding tax, if applicable, should have withheld
therefrom and paid to the Bureau of Internal Revenue. (Sec. 4, Rev. Regs. No. 10-2002)
i. It must conform to the following ceilings:
1) in an amount equivalent to the actual entertainment, amusement and recreation
expense paid or incurred within the taxable year by the taxpayer,
2) but in no case shall such deduction exceed 0.50 percent (.5%) of net sales (i.e.
gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale
of goods or properties; or
3) 1.00 percent (1%) of net revenue (i.e., gross revenue less discounts) for
taxpayers engaged in sale of services, including exercise of profession and use or lease of
properties.
4) However, if the taxpayer is deriving income from both sale of goods/properties
and services, the allowable entertainment, amusement and recreation expense shall in all
cases be determined based on an apportionment formula taking into consideration the
percentage of the net sales/net revenue to the total net sales/net revenue, but which in no
case shall exceed the maximum percentage ceiling. (Sec. 5, Ibid.)
Who are allowed to deduct entertainment, amusement and recreation expenses:
a. Individuals engaged in trade or business, including taxable estates and trusts;
b. Individuals engaged in the practice of profession;
c. Domestic corporations;
d. Resident foreign corporations;
e. General professional partnerships.
Entertainment, Amusement and Recreation Expenses, include representation expenses
and/or depreciation or rental expense relating to entertainment facilities. (1 st par., Sec. 2, Rev.
Regs. 110-2002)
Representation expenses, shall refer to expenses incurred by a taxpayer in connection
with the conduct of his trade, business or exercise of profession, in entertaining, providing
amusement and recreation to, or meeting with a guest or guests at a dining place, place of
amusement, country club, theater, concert, play, sporting event, and similar events or places. (2 nd
par., Sec. 2, Rev. Regs. 10-2002)
Representation expenses shall not refer to fixed representation allowances that are subject
to withholding tax on wages pursuant to appropriate revenue regulations. (Ibid.)

44

Club dues, when fringe benefits and when representation expenses.

In the case
particularly of a country, golf, sports club, or any other similar club where the employee or officer
of the taxpayer is the registered member and the expenses incurred in relation thereto are paid for
by the taxpayer, there shall be a presumption that such expenses are fringe benefits subject to
fringe benefits tax unless the taxpayer can prove that these are actually representation expenses.
For purpose of proving that the said expense is a representation expense and not fringe benefits,
the taxpayer should maintain receipts and adequate records that indicate
a) the amount of expense
b) date and place of expense
c) purpose of expense
d) professional or business relationship of expense
d) professional or business relationship of expense
e) name of person and company entertained with con-tact details. (2 nd par., Sec. 2, Rev.
Regs. 10-2002)
Dues paid by company officers to any one club deductible by employer as business
expense but not as representation or entertainment:
a. Dues paid to any one social, athletic, or sporting club or organization per officer may
be deductible as a business expense. However, purchase of proprietary shares and playing rights
and expenses in the said club or organization may be deductible only if said expense complies with
the rules on substantiation. Dues on company membership constitute deductible expense. (No.
3.4.2, RAMO No. 1-87)
b. Dues or fees paid to professional or business organizations and civic clubs such as
Lions, Rotary, Kiwanis shall be deductible to the employer to the extent of one club. (No. 3.4.3,
RAMO No. 1-87)
The above provisions of RAMO No. 1-87 are to be read in relation to the provisions of
Rev. Regs. No. 10-2002. If considered as a fringe benefit subject to the fringe benefits tax under
Sec. 33, NIRC of 1997, may be deductible from the employer's gross income.
Entertainment facilities shall refer to (1) a yacht, vacation home or condominium; and 2)
any similar item of real or personal property used by the taxpayer primarily for the entertainment,
amusement, or recreation of guests or employees. To be considered an entertainment facility,
such yacht, vacation home or condominium, or item of real or personal property must be owned
or form part of the taxpayers trade, business or profession, or rented by such taxpayer, for which
the taxpayer claims a depreciation or rental expense. A yacht shall be considered an entertainment
facility if its use is in fact not restricted to specified officers or employees or positions in such a
manner as to make the same a fringe benefit for purposes of imposing the fringe benefits tax.
(4th par., Sec. 2, Rev. Regs. 10-2002)
Guests shall mean persons or entities with which the taxpayer has direct business
relations, such as but not limited to, clients/customers or prospective clients/customers. The term
shall not include employees, officers, partners, directors, stockholders, or trustees of the
taxpayer. (last par., Sec. 2, Rev. Regs. No. 10-2002)
Expenses not considered as entertainment, amusement and recreational expenses:
a. Expenses which are treated as compensation or fringe benefits for services rendered
under an employer-employee relationship;
b. Expenses for charitable or fund raising events;
45

c. Expenses for bona fide business meeting of stock-holders, partners or directors;

d. Expenses for attending or sponsoring an employee to a business league or professional
organizational meeting;
e. Expenses organized for promotion, marketing and advertising including concerts,
conferences, seminars, workshops, conventions, and other similar events;
f. Other expenses of similar nature.
Notwithstanding the foregoing such items of exclusions may, nonetheless qualify as items
of deduction under Section 34 of the Tax Code of 1997, subject to conditions for deductibility
stated therein. (Sec. 3, Rev. Regs. No. 10-2002)
Reimbursements for expenses relating to entertainment shall be deductible by the employer
if
a. Used primarily for the furtherance of employers trade or business
b. Only to the extent allowable, the same is directly related to the active conduct of the
employers trade or business and
c. Subject to the rule of substantiation.. (No. 3.4.1, RAMO No. 1-87)
If considered as a fringe benefit subject to the fringe benefits tax under Sec. 33, NIRC of
1997, may be deductible from the employer's gross income. Refer to previous discussion for
limitations.
Representation expenses fall under the category of business expenses which are allowable
deductions, if they are ordinary and necessary; paid or incurred in carrying on a trade or business;
and they are reasonable. (Zamora v. Col. of Int. Revenue, 8 SCRA 163 cited in Paramount
Insurance Corporation v. Commissioner of Internal Revenue, CTA Case No. 4844,. June 7,
1996)
If treated as a fringe benefit, subject to the fringe benefits tax under Sec. 33, NIRC of
1997, it may be allowed as a deduction from the employer's gross income.
Representation expenses not supported by official receipts should be disallowed. Mere
receipts when signed by the company officers themselves are not sufficient, for while they may
show that they received the amount from the company, they do not prove payment of the alleged
representation expenses to the entity in which the same were incurred. Furthermore, the absence
of invoices receipts or vouchers, particularly lack of proof of the items constituting the expense is
fatal to the allowance of the deduction. (Paramount Insurance Corporation v. Commissioner of
Internal Revenue, CTA Case No. 4844, June 7, 1996 citing Collector of Internal Revenue v.
Goodrich Int. Rubber Co., 21 SCRA 1336 and Gancayco v. Collector of Internal Revenue, 1
SCRA 980)
BAR: 63. Preferred shares are considered capital regardless of the conditions under
which such shares are issued and dividends or interests paid thereon are not allowed as
deductions from the gross income of corporations. (Revenue Memorandum Circular No. 17-71)
In addition to the expenses allowable as deductions a private educational institution, may
at its option elect either:
a. To deduct expenditures otherwise considered as capital outlays of depreciable assets
incurred during the taxable year for the expansion of school facilities, or
b. To deduct allowance for depreciation thereof. [Sec. 34 (A) (2), NIRC of 1997]

46

Financial statements audited by in dependent external auditors constitute the normal

method of proof of the profit and loss performance of a company. A comparative statement of
revenue and expenses for two years, by itself, is not conclusive proof of serious business losses.
(Bogo-Medellin Sugarcane Planters Association, Inc. v. NLRC, et al., 296 SCRA 108, 121)
Bad debts are those which result from the worthlessness or uncollectibility, in whole or in
part, of amounts due the taxpayer by others, arising from money lent or from uncollectible
amounts of income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99)
The following are related parties:
a. Members of the same family. The family of an individual shall include only his brothers
and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for such individual;
c. Two corporations more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor
with respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]
BAR: 64. Requisites for valid deduction of bad debts from gross income:
a. There must be an existing indebtedness due to the taxpayer which must be valid and
legally demandable;
b. The same must be connected with the taxpayers trade, business or practice of
profession;
c. The same must not be sustained in a transaction entered into between related parties;
d. The same must be actually charged off the books of accounts of the taxpayer as of the
end of the taxable year; and
e. The debt must be actually ascertained to be worthless and uncollectible during the
taxable year;
f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E)
(1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; Philippine
Refining Corporation v. Court of Appeals, et al., 256 SCRA 667]
g. Must have been reported as receivables in the income tax return of the current or prior
years. (Sec. 103, Rev. Regs. No. 2)
:
Reserve for bad debts are not deductible from gross income because the debts have not
yet been ascertained to be bad debts.
The value of worthless securities are not allowed to be deductible from gross income
because they are considered as capital losses and may be deducted only from capital gains.
BAR: 65. The tax benefit rule posits that the recovery of bad debts previously allowed
as deduction in the preceding year or years shall be included as part of the taxpayers gross
income in the year of such recovery to the extent of the income tax benefit of said deduction.

