I.

General Principles

A. Definition and Concept of Taxation

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

making body, raises revenue to defray the necessary expenses of the
government. It is merely a way of apportioning the costs of government
among those who in some measures are privileged to enjoy its benefits and
must bear its burdens.
As a power, taxation refers to the inherent power of the state to
demand enforced contributions for public purpose or purposes.

Taxation is a symbiotic relationship, whereby in exchange for the

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

B. Nature of Taxation

1. It is an inherent attribute of sovereignty

2. It is legislative in character

C. Characteristics of Taxation

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

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

1 Commissioner of Internal Revenue vs. Allegre, Inc., et al., L-28896, Feb. 17, 1988
2 Churchill and Tait v. Concepcion, 34 Phil 969

1
 2. The power to tax is inherent in the State, and the State is free to
select the object of taxation, such power being exclusively vested in the
legislature, except where the Constitution provides otherwise.3

The Congress may by law authorize the President to fix within

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

Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.4
3. It is subject to Constitutional and inherent limitations; hence, it is
not an absolute power that can be exercised by the legislature anyway it
pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power
2. Power of Eminent Domain

Taxation Police Power Eminent

Domain
Purpose

Raising revenue Promote public Taking of property for

welfare thru public use
regulations

Amount of exaction

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

2
No limit Limited to the cost of No exaction,
regulations, issuance compensation paid
of the license or by the government
surveillance
Benefits received

No special or direct benefits No direct benefits but Direct benefit results

received but the enjoyment a healthy economic in the form of just
of the privileges of living in standard of society or compensation
an organized society damnum absque
injuria is attained

Non-impairment of contracts

The impairment rule subsist Contracts may be Contracts may be

impaired impaired

Transfer of property rights

Taxes paid become part of No transfer but only Property is taken by

public funds restraint on the the govt upon
exercise of property payment of just
right exists compensation

Scope

Affects all persons, property Affects all persons, Affects only the
and excise property, privileges, particular property
and even rights comprehended

Basis

Public necessity Public necessity and Public necessity,

the right of the state private property is

3
 and the public to taken for public use
self-protection and
self-preservation

Authority which exercises the power

Only by the Only by the May be granted to

government or its government or its public service,
political subdivisions political subdivisions companies, or public
utilities

E. Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the

general welfare and protection of its citizens.

2. Non-revenue/special or regulatory

Promotion of General Taxation may be used as an implement of

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

Regulation As in the case of taxes levied on excises and

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

5 see Lutz vs. Araneta, 98 Phil 148 and Osmea vs. Orbos, G.R. No. 99886, Mar. 31, 1993
6 In the case of Caltex Phils. Inc. vs. COA (G.R. No. 92585, May 8, 1992), it was held that
taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation
and stabilization of a threatened industry which is affected with public industry like the oil
industry.

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

Encourage Economic In the realm of tax exemptions and tax reliefs,

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

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

in the case of foreign importations, taxes
sometimes provide protection to local
industries like protective tariffs and customs

F. Principles of Sound Tax System

1. Fiscal Adequacy

The sources of tax revenue should coincide with, and approximate

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

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective

administration

3. Theoretical Justice

5
 The tax burden should be in proportion to the taxpayers ability to
7
pay . The 1987 Constitution requires taxation to be equitable and uniform.

G. Theory and Basis of Taxation

1. Lifeblood Theory

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

2. Necessity Theory

Taxes proceed upon the theory that the existence of the government
is a necessity; that it cannot continue without the means to pay its
expenses; and that for those means, it has the right to compel all citizens
and properties within its limits to contribute. 9
3. Benefits-Protection Theory10

The basis of taxation is the reciprocal duty of protection between the

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

4. Jurisdiction over subject and objects

Rules:

7 ability-to-pay principle
8 Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 1965
9 In a case, the Supreme Court held that:

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

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

6
 a) Tax laws cannot operate beyond a States territorial limits.
b) The government cannot tax a particular object of taxation which is
not within its territorial jurisdiction.

c) Property outside ones jurisdiction does not receive any

protection of the State.
d) If a law is passed by Congress, it must always see to it that the
object or subject of taxation is within the territorial jurisdiction of the
taxing authority.

H. Doctrines in Taxation

1. Prospectivity of tax laws

General Rule Exception

Taxes must only be imposed The language of the statute clearly

prospectively. demands or express that it shall
have a retroactive effect.

2. Imprescriptibility

General Rule Exception

Taxes are imprescriptible. When provided otherwise by the tax

law itself.11

3. Double taxation

11Example: NIRC provides for statutes of limitation in the assessment and collection of
taxes therein imposed.
The law on prescription, being a remedial measure, should be liberally construed to
afford protection as a corollary, the exceptions to the law on prescription be strictly
construed. (CIR vs CA. G.R. No. 104171, Feb. 24, 1999)

7
 a. Strict sense

Referred to as direct duplicate taxation, it means:

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

Referred to as indirect double taxation, it is taxation other than

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

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does not

prohibit double taxation.

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

taxation should, whenever possible, be avoided and prevented.

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

violation of the constitutional precepts of equal protection and uniformity
in taxation.12

12 The argument against double taxation may not be invoked where one tax is imposed
by the State and the other is imposed by the city, it being widely recognized that there is
nothing inherently obnoxious in the requirement that license fees or taxes be exacted
with respect to the same occupation, calling, or activity by both the State and a political
subdivision thereof. And where the statute or ordinance in question, there is no
infringement of the rule on equality (City of Baguio v. De Leon, 25 SCRA 938)

8
 d. Modes of eliminating double taxation

Two (2) methods of relief:13

Exemption method The income or capital which is taxable at the state

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

Credit method Although the income or capital which is taxed in

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

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

9
 4. Escape from taxation

a. Shifting of tax burden14

1) Ways of shifting the tax burden

a. Forward shifting When the burden of the tax is transferred from a

factor of production through the factors of
distribution until it finally settles on the ultimate
purchaser or consumer.15

b. Backward shifting When the burden of the tax is transferred from the
consumer or purchaser through the factors of
distribution to the factors of production.16

14 The transfer of the burden of a tax by the original payer or the one on whom the tax
was assessed or imposed to someone else.
Process by which such tax burden is transferred from statutory taxpayer to another
without violating the law.
What is transferred is not the payment of the tax, but the burden of the tax
15 Example:

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

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

10
c. Onward shifting When the tax is shifted two or more times either
forward or backward.17

2) Taxes that can be shifted

Only indirect taxes may be shifted;18 direct taxes19 cannot be shifted.