47

If in the year the taxpayer claimed deduction of bad debts written-off, he realized a
reduction of the income tax due from him on account of the said deduction, his subsequent
recovery thereof from his debtor shall be treated as a receipt of realized taxable income. (Sec. 4,
Rev. Regs. 5-99)
If the said taxpayer did not benefit from the deduction of the said bad debt written-off
because it did not result to any reduction of his income tax in the year of such deduction (i.e.
where the result of his business operation was a net loss even without deduction of the bad debts
written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return
of capital, hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
Depreciation is the gradual diminution in the useful value of tangible property resulting
from ordinary wear and tear and from normal obsolescence. The term is also applied to
amortization of the value of intangible assets the use of which in the trade or business is definitely
limited in duration.
The methods of depreciation are the following:
a. Straight line method;
b. Declining balance method;
c. Sum of years digits method; and
d. Any other method prescribed by the Secretary of Finance upon the recommendation of
the Commissioner of Internal Revenue:
1) Apportionment to units of production;
2) Hours of productive use;
3) Revaluation method; and
4) sinking fund method.
The shares of the corporation are considered as capital assets where the holder is not a
dealer in securities. Where the shares are listed and traded in the stock exchange the holder shall
be subject to the transaction tax, of of 1% of the gross selling price, which is in lieu of income
tax.
Capital assets shall refer to all real properties held by a taxpayer, whether or not connected
with his trade or business, and which are not included among the real properties considered as
ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003)
BAR: 66. The term capital assets means property held by the taxpayer (whether or not
connected with his trade or business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or
c. Property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business, or
d. Property used in the trade or business, of a character which is subject to the allowance for
depreciation; or real property used in the trade or business of the taxpayer. [Sec. 39 (A) (1),
NIRC of 1997, capitalized words, numbering and arrangement supplied; Sec. 2.a, Rev. Regs. No.
7-2003]

48

The statutory definition of capital assets is negative in nature. If the asset is not among
the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary
assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain
or an ordinary gain depending on the kind of asset involved in the transaction. (Calasanz v.
Commissioner of Internal Revenue, et al; 144 SCRA 664, 669-670)
Examples of capital assets:
a. Stock and securities held by taxpayers other than dealers in securities;
b. Jewelry not used for trade and business;
c. Residential houses and lands owned and used as such;
d. Automobiles not used in trade and business;
e. Paintings, sculptures, stamp collections, objects of arts which are not used in trade or
business;
f. Inherited large tracts of agricultural land which were subdivided pursuant to the
government mandate under land reform, then sold to tenants. (Roxas v. Court of Tax Appeals,
etc. L-25043, April 26, 1968)
g. Real property used by an exempt corporation in its exempt operations, such as a
corporation included in the enumeration of Section 30 of the Code, shall not be considered used
for business purposes, and therefore considered as capital asset. (last sentence, 3 rd par., Sec. 3.b,
Rev. Regs. No. 7-2003)
h. Real property, whether single detached, townhouse, or condominium unit, not used in
trade or business as evidenced by a certification from the Barangay Chairman or from the head of
administration, in case of condominium unit, townhouse or apartment, and as validated from the
existing available records of the Bureau of Internal Revenue, owned by an individual engaged in
business, shall be treated as capital asset. (last par., Sec. 3.b., Rev. Regs. No. 7-2003)
Ordinary assets shall refer to all real properties specifically excluded from the definition of
capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of a taxpayer if on hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
c. Real property used in trade or business (i.e. buildings and/or improvements), of a
character which is subject to the allowance for depreciation; or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 72003)
Real properties acquired by banks through foreclosure sales are considered their ordinary
assets. However, banks shall not be considered as habitually engaged in the real estate business
for purposes of determining the applicable rate of withholding tax. (Sec. 2. b, Rev. Regs. No. 72003)
A property purchased for future use in the business, even though this purpose is later
thwarted by circumstances beyond the taxpayers control, does not lose its character as an
ordinary asset. Nor does a mere discontinuance of the active use of the property change its
character previously established as a business property. (last sentence, Sec. 3.a.4, Rev. Regs.
No. 7-2003)
Examples of ordinary assets hence not capital assets:
49

a. The machinery and equipment of a manufacturing concern subject to depreciation;

b. The tractors, trailers and trucks of a hauling company;
c. The condominium building owned by a realty company the units of which are for rent
or for sale;
d. The wood, paint, varnish, nails, glue, etc. which are the raw materials of a furniture
factory;
e. Inherited parcels of land of substantial areas located in the heart of Metro Manila,
which were subdivided into smaller lots then sold on installment basis after introducing
comparatively valuable improvements not for the purpose of simply liquidating the estate but to
make them more saleable ; the employment of an attorney-in-fact for the purpose of developing,
managing, administering and selling the lots; sales made with frequency and continuity; annual
sales income from the sales was considerable; and the heir was not a stranger to the real estate
business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by introduction of good roads, concrete
gutters, drainage and lighting systems converts the property to an ordinary asset. The property
forms part of the stock in trade of the owner, hence an ordinary asset. This is so, as the owner is
now engaged in the business of subdividing real estate. (Calasanz v. Commissioner of Internal
Revenue, 144 SCRA at p. 672)
BAR: 67. Capital assets distinguished from ordinary assets:
a. Capital assets are not used in trade or business while ordinary asets are used in trade or
business.
b. Losses from capital assets are allowed to be deducted only from capital gains while
from capital gains derived from disposition of personal property other than shares of stock may be
deducted ordinary losses resulting from losses incurred in ordinary asset transactions.
c. The concept of capital asset transactions may include the holding period while this is
not so with ordinary asset transactions.
BAR: 68. It is prohibited to deduct capital losses from ordinary gains in order to prevent
tax leakages arising from the shifting of deductions from gains subject to lower tax rates(such as
capital gains), to those subject to higher tax rates (such as ordinary gains).
Tax treatment of real properties that have been transferred. Real properties classified as
capital or ordinary asset in the hands of the seller/transferor may change their character in the
hands of the buyer/transferee. The classification of such property in the hands of the
buyer/transferee shall be determined in accordance with the following rules:
a. Real property transferred through succession or donation to the heir or donee who is
not engaged in the real estate business with respect to the real property inherited or donated, and
who does not subsequently use such property in trade or business, shall be considered as a capital
asset in the hands of the heir or donee.
b. Real property received as dividend by stockholders who are not engaged in the real
estate business and who not subsequently use such real property in trade or business shall be
treated as capital assets in the hands of the recipient even if the corporation which declared the
real property dividend is engaged in real estate business.
c. The real property received in an exchange shall be treated as ordinary asset in the hands
of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business
to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in

50

real estate business, will use in business the property received in the exchange. (Sec. 3.f., Rev.
Regs. No. 7-2003)
Factors considered as helpful guides in determining whether asset is ordinary or capital:
a. The purpose for which the property was initially acquired;
b. The purpose for which the property was subsequently held;
c. The extent to which the improvements, if any, were made by the taxpayer;
d. The frequency, number and continuity of sales;
e. The extent and nature of the transactions involved;
f. The ordinary business of the taxpayer;
g. The extent of advertising, promotion, or other activities used in soliciting buyers for
the sale of the property;
h. The listing of property, with brokers; and
i. The purpose for which the property was held at the time of sale. [Elumba, et al. v. The
Honorable Commissioner of Internal Revenue, CTA Case No. 5103, August 16, 1996;
Klarkowski, TCM 1965-328, affirmed 385 F. 2d (CA-7, 1967)]
j. Real properties acquired by banks through foreclosure sales are considered as their
ordinary assets. However, banks shall not be considered as habitually engaged in the real estate
business for purposes of determining the application rate of withholding tax imposed under
Revenue Regulations. (last par., Sec. 2.b, Rev. Regs. No. 7-2003)
Monetary consideration or the presence or absence of profit in the operation of the
property is not significant in the characterization of the property. So long as the property is or has
been used for business purposes, whether for the benefit of the owner or nay of its members or
stockholders, it shall be considered as an ordinary asset. (1 st and 2nd sentences, 3rd par., Sec. 3.b.,
Rev. Regs. No. 7-2003)
Taxpayers engaged in the real estate business shall refer collectively to real estate dealers,
real estate developers, and/or real estate lessors. (Sec. 2.g, Rev. Regs. No. 7-2003)
The term taxpayers not engaged in the real estate business shall refer to persons other than
real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary
purpose of engaging in business, or whose Articles of Incorporation states that its primary
purpose is to engage in the real estate business shall be deemed to been engaged in the real estate
business. (Sec. 2.g, Rev. Regs. No. 7-2003)
The tax is imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified as capital
assets. [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations No. 7-2003 has defined real
property as having the same meaning attributed to that term under Article 415 of Republic Act
No. 386, otherwise known as the Civil Code of the Philippines. (Sec. 2.c, Rev. Regs. No. 72003)
Property must be located in the Philippines for purposes of capital gains taxation. . [Sec.
24 (D) (1), NIRC of 1997]
Tax treatment where property is not located in the Philippines. Gains realized from the
sale, exchange, or other disposition of real property, not located in the Philippines, regardless of
51

classification by resident citizens or domestic corporations shall be subject to ordinary income

taxation. [1st sentence, Sec. 4.f., Rev. Regs. No. 7-2003; Sec. 24 (A) (1), or Sec. 27 (A) or (E),
all of the NIRC of 1997]
Such income may be exempt in the case of non-resident citizens, alien individuals and
foreign corporations. [1st sentence, Sec. 4.f., Rev. Regs. No. 7-2003; Sec. 23 (B), (D) and (F) of
the NIRC of 1997]
BAR 69. Transactions covered by the presumed capital gains tax on real property:
a. sale,
b. exchange,
c. or other disposition, including pacto de retro sales and other forms of conditional
sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement supplied]
Sale, exchange, or other disposition includes taking by the government through
condemnation proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v.
Court of Tax Appeals, et al., 121 Phil. 861)
Transfers that may change the character of the classification of real properties into
ordinary or capital:
a. succession or donation;
b. a dividend declaration; and
c. exchange.
Real property transferred through succession or donation to the heir or donor who is not
engaged in the real estate business with respect to the real property inherited or donated, and who
does not subsequently use such property in trade or business, shall be considered as a capital asset
in the hands of the heir or donee. (Sec. 3.f.1, Rev. Regs. No. 7-2003)
Real property received as dividends by stockholders who are not engaged in the real
estate business and who do not subsequently use such real property in trade or business shall be
treated as capital assets in the hands of the recipients even if the corporation which declared the
real property dividend is engaged in real estate business. (Sec. 3.f.2, Rev. Regs. No. 7-2003,
paraphrasing supplied)
The real property received in an exchange shall be treated as ordinary asset in the hands
of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business
to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in
real estate business, will use in business the property received in the exchange. (Sec. 3.f.3, Rev.
Regs. No. 7-2003, paraphrasing supplied)
In the case of involuntary transfers of real properties, including expropriation or
foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such
real property in the hands of the involuntary seller, either as capital asset or ordinary asset as the
case may be. (Sec. 3.g, Rev. Regs. No. 7-2003)
In case the mortgagor exercises his right of redemption within one (1) year from the
issuance of the certificate of sale, in a foreclosure of mortgage sale of real property, no capital

52

gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale
or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
In case of non-redemption of the property sold upon a foreclosure of mortgage sale, the
presumed capital gains tax shall be imposed, based on the bid price of the highest bidder but only
upon the expiration of the one year period of redemption provided for under Sec. 6 of Act No.
3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration
of the said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
Real properties acquired by banks through foreclosure sales are considered as their
ordinary assets. However, banks shall not be considered as habitually engaged in the real estate
business for purposes of determining the application rate of withholding tax imposed under
Revenue Regulations. (last par., Sec. 2.b, Rev. Regs. No. 7-2003)
BAR: 70. The basis for the final presumed capital gains tax of six per cent (6%) is
whichever is the higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each zone or area as
determined by the Commissioner of Internal Revenue after consultation with competent
appraisers both from the private and public sectors; or
2) the fair market value as shown in the schedule of values of the Provincial and
City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]
Holding period not applied to the taxation of the presumed capital gains derived from the
sale of real property considered as capital assets.
The tax liability, of individual taxpayers (not corporate), if any, on gains from sales or
other dispositions of real property, classified as capital assets, to the government or any of its
political subdivisions or agencies or to government owned or controlled corporations shall be
determined, at the option of the taxpayer, by including the proceeds as part of gross income to be
subjected to the allowable deductions and/or personal and additional exemptions, then to the
schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the
final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6 (E),
both of the NIRC of 1997]
The interest at the legal rate on the value of expropriated land should be taxed as ordinary
income, and not as capital gains. (Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861)
The seller of the real property, classified as a capital asset, pays the presumed capital gains
tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A)
(3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25
(B) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];
53

b. an estate or trust (Ibid.);

c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
The proceeds of sale of real property, classified as capital assets, by foreign corporations
shall be subject to ordinary income taxation of whichever is higher between the reduced rate of
32% and the minimum corporate income tax [Sec. 28 (A) (1) (2) in relation to Sec. 27 (E), both
of the NIRC of 1997]
In the instances where non-resident aliens are qualified to own real property in the
Philippines (like condominium units, or buildings, or other immovables as defined under Art. 415
of Rep. Act No. 386, the Civil Code of the Philippines), and these are considered as capital in
character, they are to be subject to tax in the same manner as citizens and resident aliens. [Sec.
25 (A) (3) and Sec. 25 (B) in relation to Sec. 24 (D), all of the NIRC of 1997]
BAR: 71. Excepted from the payment of the presumed capital gains tax are those
presumed to have been realized from the disposition by natural persons of their principal place of
residence
a. the proceeds of which is fully utilized in acquiring or constructing a new principal
residence;
b. within eighteen (18) calendar months from the date of sale or disposition
c. the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30)
days from the date of sale or disposition through a prescribed return of his intention to avail of the
tax exemption; and
d. the said tax exemption can only be availed of once every ten (10) years. [Sec. 24 (D)
(2), NIRC of 1997]
The historical cost or adjusted basis of the real property sold or disposed shall be carried
overto the new principal residence huilt or acquired, provided that 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. [Sec. 24 (D) (2), NIRC of 1997]
Net loss carry-over means the deduction from net capital gains of a succeeding year the
net capital loss suffered during the prior year. Net operating loss carry-over is the deduction from
gross income for the next three (3) consecutive taxable years following the year of such loss, the
excess of allowable deduction over the gross income. (Sec. 39 [D], NIRC of 1997)
Distinctions between net loss carry-over and net operating loss carry-over. Source: The
source of net loss carry-over are capital losses only WHILE the source of net operating loss
carry-over are from the ordinary trade and business of the taxpayer. Who may enjoy the carryover: Only taxpayers other than corporations may enjoy net loss carry-over WHILE only
corporations may enjoy the net operating loss carry-over. (Sec. 39 [D], NIRC of 1997)
Any taxpayer, other than a corporation (individuals including trusts and estates), who
sustains in any taxable year a net capital loss from capital transactions involving capital assets
(other than real property or shares of stock not listed or traded in the stock exchange), is allowed
to treat during the succeeding year such net capital loss as a loss from the sale or exchange of a
capital asset (other than real property or shares of stock not listed and traded in the stock
exchange), held for more than twelve months. (Sec. 39 [D], NIRC of 1997)
54

BAR: 72. The equity investment by a bank in another corporation is capital in character,
the loss of which could be deductible only from capital gains, and not from any other income of
the taxpayer. (China Banking Corporation v. Court of Appeals, et al., G.R. No. 12508, July 19,
2000)
A capital gain or a capital loss normally requires the concurrence of two conditions for it
to result:
a. There is a sale or exchange; and
b. The thing sold or exchanged is a capital asset.
When securities become worthless there is strictly no sale or exchange but the law deems
the loss anyway to be a loss from the sale or exchange of capital assets. (China Banking
Corporation v. Court of Appeals, et al., G.R. No. 12508, July 19, 2000)
Securities, defined for deductibility of bad debts are shares of stock in a corporation and
rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes or
certificates, or other evidence of indebtedness, issued by any corporation, including those issued
by a government or political subdivision thereof, with interest coupons or in registered form.
(Sec. 2.b, Rev. Regs. No. 5-99)
General rule: If securities, held as capital asset, are ascertained to be worthless and
charged off within the taxable year, the loss resulting therefrom shall be considered as a loss from
the sale or exchange of capital asset made on the last day of such taxable year. The taxpayer,
however, has to prove through clear and convincing evidence that the securities are in fact
worthless. (Sec. 5, Rev. Regs. No. 5-99)
The above rule, however, is not true in the case of banks or trust companies incorporated
under the laws of the Philippines, a substantial part of whose business is the receipt of deposits.
(Sec. 5, Rev. Regs. No. 5-99)
BAR: 73. Non-stock non profit institutions are exempt from income taxation only on
their income from primary sources not on their income from secondary sources irrespective of
utilization.
Thus, religious societies are exempt only from income resulting from their religious
activities such as collection plates, baptismal, marriages and death fees but not from their income
generating rental properties.
The rule is different with respect to non-profit, non-stock educational institutions which
devote their revenues actually, ,directly and exclusively to educational purposes. The
constitutional exemption does not distinguish with respect to source and not to origin hence the
limitation in Sec. 30 of the NIRC of 1997 does not apply.
TRANSFER TAXES
BAR: 74. The gross estate for purposes of estate taxation of Filipino citizens, whether
residents or nonresidents and resident alien includes the value at the time of his death of all his real
property, wherever situated, personal property, whether tangible, intangible or mixed, wherever
situated, to the extent of the interest existing therein of the decedent at the time of his death.