3) Meaning of impact and incidence of

taxation

Impact of taxation Incidence of taxation

The point on which a tax is originally
imposed. In so far as the law is
concerned, the taxpayer is the
person who must pay the tax to the
government. He is also termed as
the statutory taxpayer-the one on
whom the tax is formally assessed.
He is the subject of the tax.
The point on which the tax burden
finally rests or settle down. It takes
place when shifting has been
effected from the statutory taxpayer
to another.

b. Tax avoidance20
17 Example:
Thus, a transfer from the seller to the purchaser involves one shift; from the producer to
the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to
the purchaser by the retailer, we have three shifts in all.
18 e.g. VAT
19 e.g. Income tax
20 also known as tax minimization; it is not punished by law

11
 The exploitation of the taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property or income in order to avoid
or reduce tax liability

c. Tax evasion21

The use by the taxpayer of illegal or fraudulent means to defeat or

lessen the payment of tax.

5. Exemption from taxation

a. Meaning of exemption from taxation

It is the grant of immunity to particular persons or corporations or to

persons or corporations of a particular class from a tax which persons and
corporations generally within the same state or taxing district are obliged
to pay. It is an immunity or privilege; it is freedom from a financial charge
or burden to which others are subjected.22

21 also known as tax dodging; it is punishable by law

Elements of tax evasion:
1. The end to be achieved, i.e. payment of less than that known by the taxpayer to be
legally due, or paying no tax when it is shown that tax is due
2. An accompanying state of mind which is described as being evil, in bad faith,
willful, or deliberate and not accidental
3. A course of action (or failure of action) which is unlawful
Indicia of fraud in tax evasion:
1. Failure to declare for taxation purposes true and actual income derived from
business for two (2) consecutive years; or
2. Substantial under declaration of income tax returns of the taxpayer for four (4)
consecutive years coupled with unintentional overstatement of deductions
Evidence to prove tax evasion:
Since fraud is a state of mind, it need not be proved by direct evidence but may be
proved from the circumstances of the case.
Failure of the taxpayer to declare for taxation purposes his true and actual income
derived from his business for two (2) consecutive years is an indication of his fraudulent
intent to cheat the government of its due taxes. (Republic vs. Gonzales, 13 SCRA 638)
22 Exemption is allowed only if there is a clear provision therefor.

12
 b. Nature of tax exemption

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

2) It is generally revocable by the government unless the exemption

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

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

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

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

reasonable foundation or rational basis.

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

c. Kinds of tax exemption

1) Express23

When certain persons, property or transactions are, by express

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

2) Implied24

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

transactions without mentioning the other classes.25

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

rational basis.
Exemptions are not presumed, but when public property is involved, exemption is the
rule and taxation is the exemption.
23 or affirmative exemption
24 or exemption by omission

No tax exemption by implication

It must be expressed in clear and unmistakable language
25 Every tax statute makes exemptions because of omissions.

13
 3) Contractual

Agreed to by the taxing authority in contracts lawfully entered into

by them under enabling laws.

d. Rationale/grounds for exemption

Rationale for granting tax Grounds for granting tax

exemptions exemptions

Its avowed purpose is some public 1) May be based on contract.26

benefit or interests which the
lawmaking body considers sufficient to
offset the monetary loss entailed in
the grant of the exemption.
The theory behind the grant of tax
exemptions is that such act will benefit
the body of the people. It is not based
on the idea of lessening the burden of
the individual owners of property.
2) May be based on some ground
of public policy.27
3) May be based on grounds of
reciprocity or to lessen the rigors
of international double or
multiple taxation.28

e. Revocation of tax exemption

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

unless there are restrictions. Since taxation is the rule and taxation
therefrom is the exception, the exemption may be withdrawn by the taxing
authority.29

26 In such a case, the public, which is represented by the government is supposed to

receive a full equivalent therefor, i.e. charter of a corporation.
27 i.e., to encourage new industries or to foster charitable institutions. Here, the

government need not receive any consideration in return for the tax exemption.
28 Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear

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

14
 6. Compensation and Set-off30

General Rule Exception

Taxes are not subject to set-off or Where both the claims of the
legal compensation. The government and the taxpayer
government and the taxpayer are against each other have already
not creditors and debtors or each become due and demandable as
other. Obligations in the nature of well as fully liquated.32
debts are due to the government in
its corporate capacity, while taxes
are due to the government in its
sovereign capacity.31

7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid

litigation or put an end to one already commenced.33

30 Requisites of Compensation in taxation

1. The tax assessed and the claim against the government be fully liquidated.
2. The tax assessed and the claim against the government is due and demandable,
and
3. The government had already appropriated funds for the payment of the claim
(Domingo v. Garlitos, L-18904, June 29, 1963)
31 Philex Mining Corp. vs. CIR, 294 SCRA 687; Republic vs. Mambulao Lumber Co., 6 SCRA

622
32 see Domingo vs. Garlitos, supra

33 Art. 2028, New Civil Code

Requisites:
1. Taxpayer must have a tax liability.
2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer.
3. There must be acceptance of the offer in settlement of the original claim.
When taxes may be compromised:
1. A reasonable doubt as to the validity if the claim against the taxpayer exists;
2. The financial position of the taxpayer demonstrates a clear inability to pay the
assessed tax.
3. Criminal violations, except:
a. Those already filed in court
b. Those involving fraud.

15
 8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its

authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue to collect what otherwise would be due it and, in this
sense, prejudicial thereto.34
b. Distinguished from tax exemption

Tax amnesty Tax exemption

Partakes of an absolute forgiveness The grant of immunity to particular

or waiver by the Government of its persons or corporations of a
right to collect what otherwise particular class from a tax of which
would be due it and, in this sense, persons and corporations generally
prejudicial thereto, particularly to within the same state or taxing
tax evaders who wish to relent and district are obliged to pay.
are willing to reform are given a
chance to do so and therefore
become a part of the society with a
clean slate.

Immunity from all criminal, civil and Immunity from civil liability only
administrative liabilities arising from
non-payment of taxes

34Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted
by statute must be construed strictly against the taxpayer, who must show compliance
with the law.
The government is not estopped from questioning the tax liability even if amnesty tax
payments were already received
Erroneous application and enforcement of the law by public officers do not block
subsequent correct application of the statute. The government is never estopped by
mistakes or errors by its agents.

16
Applies only to past tax periods, Prospective application
hence retroactive application

There is revenue loss since there None, because there was no actual
was actually taxes due as the person or
taxes due but collection was waived transaction is protected by tax
by the exemption.
government.

Never favored nor presumed in law, and is granted by statute. The terms of
the amnesty or exemption must be strictly construed against the taxpayer
and liberally in favor of the government.

9. Construction and Interpretation of:

a. Tax laws

General Rule Exception

17
Tax laws are liberally interpreted in Liberal interpretation does not apply
favor of the taxpayer and strictly to tax exemptions which should be
against the government. construed in strictissimi juris against
the taxpayer.35

b. Tax exemption and exclusion

General Rule Exceptions

In the construction of tax statutes, 1. The law itself expressly provides

exemptions are not favored and are for a liberal construction thereof.
construed strictissimi juris against
the taxpayer.36 The fundamental 2. In cases of exemptions granted to
theory is that all taxable property religious, charitable and educational
should bear its share in the cost and institutions or to the government or
expense of the government. its agencies or to public property
because the general rule is that they
Taxation is the rule and exemption. are exempted from tax.
He who claims exemption must be
able to justify his claim or right
thereto by a grant express in terms
too plain to be mistaken and too
categorical to be misinterpreted. If
not expressly mentioned in the law,
it must be at least within its purview
by clear legislative intent.

c. Tax rules and regulations

35Reason: Lifeblood doctrine

36Strict interpretation does not apply to the government and its agencies
Petitioner cannot invoke the rule of strictissimi juris with respect to the interpretation of
statutes granting tax exemptions to the NPC. The rule on strict interpretation does not
apply in the case of exemptions in favor of a political subdivision or instrumentality of the
government [Maceda v. Macaraig]

18
 1) General rule only

They shall not be given retroactive application if the revocation,

modification or reversal will be prejudicial to the taxpayers.37

d. Penal provisions of tax laws

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

The purpose of tax laws in imposing penalties for delinquencies is to

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

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly declared

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

I. Scope and Limitation of Taxation

1. Inherent Limitations

a. Public Purpose38

The tax must be used:

1) for the support of the state or
2) for some recognized objects of governments or

37Sec. 246
38Test in determining Public Purposes in tax:
a. Duty Test whether the thing to be threatened by the appropriation of public
revenue is something which is the duty of the State, as a government.
b. Promotion of General Welfare Test whether the law providing the tax directly
promotes the welfare of the community in equal measure.

19
 3) directly to promote the welfare of the community39
b. Inherently Legislative

1) General Rule

Taxation is purely legislative, Congress cannot delegate the power to

others. This limitation arises from the doctrine of separation of powers
among the three branches of government.

2) Exceptions

a) Delegation to local governments40

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

always subject to the limitations which the Congress may provide, the
former having no inherent power to tax.41

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

jurisdiction, it may be exercised by local legislative bodies, no longer merely
by virtue of a valid delegation but pursuant to direct authority conferred by
Section 5,42 Article X of the1987 Constitution, subject to guidelines and

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

affecting the inhabitants of the state or taxing district as a community and not merely as
individuals.
A tax levied for a private purpose constitutes a taking of property without due process
of law.
The purposes to be accomplished by taxation need not be exclusively public. Although
private individuals are directly benefited, the tax would still be valid provided such
benefit is only incidental.
The test is not as to who receives the money, but the character of the purpose for
which it is expended; not the immediate result of the expenditure but rather the ultimate.
In the imposition of taxes, public purpose is presumed.
39 taxation as an implement of police power
40 Art. X. Sec. 5
41 Basco v. PAGCOR
42 Each local government unit shall have the power to create its own sources of revenues

and to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes,
fees, and charges shall accrue exclusively to the local governments.

20
limitations which Congress may provide which must be consistent with the
basic policy of local autonomy.43

b) Delegation to the President44

The power granted to Congress under this constitutional provision to

authorize the President to fix within specified limits and subject to such
limitations and restrictions as it may impose, tariff rates and other duties
and imposts include tariffs rates even for revenue purposes only. Customs
duties which are assessed at the prescribed tariff rates are very much like
taxes which are frequently imposed for both revenue-raising and regulatory
purposes.45

c) Delegation to administrative
agencies

With respect to aspects of taxation not legislative in character.46

c. Territorial

1) Situs of Taxation47

a) Meaning

43 MCIAA v. Marcos, 261 SCRA 667

44 Art.VI, Sec. 28(2)
45 Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 1992
46 Example: assessment and collection

Certain aspects of the taxing process that are not really legislative in nature are
vested in administrative agencies. In these cases, there really is no delegation, to wit:
a) power to value property
b) power to assess and collect taxes
c) power to perform details of computation, appraisement or adjustments.
For the delegation to be constitutionally valid, the law must be complete in itself and
must set forth sufficient standards.
47 It is an inherent mandate that taxation shall only be exercised on persons, properties,

and excise within the territory of the taxing power because:

1. Tax laws do not operate beyond a countrys territorial limit.
2. Property which is wholly and exclusively within the jurisdiction of another state
receives none of the protection for which a tax is supposed to be compensation.
However, the fundamental basis of the right to tax is the capacity of the government
to provide benefits and protection to the object of the tax. A person may be taxed,
even if he is outside the taxing state, where there is between him and the taxing state, a
privity of relationship justifying the levy.