55

BAR: 75. The gross estate for purposes of estate taxation of non-resident aliens includes
the value at the time of his death of all the real property situated in the Philippines, personal
property whether tangible, intangible or mixed, situated in the Philippines, to the extent of the
interest therein of the decedent at the time of his death.
BAR: 76. Life insurance proceeds included as part of the gross estate of a decedent:
a. The insurance was taken by the decedent on his own life and the beneficiary
1) is himself, his estate, his executor or administrator.
2) irrespective of whether the designation is revocable or irrevocable.
b.
The insurance was taken by the decedent on his own life and the designated
beneficiary is not himself, his estate, his executor or administrator (such as his wife, child, parent,
or other relative, friend, etc.) but the designation is revocable.
c. The insurance was taken by one who is not the decedent (such as an employer, a
relative, etc.), and the designated beneficiary is the decedent, his estate, administrator or executor,
whether the designation is revocable or irrevocable.
BAR: 77. Life insurance proceeds not included as part of the gross estate of a decedent:
a.
The insurance was taken by the decedent on his own life and the designated
beneficiary is not himself, his estate, his executor or administrator (such as his wife, child, parent,
or other relative, friend, etc.) but the designation is irrevocable.
b. The insurance was taken by one who is not the decedent (such as an employer, a
relative, etc.), and the designated beneficiary is not the decedent, his estate, administrator or
executor, whether the designation is revocable or irrevocable.
Items deductible from the gross estate of a resident or nonresident Filipino decedent or
resident alien decedent:
a. Expenses, losses, claims, indebtedness and taxes;
b. Property previously taxed;
c. Transfers for public use;
d. The Family Home up to a value not exceeding P1 million;
e. Standard deduction of P1 million;
f. Medical expenses not exceeding P500,000.00;
g. Amount of exempt retirement received by the heirs under Rep. Act Mo. 4917;
h. Net share of the surviving spouse in the conjugal partnership.
The notarial fee paid for the extrajudicial settlement is clearly a deductible expense since
such settlement effected a distribution of the estate to his lawful heirs, Similarly, the attorneys
fees for a guardian of the property during the decedents lifetime should also be considered as a
deductible administration expense. The guardian gives a detailed accounting of decedents
property and gives advice as to the proper settlement of the estate, acts which contributed
towards the collection of decedents assets and the subsequent settlement of the case.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, March 22,
2000)
Judicial expenses are expenses of administration. Administration expenses, as an allowable
deduction from gross estate of the decedent for purposes of arriving at the value of the net estate,
have been construed to include all expenses essential to the collection of the assets, payment of

56

debts or the distribution of the property to the persons entitled to it. In other words, the
expenses must be essential to the proper settlement of the estate.
Not deductible are expenditures incurred for the individual benefit of the heirs, devisees or
legatees. Thus, in Lorenzo v. Posadas, the Court construed the phrase judicial expenses of the
testamentary or intestate proceedings as not including the compensation paid to a trustee of the
decedents estate when it appeared that such trustee was appointed for the purpose of managing
the decedents real property for the benefit of the testamentary heir. In another case, the Court
disallowed the premiums paid on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a qualification for the office, and not
necessary in the settlement of the estate. Neither may attorneys fees incident to litigation
incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross
estate. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, March
22, 2000)
Not every inter-vivos transfer in anticipation of death is considered transfer in
contemplation of death for purposes of determining the property to be included in the gross
estate of a decedent.
BAR: 78. To be considered a transfer in contemplation of death 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 [Sec. 85 (B), NIRC of 1997]. It is clear that the
properties are not transferred in contemplation of or intended to take effect in possession or
enjoyment at or after death.
There is no transfer in contemplation of death if there is no showing the transferor
retained for his life or for any period which does not in fact end before his death: (1) the
possession or enjoyment of, or the right to the income from the property, or (2) the right, either
alone or in conjunction with any person, to designate the person who shall possess or enjoy the
property or the income therefrom. [Sec. 85 (B), NIRC of 1997]
The approval of the court sitting in probate, or as a settlement tribunal over the estate of
the deceased is not a mandatory requirement for the collection of the estate. The probate court is
determining issues which are not against the property of the decedent, or a claim against the estate
as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the
property formerly held by the decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable, the same can no
longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273
SCRA 47)
BAR: 80. When the donee or beneficiary is a stranger, the tax payable by the donor shall
be 30% of the net gifts.
BAR: 81. For purposes of the donors tax, a stranger is person who is not a:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal
descendant; or

57

(2) Relative by consanguinity in the collateral line within the fourth degree of
relationship. [Sec. 99 (B), NIRC of 1997]
BAR: 82. The amount of P100,000.00 donated during a calendar year is exempt from
donors tax. [Sec. 99 (A), NIRC of 1997]
Thus, a P200,000.00 deposit could be splitted in calendar years to avail of thetax
exemption.
The donation of a prize to an athlete in an international sports tournament held abroad and
sanctioned by the national sports association is exempt from donors tax. (Sec. 1, Rep. Act No.
7549)
BAR: 83. Any provision of law to the contrary notwithstanding, any contribution in cash
or in kind to any candidate or political party or coalition of parties for campaign purposes, duly
reported to the Commission on Elections, shall not be subject to the payment of any gift tax. (last
par., Sec. 13, R. A. No. 7166)
A non-resident citizen or alien is exempt only from the payment of donors taxes if his gifts
are 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.
BAR: 84. A non-resident citizen or alien is subject to donors tax where the gift is not
made in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, foundation, trust or philanthropic organization or research institution or corporation
which does not use more than 30% of the donation for administration purposes.
RETURNS AND WITHHOLDING
Income tax returns being public documents, until controverted by competent evidence, are
competent evidence, are prima facie correct with respect to the entries therein. (Ropali Trading
v. NLRC, et al., 296 SCRA 309, 317)
BAR: 85. Married individuals, whether citizens, resident or non-resident 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 Section 51 (D) of the NIRC of 1997 There is no showing in
the problem that it is impracticable for Bill and Hillary to file one return, hence they should file a
single return.
BAR: 86. Individuals required to file an income tax return.
a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines on his income from sources
within the Philippines;
c. Every alien residing in the Philippines on income derived from sources within the
Philippines; and
d. Every nonresident alien engaged in trade or business or in the exercise of profession in
the Philippines. [Sec. 51 (A) (1), NIRC of 1997]
58