21
 Literally means the place of taxation.

The place or the authority that has the right to impose and collect
48
taxes. It is premised upon the symbiotic relation between the taxpayer
and the State.

b) Situs of Income Tax

1) From sources within the

Philippines
2) From sources without the
Philippines

Determined by the nationality, residence of the taxpayer and source

of income.49

3) Income partly within and

partly without the
Philippines

Allocated or apportioned to sources within or without the

Philippines.50
c) Situs of Property Taxes

48 Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 2001

49 Sec. 42
Theories:
1. Domicillary theory - the location where the income earner resides is the situs of
taxation
2. Nationality theory - the country where the income earner is a citizen is the situs of
taxation
3. Source rule - the country which is the source of the income or where the activity
that produced the income took place is the situs of taxation.
50 For the purpose of computing the taxable income therefrom, where items of gross

income are separately allocated to sources within the Philippines, there shall be
deducted:
(a) the expenses, losses and other deductions properly apportioned or allocated
thereto, and
(b) a ratable part of other expenses, losses or other deductions which cannot definitely
be allocated to some items or classes of gross income. The remainder, if any, shall be
included in full as taxable income from sources within the Philippines.

22
 (1) Taxes on Real Property

The place where the property is located. The applicable concept is lex
situs or lex rei sitae.51

(2) Taxes on Personal Property

Tangible personal property Intangible personal property

Where the property is physically The place where the owner is

located although the owner resides located. The applicable concept is
in another jurisdiction.52 mobilia sequuntur personam.53

d) Situs of Excise Tax

(1) Estate Tax

(2) Donors Tax

Determined by the nationality and residence of the taxpayer and the

place where the property is located.

51 We can only impose property tax on the properties of a person whose residence is in
the Philippines.
52 51 Am Jur. 467
53 movables follow the owner or domicile of the owner

Exceptions:
1. When the property has acquired a business situs in another jurisdiction;
2. When an express provision of the statute provide for another rule.

23
 e) Situs of Business Tax

The place where the act or business is performed or occupation is

engaged in.54

(1) Sale of Real Property

The place or location of the real property.55

(2) Sale of Personal Property

The place of sale.

(3) VAT

Where the goods, property or services are destined, used or

consumed.

d. International Comity56

54 where the transaction is performed because it is that place that gives protection
The power to levy an excise upon the performance of an act or the engaging in an
occupation does not depend upon the domicile of the person subject to the exercise,
nor upon the physical location of the property or in connection with the act or
occupation taxed, but depends upon the place on which the act is performed or
occupation engaged in.
Thus, the gauge of taxability does not depend on the location of the office, but
attaches upon the place where the respective transaction is perfected and
consummated (Hopewell vs. Com. of Customs)
55 So, if the property sold is situated within the Phils., the income derived from such sale is

considered as income within.

56 Comity is the respect accorded to other sovereign nations.

24
 The property of a foreign state or government may not be taxed by
another.57

f. Exemption of Government Entities, Agencies,

and Instrumentalities

i. Agencies performing governmental functions - tax exempt58

ii. Agencies performing proprietary functions - subject to tax.

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation

1) Prohibition against imprisonment for non-

payment of poll tax

No person shall be imprisoned for debt or non-payment of poll tax.59

57 The grounds for the above are:

1. sovereign equality among states
2. usage among states that when one enter into the territory of another, there is an
implied understanding that the power does not intend to degrade its dignity by placing
itself under the jurisdiction of the latter
3. foreign government may not be sued without its consent so that it is useless to assess
the tax since it cannot be collected
4. reciprocity among states
58 The exemption applies only to governmental entities through which the government

immediately and directly exercises its sovereign powers.

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

25
 2) Uniformity and equality of taxation

The rule of taxation shall be uniform and equitable. The Congress

shall evolve a progressive system of taxation.60

3) Grant by Congress of authority to the President

to impose tariff rates

The Congress may, by law, authorize the President to fix tariff rates,
import and export quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development program of the
government.61

4) Prohibition against taxation of religious,

charitable entities, and educational entities

59 Sec. 20, Art. III

The only penalty for delinquency in payment is the payment of surcharge in the form
of interest at the rate of 24% per annum which shall be added to the unpaid amount
from due date until it is paid. (Sec. 161, LGC)
The prohibition is against imprisonment for non-payment of poll tax. Thus, a person
is subject to imprisonment for violation of the community tax law other than for non-
payment of the tax and for non-payment of other taxes as prescribed by law.
The non-imprisonment rule applies to non-payment of poll tax which is punishable only
by a surcharge, but not to other violations like falsification of community tax certificate or
non-payment of other taxes.
60 Sec. 28(1), Art. VI

Uniformity (equality or equal protection of the laws) means all taxable articles or kinds
or property of the same class shall be taxed at the same rate. A tax is uniform when the
same force and effect in every place where the subject of it is found.
Equitable means fair, just, reasonable and proportionate to ones ability to pay.
Progressive system of Taxation places stress on direct rather than indirect taxes, or on
the taxpayers ability to pay
Inequality which results in singling out one particular class for taxation or exemption
infringes no constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164
SCRA 27)
The rule of uniformity does not call for perfect uniformity or perfect equality, because
this is hardly attainable.
61 Art. 28 (2), Art. VI

26
 Subject to the conditions prescribed by law, all grants, endowments,
donations or contributions used actually, directly and exclusively for
educational purposes shall be exempt from tax.62
5) Prohibition against taxation of non-stock, non-
profit institutions

All revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for educational purposes
shall be exempt from taxes and duties.63

6) Majority vote of Congress for grant of tax

exemption

No law granting any tax exemption shall be passed without the

concurrence of a majority of all the members of the Congress.64
7) Prohibition on use of tax levied for special
purpose

62 Sec. 4(4), Art. XIV.

The exemption granted to non-stock, non-profit educational institution covers income,
property, and donors taxes, and custom duties.
To be exempt from tax or duty, the revenue, assets, property or donation must be used
actually, directly and exclusively for educational purpose.
In the case or religious and charitable entities and non-profit cemeteries, the
exemption is limited to property tax.
The said constitutional provision granting tax exemption to non-stock, non-profit
educational institution is self-executing.
Tax exemptions, however, of proprietary (for profit) educational institutions require prior
legislative implementation. Their tax exemption is not self-executing.
Lands, Buildings, and improvements actually, directly, and exclusively used for
educational purposed are exempt from property tax, whether the educational institution
is proprietary or non-profit
63 Sec. 4 (3), Art. XIV

Proceeds of the sale of real property by the Roman Catholic church is exempt from
income tax because the transaction was an isolated one (Manila Polo Club vs. CTA)
Income derived from the hospital pharmacy, dormitory and canteen was exempt
from income tax because the operation of those entities was merely incidental to the
primary purpose of the exempt corporation (St. Paul Hospital of Iloilo vs. CIR)
Where the educational institution is private and non-profit (but a stock corporation), it
is subject to income tax but at the preferential rate of ten percent (10%)
64 Sec. 28(4), Art. VI

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

quorum, but of all members of the Congress.

27
 All money collected or any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If the purpose
for which a special fund was created has been fulfilled or abandoned the
balance, if any, shall be transferred to the general funds of the
government.65

8) Presidents veto power on appropriation,

revenue, tariff bills

The President shall have the power to veto any particular item or
items in an Appropriation, Revenue or Tariff bill but the veto shall not affect
the item or items to which he does not object.66

9) Non-impairment of jurisdiction of the Supreme

Court

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

apportion the jurisdiction of the various courts but may not deprive the
Supreme Court of its jurisdiction over cases enumerated in Sec. 567 hereof.

65 Sec. 29(3), Art. VI

An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the
prices of imported crude oil. In a decide case, it was held that where under an executive
order of the President, this special fund is transferred from the general fund to a trust
liability account, the constitutional mandate is not violated. The OPSF, according to the
court, remains as a special fund subject to COA audit (Osmea vs Orbos, et al., G.R. No.
99886, Mar. 31, 1993)
66 Sec. 27(2), Art. VI
67 The Supreme Court shall have the following powers:

1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers
and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and
habeas corpus.
2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the
Rules of Court may provide, final judgments and orders of lower courts in:
a. All cases in which the constitutionality or validity of any treaty, international or
executive agreement, law, presidential decree, proclamation, order, instruction,
ordinance, or regulation is in question.
b. All cases involving the legality of any tax, impost, assessment, or toll, or any
penalty imposed in relation thereto.
c. All cases in which the jurisdiction of any lower court is in issue.
d. All criminal cases in which the penalty imposed is reclusion perpetua or higher.
e. All cases in which only an error or question of law is involved.
3. Assign temporarily judges of lower courts to other stations as public interest may
require. Such temporary assignment shall not exceed six months without the consent of
the judge concerned.

28
 10) Grant of power to the local government units
to create its own sources of revenue

Each local government unit has the power to create its own revenue
and to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide.68

11) Flexible tariff clause

This clause provides the authority given to the President to adjust

tariff rates under Section 40169 of the Tariff and Customs Code.70
12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents

appurtenant thereto, mosques, non-profit cemeteries, and all lands,
building, and improvements actually, directly and exclusively used for
4. Order a change of venue or place of trial to avoid a miscarriage of justice.
5. Promulgate rules concerning the protection and enforcement of constitutional
rights, pleading, practice, and procedure in all courts, the admission to the practice of
law, the integrated bar, and legal assistance to the under-privileged. Such rules shall
provide a simplified and inexpensive procedure for the speedy disposition of cases, shall
be uniform for all courts of the same grade, and shall not diminish, increase, or modify
substantive rights. Rules of procedure of special courts and quasi-judicial bodies shall
remain effective unless disapproved by the Supreme Court.
6. Appoint all officials and employees of the Judiciary in accordance with the Civil
Service Law. (Art. VIII)
68 Sec 5, Art. X

Local government units have no power to further delegate said constitutional grant to
raise revenue, because what is delegated is not the enactment or the imposition of a
tax, it is the administrative implementation.
The power of local government units to impose taxes and fees is always subject to the
limitations which Congress may provide, the former having no inherent power to tax.
Municipal corporations are mere creatures of Congress which has the power to
create and abolish municipal corporations. Congress therefore has the power to control
over local government units. If Congress can grant to a municipal corporation the
power to tax certain matters, it can also provide for exemptions or even take back the
power (Basco vs. PAGCOR)
69 In the interest of national economy, general welfare and/or national security, the

President upon the recommendation of the National Economic and Development

Authority is empowered:
1) To increase, reduce or remove existing protective rates of import duty, provided
that the increase should not be higher than 100% ad valorem
2) To establish import quota or to ban imports of any commodity
3) To impose additional duty on all imports not exceeding 10% ad valorem.
70 Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)

29
religious, charitable or educational purposes shall be exempt from
taxation.71
13) No appropriation or use of public money for
religious purposes

No public money or property shall be appropriated, applied, paid or

employed, directly or indirectly for the use, benefit, support of any sect,
church, denomination, sectarian institution, or system of religion or of any
priest, preacher, minister, or other religious teacher or dignitary as such
except when such priest, preacher, minister or dignitary is assigned to the
armed forces or to any penal institution, or government orphanage or
leprosarium.72

b. Provisions Indirectly Affecting Taxation

1) Due process

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

process of law73 x x x.

71 Sec. 28(3), Art. VI

Lest of the tax exemption: the use and not ownership of the property
To be tax-exempt, the property must be actually, directly and exclusively used for the
purposes mentioned.
The word exclusively means primarily.
The exemption is not limited to property actually indispensable but extends to facilities
which are incidental to and reasonably necessary for the accomplishment of said
purposes.
The constitutional exemption applies only to property tax.
However, it would seem that under existing law, gifts made in favor or religious
charitable and educational organizations would nevertheless qualify for donors gift tax
exemption. (Sec. 101(9)(3), NIRC)
The constitutional tax exemptions refer only to real property that are actually, directly
and exclusively used for religious, charitable or educational purposes, and that the only
constitutionally recognized exemption from taxation of revenues are those earned by
non-profit, non-stock educational institutions which are actually, directly and exclusively
used for educational purposes. (Commissioner of Internal Revenue v. Court of Appeals,
et al., 298 SCRA 83)
72 Sec. 29(2), Art. VI

Public property may be leased to a religious group provided that the lease will be
totally under the same conditions as that to private persons (amount of rent).
Congress is without power to appropriate funds for a private purpose.
73 Sec. 1, Art. III

30
 2) Equal protection

xxx nor shall any person be denied the equal protection of the
laws.74

3) Religious freedom

No law shall be made respecting an establishment of religion or

prohibiting the free exercise thereof. The free exercise and enjoyment of
religious profession and worship, without discrimination or preference,
shall be forever allowed. 75

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed.76

J. Stages of Taxation

1. Levy

Determination of the persons, property or excises to be taxed, the

sum or sums to be raised, the due date thereof and the time and manner of
levying and collecting taxes.