BAR: 87. Individuals who are not required to file an income tax return.
a. An individual whose gross income does not exceed his total personal and additional
exemptions for dependents, Provided, That a citizen of the Philippines and any alien individual
engaged in business or practice of profession within the Philippines shall file an income tax return
regardless of the amount of gross income;
b. An individual with respect to pure compensation income for services in whatever form
paid, including, but not limited to fees, salaries, wages, commissions, and similar items, derived
from sources within the Philippines, the income tax on which has been correctly withheld,
Provided, That an individual deriving compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax return: Provided, further, That an
individual whose pure compensation income derived from sources within the Philippines exceeds
Sixty thousand pesos (P60,000.00), shall also file an income tax return;
c. An individual whose sole income has been subject to final withholding tax;
d. An individual who is exempt from income tax pursuant to the provisions of the NIRC
of 1997, and other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997]
An individual who is not required to file an income tax return may nevertheless be
required to file an information return. [Sec. 51 (A) (3), NIRC of 1997]
A corporation files its income tax return and pays its income tax four (4) times during a
single taxable year. Quarterly returns are required to be filed for the first three quarters, then a
final adjustment return is filed covering the total taxable income for the whole taxable year, be it
calendar or fiscal.
An individual earning from the practice of his profession or who engages in trade or
business files his income tax return and pays his income tax four (4) times during a single taxable
year. Quarterly returns are required to be filed for the first three quarters, then an annual income
tax return is filed covering the total taxable income for the whole of the previous calendar year.
The purpose of the above four (4) times a year requirement is to make available sufficient
funds to meet the budgetary requirements, on a quarterly basis thereby increasing government
liquidity. It also eases hardships on the part of individuals who are required to make this four time
return. Thus, the taxpayer does not have to raise large sums of money in order to pay the tax.
An individual earning purely compensation income files only one annual income tax return
covering the total taxable compensation income for the whole of the previous calendar year.
Under the withholding tax system, taxes imposed or prescribed by the NIRC of 1997 are
to be deducted and withheld by the payors from payments made to payees for the former to pay
directly to the Bureau of Internal Revenue. It is also known as collection of the tax at source.
A withholding agent is explicitly made personally liable under the Tax Code for the
payment of the tax required to be withheld, in order to compel the withholding agent to withhold
the tax under any and all circumstances. In effect, the responsibility for the collection of the tax as
well as the payment thereof is concentrated upon the person over whom the Government has
jurisdiction. (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498
& 124377, October 12, 1999) The system facilitates tax collection.
59

The two (2) types of withholding at source are the 1) final withholding tax; and 2)
creditable withholding tax.
Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income due from the payee on
the said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
The liability for payment of the tax rests primarily on the payor or the withholding agent..
Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax
shall be collected from the payor withholding agent. The payee is not required to file an income
tax return for the particular income.
Under the creditable withholding tax system, taxes withheld on certain income payments
are intended to equal or at least approximate he tax due from the payee on the said income. The
income recipient is still required to file an income tax return and/or pay the difference between the
tax withheld and the tax due on the income. [1 st and 2nd sentences, Sec. 257(B), Rev. Regs. No.
2-98]
The two kinds of creditable withholding taxes are (a) taxes withheld on income payments
covered by the expanded withholding tax; and (b) taxes withheld on compensation income.
Payments to the following are exempt from the requirement of withholding or when no
withholding taxes required:
a. National Government and its instrumentalities including provincial, city, or municipal
governments;
b. Persons enjoying exemption from payment of income taxes pursuant to the provisions
of any law, general or special, such as but not limited to the following:
1) Sales of real property by a corporation which is registered with and certified by
the HLURB or HUDCC as engaged in socialized housing project where the selling price
of the house and lot or only the lot does not exceed P180,000.00 in Metro Manila and
other highly urbanized areas and P150,000.00 in other areas or such adjusted amount of
selling price for socialized housing as may later be determined and adopted by the
HLURB;
2) Corporations registered with the Board of Investments and enjoying
exemptions from income under the Omnibus Investment Code of 1997;
3) Corporations exempt from income tax under Sec. 30, of the Tax Code, like the
SSS, GSIS, the PCSO, etc. However, income payments arising from any activity which is
conducted for profit or income derived from real or personal property shall be subject to a
withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)
BAR: 88. In applications for refund, the withholding agent is a taxpayer (Commissioner
of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA
377, 383-386), but for tax amnesty purposes, he is not. (Commissioner of Internal Revenue v.
Court of Appeals, et
al., G.R. No. 108576, January 20, 1999, the Anscor case)
BAR: 89. Legal requirements for claiming tax rewards for internal revenue taxes:

60

a. The informant should voluntarily file a confidential information under oath with the
Law Division of the Bureau of Internal Revenue alleging therein the specific violations
constituting fraud;
b. The information must not yet be in the possession of the Bureau of Internal Revenue,
or refer to a case already pending or previously investigated by the Bureau of Internal Revenue;
c. The informant must not be a government employee or a relative of a government
employee within the sixth degree of consanguinity; and
d. The information must result to collections of revenue and/orfines.
PENALTIES, INTERESTS AND SURCHARGES
Surtax or surcharge, also known as the civil penalties, are the amounts imposed in addition
to the tax required.
They are in the nature of penalties and shall be collected at the same time, in the same
manner, and as part of the tax. [Sec.248 (A), NIRC of 1997]
The two (2) kinds of civil penalties are (a) the 25% surcharge for late filing or late
payment [Sec. 248 (A), NIRC of 1997] (also known as the delinquency surcharge), and the 50%
willful neglect or fraud surcharge. [Sec. 248 (B), Ibid.]
Deficiency income tax is the amount by which the tax imposed under the NIRC of 1997
exceeds the amount shown as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1),
NIRC of 1997]
Deficiency interest is the interest assessed and collected on any unpaid amount of tax at
the rate of 20% per annum or such higher rate as may be prescribed by regulations, from the date
prescribed for payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]
Delinquency interest is the interest assessed and collected on the unpaid amount until
fulluy paid where there is failure on the part of the taxpayer to pay the amount die on any return
required to be filed; or the amount of the tax due for which no return is required; or a deficiency
tax, or any surcharge or interest thereon, on the date appearing in the notice and demand by the
Commissioner of Internal Revenue. [Sec.249 (c), NIRC of 1997]
Compromise penalty is the amount agreed upon between the taxpayer and the
Government to be paid as a penalty in cases of a compromise.
The five year prescriptive period for the filing of criminal action for violation of the Tax
Code (assessment cases) starts to run when the assessment has become final and unappealable.
TARIFF AND CUSTOMS CODE
Importation begins when the conveying vessel or aircraft enters the jurisdiction of the
Philippines with intention to unlade therein. (Sec. 1202, TCCP)
Importation is deemed terminated upon payment of the duties, taxes and other charges due
upon the agencies, or secured to be paid, at the port of entry and the legal permit for withdrawal
shall have been granted.
61

In case the articles are free of duties, taxes and other charges, until they have legally left
the jurisdiction of the customs. (Sec. 1202, TCCP)
BAR: 90. The flexible tariff clause is a provision in the Tariff and Customs Code, which
implements the constitutionally delegated power of 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.
Customs duties is the name given to taxes on the importation and exportation of
commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign
country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)
Special customs duties are additional import duties imposed on specific kinds of imported
articles under certain conditions. The special customs duties are the anti-dumping duty, the
countervailing duty, the discriminatory duty and the marking duty.
The special customs duties are imposed for the protection of consumers and
manufacturers, as well as Philippine products.
BAR: 91. Dumping duty is an additional special duty amounting to the difference
between the export price and the normal value of such product, commodity or article (Sec. 301
(s) (1), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999.) imposed on the
importation of a product, commodity or article of commerce into the Philippines at less than its
normal value when destined for domestic consumption in the exporting country which is causing
or is threatening to cause material injury to a domestic industry, or materially retarding the
establishment of a domestic industry producing the like product. [Sec. 301 (s) (5), TCC, as
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999]
The anti-dumping duty is imposed
a. Where a product, commodity or article of commerce is exported into the Philippines at
a price less than its normal value when destined for domestic consumption in the exporting
country,
b. and such exportation is causing or is threatening to cause material injury to a domestic
industry, or materially retards the establishment of a domestic industry producing the like product.
[Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999]
Normal value for purposes of imposing the anti-dumping duty is the comparable price at
the date of sale of like product, commodity, or article in the ordinary course of trade when
destined for consumption in the country of export. [Sec. 301 (s) (3 ), TCC, as amended by Rep.
Act No. 8752, Anti-Dumping Act of 1999]
A dumped imported product is any product, commodity or article of commerce introduced
into the Philippines at an export price less than its normal value in the ordinary course of trade, for
the like product, commodity or article destined for consumption in the exporting country, which is
causing or is threatening to cause material injury to a domestic industry, or materially retarding the
62