2. Assessment and Collection

74 Ibid.
75 Sec. 5 Art. III
License fees/taxes would constitute a restraint on the freedom of worship as they are
actually in the nature of a condition or permit of the exercise of the right.
However, the Constitution or the Free Exercise of Religion clause does not prohibit
imposing a generally applicable sales and use tax on the sale of religious materials by a
religious organization. (see Tolentino vs Secretary of Finance, 235 SCRA 630)
76 Sec. 10, Art. III

A law which changes the terms of the contract by making new conditions, or
changing those in the contract, or dispenses with those expressed, impairs the obligation.
The non-impairment rule, however, does not apply to public utility franchise since a
franchise is subject to amendment, alteration or repeal by the Congress when the public
interest so requires.

31
 The manner of enforcement of the obligation on the part of those
who are taxed.77

The two processes together constitute the taxation system.

3. Payment

The act of compliance by the taxpayer, including such options,

schemes or remedies as may be legally available.

4. Refund

The recovery of any tax alleged to have been erroneously or illegally

assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively, or in any
manner wrongfully collected.

K. Definition, Nature, and Characteristics of Taxes

Definition Taxes are the enforced proportional

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

Nature They are not arbitrary exactions but

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

Characteristics 1. It is levied by the law-making body of the

State.78

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

32
 2. It is an enforced contribution.79
3. It is generally payable in money.80

4. It is proportionate in character.81

5. It is levied on persons or property.82

6. It is levied for public purpose or purposes.83

7. It is levied by the State which has jurisdiction

over the persons or property.84

L. Requisites of a valid tax

1) It should be for a public purpose

2) The rule of taxation should be uniform
3) Either the person or property taxed be within the jurisdiction of
the taxing authority
4) The assessment and collection be in consonance with the due
process clause

78 The power to tax is a legislative power which under the Constitution only Congress can
exercise through the enactment of laws. Accordingly, the obligation to pay taxes is a
statutory liability.
79 A tax is not a voluntary payment or donation. It is not dependent on the will or

contractual assent, express or implied, of the person taxed. Taxes are not contracts but
positive acts of the government.
80 Tax is a pecuniary burden an exaction to be discharged alone in the form of money

which must be in legal tender, unless qualified by law, such as R.A. 304 which allows
backpay certificates as payment of taxes.
81 It is ordinarily based on the taxpayers ability to pay.
82 A tax may also be imposed on acts, transactions, rights or privileges.
83 Taxation involves, and a tax constitutes, a burden to provide income for public

purposes.
84 The persons, property or service to be taxed must be subject to the jurisdiction of the

taxing state.

33
 5) The tax must not infringe on the inherent and constitutional
limitations of the power of taxation.85

M. Tax as distinguished from other forms of exactions

1. Tariff

May be used in three (3) senses:

a. A book of rates drawn usually in alphabetical order containing the

names of several kinds of merchandise with the corresponding duties to be
paid for the same.
b. Duties payable on goods imported or exported.86
c. The system or principle of imposing duties on the
importation/exportation of goods.

2. Toll

Sum of money for the use of something, generally applied to the

consideration which is paid for the use of a road, bridge of the like, of a
public nature.

Tax Toll

Demand of sovereignty Demand of proprietorship

Paid for the support of the Paid for the use of anothers
government property

Generally, no limit as to amount Amount depends on the cost of

imposed construction or maintenance of the
public improvement used

85 Taxes are the lifeblood of the government and should be collected without
unnecessary hindrance. But their collection should not be tainted with arbitrariness
86 P.D. No. 230

34
Imposed only by the government Imposed by the government or
private individuals or entities

3. License fee

A charge imposed under the police power for the purposes of

regulation.87

Tax License/Permit Fee

Enforced contribution assessed Legal compensation or reward of an

by sovereign authority to defray officer for specific purposes
public expenses

For revenue purposes For regulation purposes

An exercise of the taxing power An exercise of the police power

Generally no limit in the amount Amount is limited to the necessary

of tax to be paid expenses of inspection and regulation

87Three kinds of licenses are recognized in the law:

1. Licenses for the regulation of useful occupations.
2. Licenses for the regulation or restriction of non-useful occupations or enterprises
3. Licenses for revenue only
Importance of the distinctions between tax and license fee:
1. Some limitations apply only to one and not to the other, and that exemption from
taxes may not include exemption from license fees.
2. The power to regulate as an exercise of police power does not include the power to
impose fees for revenue purposes. (see American Mail Line vs City of Butuan, L-12647,
May 31, 1967 and related cases)
3. An extraction, however, maybe considered both a tax and a license fee.
4. But a tax may have only a regulatory purpose.
5. The general rule is that the imposition is a tax if its primary purpose is to generate
revenue and regulation is merely incidental; but if regulation is the primary purpose, the
fact that incidentally revenue is also obtained does not make the imposition of a tax.
(see Progressive Development Corp. vs Quezon City, 172 SCRA 629)

35
Imposed also on persons and Imposed on the right to exercise
property privilege

4. Special assessment

An enforced proportional contribution from owners of lands

especially or peculiarly benefited by public improvements.88

Tax Special Assessment

Imposed on persons, property and Levied only on land

excise

Personal liability of the person Not a personal liability of the person

assessed assessed, i.e. his liability is limited
only to the land involved

Based on necessity as well as on Based wholly on benefits

benefits received

General application89 Exceptional both as time and place

88 Since special assessments are not taxes within the constitutional or statutory provisions
on tax exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the
Constitution does not apply to special assessments.
However, in view of the exempting proviso in Sec. 234 of the Local Government Code,
properties which are actually, directly and exclusively used for religious, charitable and
educational purposes are not exactly exempt from real property taxes but are exempt
from the imposition of special assessments as well. (see Aban)
The general rule is that an exemption from taxation does not include exemption from
special assessment.
89 see Apostolic Prefect vs Treas. Of Baguio, 71 Phil 547

36
 5. Debt

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

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

Tax Debt

Based on law Based on contracts, express or

implied

Generally, cannot be assigned Assignable

Generally payable in money May be paid in kind

Generally not subject to set-off or May be subject to set-off or

compensation compensation

Imprisonment is a sanction for non- No imprisonment for non-payment

payment of tax except poll tax of debt

Governed by special prescriptive Governed by the ordinary periods of

periods provided for in the Tax Code prescriptions

Does not draw interest except only Draws interest when so stipulated,
when delinquent or in case of default

37
 N. Kinds of Taxes

1. As to object

Personal, capitation, or Property tax Privilege tax

poll tax

Tax of a fixed amount Tax imposed on A charge imposed upon

imposed on persons property, real or the performance of an
residing within a personal, in proportion act, the enjoyment of
specified territory, to its value or in privilege, or the
whether citizens or not, accordance with some engaging in an
without regard to their other reasonable occupation.
property or the method of
occupation or business apportionment.
in which they may be
engaged.90

2. As to burden or incidence

Direct Indirect

90 i.e. community tax.

38
Demanded from the person who
also shoulders the burden of the tax.
It is a tax which the taxpayer is
directly or primarily liable and which
he or she cannot shift to another.
Demanded from a person in the
expectation and intention that he or
she shall indemnify himself or
herself at the expense of another,
falling finally upon the ultimate
purchaser or consumer. A tax which
the taxpayer can shift to another.

3. As to tax rates

Specific Ad valorem Mixed

The computation of the Tax upon the value of Tax rates are partly
tax or the rates of the the article or thing progressive and partly
tax is already provided subject to taxation; the regressive.
for by law. intervention of another
party is needed for the
computation of the tax.

4. As to purposes

General or fiscal Special, regulatory, or

sumptuary

Imposed for the purpose of raising Imposed primarily for the regulation
public funds for the service of the of useful or non-useful occupation
government. or enterprises and secondarily only
for the purpose of raising public
funds.

39
 5. As to scope or authority to impose

National internal revenue Local real property tax, municipal

taxes tax

Imposed by the National Imposed by the municipal

Government. corporations or local government
units.

6. As to graduation

Progressive Regressive Proportionate

Rate or amount of tax Tax rate decreases as Tax based on a fixed

increases as the the amount of income percentage of the
amount of the income to be taxed increases. amount of the property
or earning to be taxed receipts or other basis
increases. to be taxed.91

91 Example: real estate tax.

40
II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

1. Income Tax Systems

a. Global Tax System

All income received by the taxpayer are grouped together, without

any distinction as to the type or nature of the income, and after deducting
therefrom expenses and other allowable deductions, are subjected to tax at
a fixed rate.

b. Schedular Tax System

The various types or items of income92 are classified accordingly and

are accorded different tax treatments, in accordance with schedules
characterized by graduated tax rates. Since these types of income are
treated separately, the allowable deductions shall likewise vary for each
type of income.

Schedular system Global system

There are different tax rates There is a single tax rate

There are different categories of There is no need for classification as

taxable income all taxpayers are subjected to a
single tax rate.

92 compensation, business or professional income

41
Usually used in the income taxation Usually applied to corporations.
of individuals

c. Semi-schedular or semi-global tax system93

A system where the compensation, business or professional income,

capital gain and passive income not subject to final tax, and other income
are added together to arrive at the gross income, and after deducting the
sum of allowable deductions from business or professional income, capital
gain and passive income not subject to final tax, and other income, in the
case of corporations, as well as personal and additional exemptions, in the
case of individual taxpayers, the taxable income is subjected to one set of
graduated tax rates; method of taxation under the law.

2. Features of the Philippine Income Tax Law

Direct tax Progressive Comprehensive Semi-schedular

or semi-global
tax system94

One assessed The tax rates The Philippine

upon the increase as the Income tax law
property, person, tax base adopted the so-
business income, increases. In called
etc. of those who certain cases, comprehensive
pay them. however, final tax situs
taxes are comprehensive
imposed on in the sense that
passive income.95 it practically
applies all

93 approach used in the Philippines

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

42
 possible rules of
tax situs.

3. Criteria in Imposing Philippine Income Tax

Citizenship Principle Residence Principle Source Principle

A citizen of the A resident alien is liable An alien is subject to

Philippines is subject to to pay income tax on Philippine income tax
Philippine income tax his income from because he derives
sources within the income from sources
(a) on his worldwide Philippines but exempt within the Philippines.
income, if he resides in from tax on his income Thus, a nonresident
the Philippines, or from sources outside alien is liable to pay
the Philippines. Philippine income tax
(b) only on his income on his income from
from sources within the sources within the
Philippines, if he Philippines96 despite
qualifies as nonresident the fact that he has not
citizen. set foot in the
Philippines.

4. Types of Philippine Income Tax

Presumptive Income Composite Tax Unitary Income Tax

Tax

96 such as dividend, interest, rent, or royalty

43
A scale of income taxes
is imposed in relation
to a group of persons
actual expenditure and
the presumed income.
5. Taxable Period
Calendar Period
A period of twelve (12)
months commencing
from January 1 and
ending December 31.
97 ex. Feb. 1 to Jan. 31
A tax consisting of a Incomes are arranged
series of separate according to source.
quasi-personal taxes, The separate items are
assessed on the added together and the
particular source of rate applied to the
income with a resulting total income.
superimposed personal
tax on the income as a
whole.
Fiscal Period Short Period
An accounting period of A period of less than
12 months ending on twelve (12) months.
the last day of any
month other than
December.97
44
 6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens98

Citizens of the Philippines who are residing therein.

b) Non-resident citizens99

1. A citizen of the Philippines who establishes to the satisfaction of

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

2. A citizen of the Phils. who leaves the country during the taxable
year to reside abroad, either as immigrant or for employment or on
permanent basis.