establishment of a domestic industry producing the like product. [Sec. 301 (s) (5), TCC, as
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999]
The imposing authority for the anti-dumping duty is the Secretary of Trade and Industry in
the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the
case of agricultural product, commodity or article, after formal investigation and affirmative
finding of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, AntiDumping Act of 1999]
Even when all the requirements for the imposition have been fulfilled, the decision on
whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff
Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of
1999]
In the determination of whether to impose the anti-dumping duty, the Tarrif Commission,
may consider among others, the effect of imposing an anti-dumping duty on the welfare of the
consumers and/or the general public, and other related local industries. (Sec. 301 (a), TCC, as
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999)
The amount of anti-dumping duty that may be imposed is the difference between the
export price and the normal value of such product, commodity or article. (Sec. 301 (s) (1), TCC,
as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999)
The anti-dumping duty shall be equal to the margin of dumping on such product,
commodity or article thereafter imported to the Philippines under similar circumstances, in
addition to ordinary duties, taxes and charges imposed by law on the imported product,
commodity or article,
BAR: 92. Countervailing duties are additional customs duties imposed on any product,
commodity or article of commerce which is granted directly or indirectly by the government in the
country of origin or exportation, any kind or form of specific subsidy upon the production,
manufacture or exportation of such product commodity or article, and the importation of such
subsidized product, commodity, or article has caused or threatens to cause material injury to a
domestic industry or has materially retarded the growth or prevents the establishment of a
domestic industry. (Sec. 302, TCCP as amended by Section 1, R.A. No. 8751)
The imposing authority for the countervailing duties is the Secretary of Trade and
Industry in the case of non-agricultural product, commodity, or article or the Secretary of
Agriculture, in the case of agricultural product, commodity or article, after formal investigation
and affirmative finding of the Tariff Commission.
Even when all the requirements for the imposition have been fulfilled, the decision on
whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff
Commission. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of
1999)
The countervailing duty is equivalent to the value of the specific subsidy.
BAR: 93. Marking duties are the additional customs duties imposed on foreign articles
(or its containers if the article itself cannot be marked), not marked in any official language in the
63

Philippines, in a conspicuous place as legibly, indelibly and permanently in such manner as to

indicate to an ultimate purchaser in the Philippines the name of the country of origin.
The Commissioner of Customs imposes the marking duty.
The marking duty is equivalent to five percent (5%) ad valorem.
BAR: 94. A discriminatory duty is a new and additional customs duty imposed upon
articles wholly or in part the growth or product of, or imported in a vessel, of any foreign country
which imposes, directly or indirectly, upon the disposition or transportation in transit through or
re-exportation from such country of any article wholly or in part the growth or product of the
Philippines, any unreasonable charge, exaction, regulation or limitation which is not equally
enforced upon like articles of every foreign country, or discriminates against the commerce of the
Philippines, directly or indirectly, by law or administrative regulation or practice, by or in respect
to any customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition,
restriction or prohibition, in such manner as to place the commerce of the Philippines at a
disadvantage compared with the commerce of any foreign country.
The President of the Philippines imposes the discriminatory duties.
BAR: 95. Returning resident s are nationals who have stayed in a foreign country for a
period of at least six (6) months.
BAR: 96. When a ruling or decision of the collector is made whereby liability for duties,
taxes, fees, or other charges are determined, except the fixing of fines in seizure cases, the party
adversely affected may protest such ruling or decision
a. by presenting to the Collector at the time when payment is made, or within fifteen (15)
days thereafter,
b. a written protest setting forth his objection to the ruling or decision in question,
together with his reasons therefor. No protest shall be considered unless payment of the amount
due after final liquidation has first been made and the corresponding docket fee. (Sec. 2308, TCC
numbering and arrangement supplied)
Protest Exclusive Remedy in Protestable Cases. 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. (Sec. 2309, TCC)
BAR: 97. The basis of dutiable value of merchandise that is subject to ad valorem
customs duties is the transaction value, which shall be the price actually paid or payable for the
goods when sold for export to the Philippines, adjusted by adding certain cost elements to the
extent that they are incurred by the buyer but are not included in the price actually paid or payable
for the imported goods, and may include the following:
a. Cost of containers and packing,
b. Insurance, and
c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No. 9135)

64

The above transaction value is the primary method of determining dutiable value. If the
transaction value of the imported article could not be determined using the above, the following
alternative methods should be used one after the other:
a. Transaction value of identical goods
b. Transaction value of similar goods
c. Deductive method
d. Computed method
e. Fallback method
There is a mistaken belief that claims for refund are governed by the rule on quasi-contract
of solutio indebeti which prescribes in six (6) years under Article 1145 of the Civil Code.
In order for the rule on solutio indebeti to apply it is an essential condition that the
petitioner must first show that its payment of the customs duties was in excess of what was
required by the law at the time the subject 16 importations of milk and milk products were made.
Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in
favor of the Collector of Customs. (Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July
6, 2001)
There is no automatic grant of refund. In determining whether Nestle is entitled to refund
of alleged overpayment of custom duties, it is necessary to determine exactly how much the
Government is entitled to collect as customs duties. Until there is such a determination by the
Collector and affirmed or rejected by the Commissioner, then the Court of Tax Appeals does not
have jurisdiction. The CTAs jurisdiction under the Tariff and Customs Code is not concurrent
with that of the Commissioner of Customs due to the absence of any certification from the
Collector of Customs of Manila that such import duties should be refunded. Consequently, the
finding by the CTA in another case of overpayment of internal revenue taxes is not necessarily a
finding that there was overpayment of customs duties. (Nestle Phil. v. Court of Appeals, et al.,
G.R. No. 134114, July 6, 2001)
All claims for refund of duties shall be made in writing and forwarded to the Collector of
Customs to whom such duties are paid, who upon receipt of such claim, shall verify the same by
the records of his Office, and if found to be correct and in accordance with law, shall certify the
same to the Commissioner of Customs with his recommendation together with all necessary
papers and documents. Upon receipt by the Commissioner of such certified claim he shall cause
the same to be paid if found correct. (Sec. 1708, TCC)
BAR: 98. Under the doctrine of primary jurisdiction, the Bureau of Customs has
exclusive administrative jurisdiction to conduct searches, seizures and forfeitures of contraband
without interference from the courts. It could conduct searches and seizures without need of a
judicial warrant except if the search is to be conducted in a dwelling place.
The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the
RTCs is anchored upon the policy of placing no unnecessary hindrance on the governments drive,
not only to prevent smuggling and other frauds upon Customs, but more importantly, to render
effective and efficient the collection of import and export duties due the State, which enables the
government to carry out the functions it has been instituted to perform. (Jao, et al., v. Court of
Appeals, et al., and companion case, 249 SCRA 35, 43)

65

The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive
jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable
goods. RTCs are precluded from assuming cognizance over such matters even through petitions
of certiorari, prohibition or mandamus. (The Bureau of Customs, et al., v. Ogario, et al., G.R.
No. 138081, March 20, 2000)
Regional Trial Courts have no jurisdiction to replevin a property which is subject to
seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions
for forfeiture of property for violation of the Customs laws could easily be undermined by the
simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)
The customs authorities do not have to prove to the satisfaction of the court that the
articles on board a vessel were imported from abroad or are intended to be shipped abroad before
they may exercise the power to effect customs searches, seizures, or arrests provided by law and
continue with the administrative hearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R.
No. 138081, March 20, 2000)
The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative
remedy of seizure, such as by enforcing the tax lien on the imported article when the imported
articles could be found and be subject to seizure and forfeiture.
The Tariff and Customs Code allows the Bureau of Customs to resort to the judicial
remedy of filing an action in court when the imported articles could not anymore be found.
Instances where there is no right of redemption of seized and forfeited articles:
a. There is fraud;
b. The importation is absolutely prohibited, or
c. The release of the property would be contrary to law. (Transglobe International, Inc. v.
Court of Appeals, et al., G.R. No. 126634, January 25, 1999)
In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax
appeals, et al., 217 SCRA 298, the Supreme court clarified that the fraud contemplated by law
must be actual and not constructive. It must be intentional, consisting of deception, willfully and
deliberately done or resorted to in order to induce another to give up some right.
Fraud must be proved to justify forfeiture. It must be actual, amounting to intentional
wrong-doing with the clear purpose of avoiding the tax. Forfeiture is not favored in law nor in
equity. Mere negligence is not equivalent to the fraud contemplated by law. An honest mistake,
will not deprive the government of its right to collect the proper tax. (Republic, etc., v. The
Court of Appeals, et al., G.R. No. 139050, October 2, 2001)
Requisites for forfeiture of imported goods:
a. Wrongful making by the owner, importer, exporter or consignee of any declaration or
affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper
all touching on the importation or exportation of merchandise.
b. the falsity of such declaration, affidavit, invoice, letter or paper; and
c. an intention on the part of the importer/consignee to evade the payment of the duties
due. (Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001)
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Forfeiture of seized goods in the Bureau of Customs is in the nature of a proceeding in

rem, i.e. directed against the res or imported goods and entails a determination of the legality of
their importation. In this proceeding, it is in legal contemplation the property itself which
commits the violation and is treated as the offender, without reference whatsoever to the character
or conduct of the owner.
The issue is limited to whether the imported goods should be forfeited and disposed of in
accordance with law for violation of the Tariff and Customs Code. .(Transglobe International,
Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999)
The one-year prescriptive period for forfeiture proceedings applies only in the absence of
fraud. (Commissioner of Customs v. Court of Tax Appeals, et al., G.R. No. 132929, March 27,
2000)
BAR: 99. The Collector of Customs upon probable cause that the articles are imported
or exported, or are attempted to be imported or exported, in violation of the tariff and customs
laws shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, then a search warrant
should be issued by the regular courts not the Bureau of Customs.
There may be instances where no warrants issued by the Bureau of Customs or the regular
courts is required, as in search and seizures of motor vehicles and vessels.
LOCAL TAXATION

BAR: 100. The fundamental principles of local taxation are:

a. Uniformity;
b. Taxes, fees, charges and other impositions shall be equitable and based on ability to pay,
for public purposes, not unjust, excessive, oppressive or confiscatory, not contrary to law, public
policy, national economic policy or in restraint of trade;
c. The levy and collection shall not be let to any private person;
d. Inures solely to the local government unit levying the tax;
e. The progressivity principle must be observed.
Under the now prevailing Constitution, where there is neither a grant nor prohibition by
statute, the taxing power of local governments must be deemed to exist although Congress may
provide statutory limitations and guidelines in order to safeguard the viability and self-sufficiency
of local government units by directly granting them general and broad tax powers. (City
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
BAR: 101. The paradigm shift to the grant of the power of taxation to local government
units results from the realization that genuine development can be achieved only by strengthening
local autonomy and promoting decentralization of governance.
For along time, the countrys highly centralized government structure has bred a culture of
dependence among local government leaders upon the national leadership. It has also dampened

67

the spirit of initiative, innovation and imaginative resilience in matters of local development on the
part of local government leaders.
The only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services and confer them sufficient powers to generate their own sources of
revenue for the purpose. (National Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)
BAR: 102. The Local Government Code explicitly authorizes provinces and cities,
notwithstanding any exemption granted by any law or other special law to impose a tax on
businesses enjoying a franchise. Indicative of the legislative intent to carry out the constitutional
mandate of vesting broad tax powers to local government units, the Local Government Code has
withdrawn tax exemptions or incentives theretofore enjoyed by certain entities. (City Government
of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
LGUs such as the province or the city can impose franchise tax notwithstanding any
exemption granted by law or other special law. The legislative purpose to withdraw tax
exemption privileges under existing law or charter is clearly manifested by the language used
categorically withdrawing such exemption subject only to the exceptions enumerated.
Since it would be not only tedious and impractical to attempt to enumerate all the existing
statutes providing for special tax exemptions or privileges the Local Government Code provided
for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal
language could have been used. (National Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)
Rationale for blanket withdrawal of local government tax exemptions: Doubtless the
power to tax is the most effective instrument to raise needed revenues to finance and support
myriad activities of the LGUs for the delivery of basic services essential to the promotion of the
general welfare and the enhancement of peace, progress and prosperity of the people.
The original reasons for the withdrawal of local government tax exemptions to
government owned or controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortion in the tax treatment of similarly
situated enterprises.
With the added burden of devolution, it is even more imperative for government entities to
share in the requirements of development, fiscal or otherwise, by paying taxes or other charges
due from them. (National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9,
2003)
Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc.,G.R.No.
143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to
impose and collect a local franchise tax because the Local Government has withdrawn all tax
exemptions previously enjoyed by all persons and authorized local government units to impose a
tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them.
Power of local governments to tax is only a delegated power. Local governments do not
have the inherent power to tax except to the extent that such power might be delegated to them
either by the basic law or statute. Presently, under Article X of the 1987 Constitution a general
delegation of that power has been given in favor of local government units. (Manila Electric
Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
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The fundamental law did not intend the delegation to local government units to be
absolute and unconditional, the constitutional objective obviously is to ensure that, while local
government units are being strengthened and made more autonomous, the legislature must still
see to it that:
a. the taxpayer will not be over-burdened or saddled with multiple and unreasonable
impositions;
b. each local government unit will have its fair share of available resources;
c. the resources of the national government will be unduly disturbed; and
d. local taxation will be fair, uniform and just. (Manila Electric Company v. Province of
Laguna, et al., G.R. No. 131359, May 5, 1999)
The withdrawal of a tax exemption should not be construed as prohibiting future grants of
exemption from all taxes. Indeed, the grant of taxing powers to local government units under the
Local Government Code does not affect the power of Congress to grant exemptions to certain
persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local
governments simply means that in interpreting statutory provisions on municipal taxing powers,
doubts must be resolved in favor of municipal corporations. (Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc.,G.R. No. 143867, August 22, 2001)
Smart and Globe are exempt from local taxes (including the franchise tax) because their
franchises which were granted after the effectivity of the LGC exempted them from the payment
of local franchise and business taxes. (Philippine Long Distance Telephone Company, Inc., v. City
of Davao, et al., etc.,G.R. No. 143867, August 22, 2001)
When Congress approved a provision that, Any advantage, favor, privilege, exemption,
or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto
become part of previously granted telecommunications franchises and shall be accorded
immediately and unconditionally to the grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning
territory covered by the franchise, the life span of the franchise, or the type of service authorized
by the franchise. (Underscoring supplied) there was no intention for it to operate as a blanket
tax exemption to all telecommunications entities. Applying the rule of strict construction of laws
granting tax exemptions and the rule that doubts should be resolved in favor of municipal
corporations in interpreting statutory provisions on municipal taxation, it was held that said
provisions cannot be considered as extending its application to franchises such as that of PLDT.
(Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc.,G.R.No.
143867, August 22, 2001)
BAR: 103. A law which deprives local government units of their power to tax would be
unconstitutional. The constitution has delegated to local governments the power to levy taxes,
fees and other charges. This constitutional delegation may only be removed by a constitutional
amendment.
BAR: 104. The power of local governments to tax and raise their own sources of
revenue is exercised through tax ordinances passed by the local Sangguniangs and approved by
the LGU Chief Executive.

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The authority under the Local Government Code to collect taxes on quarry resources
applies only to those extracted from public lands. (Sec. 134 in relation to Sec. 138, Local
Government Code)
The Local Government Code prohibits local government units from collecting excise taxes
on articles enumerated under the NIRC, and taxes, fees or charges on petroleum products. (Sec.
133 [h], Local Government Code in relation to the Tax Code] While the Tax Code levies a tax on
all quarry resources, regardless of origin, whether extracted from public or private lands, the
Local Government Code authorizes the local government unit to impose such taxes on those
taken from public lands. Thus, quarry resources extracted from private lands are taxable under
the NIRC and not by local government units. (The Province of Bulacan, et al., v. The Court of
Appeals, etc., et al., 299 SCRA 442)
BAR: 105. Professional basketball games should pay the amusement taxes collected by
the BIR and not the amusement taxes collected by the local governments. The amusement tax
which provinces and cities are allowed to collect under Sec. 140 of the Local Government Code,
refers to an amusement tax to be collected from proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia, and other places of amusement. The authority to
tax professional basketball games is not included therein because it is a national tax provided for
under Sec. 125 of the 1997 Tax Code which provides that, There shall be collected from the
proprietor, lessee or operator of cockpits, cabarets, night or day clubs, boxing exhibitions,
professional basketball games, Jai-Alai and racetracks, a tax equivalent to: xxxx (d) Fifteen
percent (15%) in the case of professional basketball games envisioned in Presidential Decree No.
971: Provided, however, That the tax herein shall be in lieu of all other percentage taxes of
whatever nature and description; xxx (Philippine Basketball Association v. Court of Appeals, et
al., G.R. No. 119122, August 8, 2000)
BAR: 106. The remedy to impugn the constitutionality of a local tax ordinance is an
appeal to the Secretary of Justice within a period of thirty (30) days from effectivity. The
Secretary has a period of 60 days within which to decide. Should the SOJ fail to decide within
that period, or if the decision is adverse to the taxpayer or to the government, the party may
appeal to the RTC within a period of 30 days from the expiration of the 60 day period within
which to decide or within 30 days from receipt of the adverse judgment.
REAL PROPERTY TAXATION
BAR:
a.
b.
c.
d.
e.

107. The fundamental principles of real property taxation are:

Appraisal at current and fair market value;
Classification for assessment on the basis of actual use;
Assessment on the basis of uniform classification;
Appraisal, assessment, levy and collection shall not be let to a private person;
Appraisal and assessment shall be equitable.

The reasonable market value is determined by the assessor in the form of a schedule of fair
market values. The schedule is then enacted by the local sanggunian.
The assessment level is fixed by ordinances of the appropriate sanggunian.

70

The tax rate is also fixed by ordinances of the appropriate sanggunian.

BAR: 108. Personal property under the civil law may be considered as real property for
purposes of taxes where the property is essential to the conduct of the business. Underground
tanks are essential to the conduct of the business of a gasoline station without which it would not
be operational. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA
296)
Light Rail Transit (LRT) improvements such as buildings, carriageways, passenger
terminals stations, and similar structures do not form part of the public roads since the former are
constructed over the latter in such a way that the flow of vehicular traffic would not be impaired.
The carriageways and terminals serve a function different from the public roads. Furthermore,
they are not open to use by the general public hence npt exempt from real propery taxes. (Light
Rail Transit Authority v. Central Board of Assessment Appeals, et al., G. R. No. 127316, October
12, 2000)
Even granting that the national government owns the carriageways and terminal stations,
the property is not exempt because their beneficial use has been granted to LRTA a taxable entity.
(Light Rail Transit Authority v. Central Board of Assessment Appeals, et al., G. R. No. 127316,
October 12, 2000)
BAR: 109. Property exempt from the payment of real property tax:
a. Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted to a taxable person for a
consideration or otherwise;
b. Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries, and all lands, buildings and improvements actually,
directly and exclusively used for religious, charitable and educational purposes;
c. Machineries and equipment, actually, directly and exclusively used by local water
districts; and government owned and controlled corporations engaged in the supply and
distribution of water and generation and transmission of electric power;
d. Real property owned by duly registered cooperatives;
e. Machinery and equipment used for pollution control and environmental protection.
The restriction upon the power of courts to impeach tax assessment without a prior
payment, under protest, of the taxes assessed is consistent with the doctrine that taxes are the
lifeblood of the nation, and as such their collection cannot be curtailed by injunction or any like
action; otherwise, the state or, in this case, the local government unit, shall be crippled in
dispensing the needed services to the people, and its machinery gravely disabled. (Manila
Electric Company v. Barlis, G.R. No. 114231, May 18, 2001)
Thus, the trial court has no jurisdiction to entertain a petition for prohibition absent
payment under protest of the tax assessed. (Ibid.)
BAR: 110. Unpaid realty taxes attach to the property and is chargeable against the person
who had actual or beneficial use and possession of it regardless of whether or not he is the owner.
To impose the real property tax on the subsequent owner which was neither the owner not the
beneficial user of the property during the designated periods would not only be contrary to law
but also unjust.
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Consequently, MERALCO the former owner/user of the property was required to pay the
tax instead of the new owner NAPOCOR. (Manila Electric Company v. Barlis, G.R. No. 114231,
May 18, 2001)
BAR: 111. The administrative remedies that are provided for under the provisions of
Rep. Act No. 7160, the Local Government Code, before resort to courts is made relative to real
property taxes.
a. A taxpayer may question the constitutionality or legality of a tax ordinance on appeal
within thirty (30) days from effectivity thereof, to the Secretary of Justice. The taxpayer after
finding that his assessment is unjust, confiscatory, or excessive, must bring the case before the
Secretary of Justice for questions of legality or constitutionality of a city ordinance.
b. An owner of real property who is not satisfied with the assessment of his property may,
within sixty (60) days from notice of assessment, appeal to the Local Board of Assessment
Appeals.
c. Should the taxpayer question the excessiveness of the amount of tax, he must first pay
the amount due. Then, he must request the annotation of the phrase paid under protest and
accordingly appeal to the Local Board of Assessment Appeals by filing a petition under oath
together with copies of the tax declarations and affidavits or documents to support his appeal.
(Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)
Secretary of Justice can take cognizance of a case involving the constitutionality or
legality of tax ordinances where there are factual issues involved. (Figuerres v. Court of Appeals,
et al., G.R. No. 119172, March 25, 1999)
Taxpayer files appeal to the Secretary of Justice, within 30 days from effectivity thereof.
In case the Secretary decides the appeal, a period also of 30 days is allowed for an aggrieved
party to go to court. But if the Secretary does not act thereon, after the lapse of 60 days, a party
could already seek relief in court.
These three separate periods are clearly given for compliance as a prerequisite before
seeking redress in a competent court. Such statutory periods are set to prevent delays as well as
enhance the orderly and speedy discharge of judicial functions. For this reason the courts
construe these provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al.,
G.R. No. 118233, December 10, 1999)
A City Assessor cannot be commanded by mandamus to classify a particular property as
exempt from real property taxation because this is an exercise of his function of assessing
properties for taxation purposes. While it is his duty to conduct assessments is a ministerial
function, the actual exercise thereof is necessarily discretionary.
Furthermore, recourse to courts will violate the doctrine of exhaustion of administrative
remedies because the action of the City Assessor is appealable to the Local Board of Assessment
Appeals, thence to the Central Board of Assessment Appeals (Systems Plus Computer College of
Caloocan City v. Local Government of Caloocan City, et al., G. R. No. 146382, August 7, 2003)
Public hearings are mandatory prior to approval of tax ordinance, but this still requires the
taxpayer to adduce evidence to show that no public hearings ever took place. (Reyes, et al., v.
Court of Appeals, et al., G.R. No. 118233, December 10, 1999)
Solutio indebeti and issues relative to validity do not require payment under protest.
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The concurrent and simultaneous remedies afforded local government units in enforcing
collection of real property taxes:
a. Distraint of personal property;
b. Sale of delinquent real property, and
c. Collection of real property tax through ordinary court action.
The remedy of levy can be pursued by putting up for sale the real property subject of tax,
i.e., the delinquent property upon which the tax lien attaches, regardless of the present owner or
possessor thereof. However this remedy is only one of the other remedies. (Manila Electric
Company v. Barlis, G.R. No. 114231, May 18, 2001)
The LGU could also avail of the remedy of distraint and levy of personal property
subjecting any personal property of the taxpayer to execution. thus, the issuance of the warrants
of garnishment over MERALCOs bank deposits was not improper or irregular. (Manila Electric
Company v. Barlis, et al., G.R. No. 114231, May 18, 2001)
BAR: 112. It is true that the unpaid tax attaches to the property and is chargeable against
the person who has actual or beneficial use and possession of it regardless of whether or not he is
the owner. However, to impose the real property tax on the subsequent owner which was neither
the owner nor the beneficial user of the property during the designated periods would not only be
contrary to law but also unjust. ((Manila Electric Company v. Barlis, et al., G.R. No. 114231,
May 18, 2001 citing Testate Estate of Concordia T. Lim v. City of Manila, 182 SCRA 482) Thus
MERALCO the former owner, not NAPOCOR, the present owner, is liable for the payment of the
back taxes on the above properties.
Notice and publication, as well as the legal requirements for a tax delinquency sale, are
mandatory, and the failure to comply therewith can invalidate the sale. The prescribed notices
must be sent to comply with the requirements of due process. (De Knecht, et al,. v. Court of
Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)
The reason behind the notice requirement is that tax sales are administrative proceedings
which are in personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169
SCRA 314)
Steps to be followed for the mandatory conduct of General Revision of Real Property
Assessments:
a. Preparation of Schedule of Fair Market Values;
b . Enactment of Ordinances:
1) Levying an annual ad valorem tax on real property and an
additional tax accruing to the Special Education Fund;
2) Fixing the assessment levels to be applied to the market values of real
properties;
3) Providing the necessary appropriations to defray expenses incident to general
revision of real property assessments,; and
4) Adopting the Schedule of Fair Market Values prepared by the assessors. (Lopez
v. City of Manila, et al., G.R. No. 127139, February 19, 1999)

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Preparation of fair market values:

a. The city or municipal assessor shall prepare a schedule of fair market values for the
different classes of real property situated in their respective Local Government Units for the
enactment of an ordinance by the sanggunian concerned; and
b. The schedule of fair market values shall be published in a newspaper of general
circulation in the province, city or municipality concerned or the posting in the provincial capitol
or other places as required by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February
19, 1999)
Proposed fair market values of real property in a local government unit as well as the
ordinance containing the schedule must be published in full for three (3) consecutive days in a
newspaper of local circulation, where available, within ten (10) days of its approval, and posted in
at lease two (2) prominent places in the provincial capitol, city, municipal or barangay hall for a
minimum of three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,. G.R. No.
119172, March 25, 1999)
A special levy or special assessment is an imposition by a province, a city or a municipality
within the Metropolitan Manila Area upon real property specially benefited by a public works
expenditure of the LGU to recover not more than 60% of such expenditure.
The real property taxes that may be collected by provinces, cities and municipalities within
the Metro Manila area are the basic real property tax, the special education fund, and the ad
valorem tax on idle lands.

74