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

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

citizen and who arrives in the Phils. at any time during the taxable year to
reside permanently in the country.100

98 Taxable for income derived from all sources based on taxable (i.e., net) income
99 Taxable for income derived within the Philippines based on taxable (i.e., net) income

45
 5. A citizen who shall have stayed outside the Phils. for 183 days or
more by the end of the year.101

2) Aliens102

100 He shall be considered a NRC for the taxable year in which he arrives in the Phils. with
respect to his income derived from sources abroad until the date of his arrival in the Phils.
101 Sec. 22 (E)

The continuity of residence abroad is not essential. If physical presence is established,

such physical presence for the calendar year is not interrupted by reasons of travels to
the Phils. (Rev. Regs. No. 9-73, November 26, 1973)
An overseas contract worker is taxable only on income from sources within the
Philippines. (Sec. 23 (c).
A seaman who is a Filipino citizen and who receives compensation for services
rendered abroad as member of the complement of a vessel engaged exclusively in
international trade is treated as an overseas contract worker.
Length of stay is indicative of intention. A citizen of the Philippines who shall have
stayed outside the Philippines for 183 days or more by the end of the year is a non-
resident citizen. His presence abroad, however, need not be continuous. [RR1-79]
102 What makes an alien a resident or non-resident alien is his intention with regard to
the length and nature of his stay. Thus:
a. One who comes to the Philippines for a definite purpose which in its very
nature may
be promptly accomplished is not a resident citizen.
b. One who comes to the Philippines for a definite purpose which in its very
nature would require an extended stay, and to that end, makes his home temporarily in
the Philippines, becomes a resident, though it may be his intention at all times to return
to his domicile abroad when the purpose for which he came has been consummated
or abandoned. (Sec. 5, RR 2)
Length of stay is indicative of intention.
An alien who shall have stayed in the Philippines for more than one (1) year by
the end of the taxable year is a resident alien
An alien who shall come to the Philippines and stay for an aggregate period of more
than one hundred eighty (180) days during a calendar year shall be considered a non-
resident alien in business, or in the practice of profession, in the Philippines. [Sec.
25(A)(1)] Thus, if an alien stays in the Philippines for 180 days or less during the calendar
year, he shall be deemed a non-resident alien not doing business in the Philippines,
regardless of whether he owns
1. Stock in trade of the taxpayer, or other property of a kind which would properly be
included in an inventory of a taxpayer if on hand at the end of the taxable year
(example: Raw Materials Inventory, Work in Process Inventory, Office Supplies Inventory)
2. Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business (example: Merchandise Inventory)
3. Property used in the trade or business which is subject to the allowance for
depreciation (example: Office Equipment) actually engages in trade or business
therein. (Mamalateo)

46
 a) Resident aliens

Those whose residence are within the Philippines but who are not
citizens thereof.103

b) Non-resident alien104

Those not residing in the Phils. and who are not citizens thereof.105

(1) Engaged in trade or business

An alien who stays in the Philippines for more than 180 days.106

(2) Not engaged in trade or business

An alien who stays in the Philippines for 180 days or less.107

(3) Special Class of Individual Employees

a) Minimum wage earner

103 Sec. 22 [F], NIRC

A mere floating intention, indefinite as to time, to return to another country is not
sufficient to constitute him a transient.
For tax purposes, a resident alien is;
1. An alien who lives in the Phils. with no definite intention to stay as a resident.
2. One who comes in the Phils. for definite purposes which in its very nature would
require an extended stay and to that end, makes his home temporarily in the Phils.
3. An alien who stay within the Phils. for more than 12 months from the date of his
arrival in the Phils.
104 A non-resident alien individual who came to the Phils. and stayed therein for an

aggregate period of more than 180 days during any calendar year shall be deemed a
NRA doing business in the Phils.
105 Sec. 22 (G), id.
106 Sec. 25 [A], NIRC
107 Sec. 25 [B], id.

It is the length of stay in the Philippines that determines whether or not he is engaged
in trade or business. The number of transaction he entered into is immaterial.

47
 A worker in the private sector paid the statutory minimum wage, or
to an employee in the public sector with compensation income of not more
than the statutory minimum wage in the non-agricultural sector where
he/she is assigned.108

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

exempted from the payment of the net income tax.109

b) Corporations110

1) Domestic corporations

Created or organized in the Phils. or under its laws.111

2) Foreign corporations

Created, organized or existing under any laws other than those of the
Phils.

(1) Resident

Engaged in trade or business112 within the Phils.

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

109 They are not required to file an income tax return
Thus: xxx, That minimum wage earners shall be exempt from the payment of income
tax on their taxable income: Provided, further, that the holiday pay, overtime pay, night
shift differential pay and hazard pay received by such minimum wage earners shall
likewise be exempt from income tax.
110 The term shall include partnership, no matter how created or organized, joint stock

companies, joint accounts, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to operating or consortium agreement under a service
contract with the government. (Sec. 24(b), id)
111 liable for income from sources within and without the Philippines (Sec 22[C], id.)
112 The term implies a continuity of commercial dealings and arrangements and

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

48
 (2) Non-resident

Not engaged in trade or business within the Phils.

c. Partnerships113

Partnership is a contract whereby two or more persons bind

themselves to contribute money, property, or industry to a common fund
with the intention of dividing the profits among themselves.114

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their common

profession, no part of the income of which is derived from engaging in any
trade & business.115

e. Estates and Trusts

Estate Trust

The mass of property, rights and An arrangement created by will or

obligations left behind by the co-agreement under which title to
decedent upon his death.116 property is passed to another for

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

tax as such.
Partners are considered stockholders and, therefore, profits distributed to them by the
partnership are considered as dividends.
114 Partnerships, no matter how created or organized, including joint ventures or

consortiums, are taxable.

What are taxable unregistered partnerships?
The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered
partnerships and even associations or joint accounts which have no legal personalities
apart from their individual members. Accordingly, a pool of individual real property
owners dealing in real estate business was considered a corporation for tax purposes
[Afisco Insurance Corporation v. CA, 302 SCRA 1]
115 Sec. 22 (b)

e. g. Law firm
General professional partnerships are not taxable but partners are taxed on their
share of partnership profits actually or constructively paid during the year.
116 Estates may be classified as follows:

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

49
 conservation or investment with the
income therefrom and ultimately the
corpus117 to be distributed in
accordance with the directions of the
creator as expressed in the governing
instrument.118
f. Co-ownerships119

- The tax liability on income of the co-ownership levied directly on the co-owners.
Thus, the heirs shall include in their respective returns their distributive shares of the net
income of the estate.
2. Estates under judicial settlement - are subject to income tax in the same manner
as individual.
- Income received during the settlement of the estate is taxable to the fiduciary
(guardian, executor, trustee, and administrator).
- The return should be filed by executor or administrator of the trust.
117 principal
118 Two (2) Kinds of Trust :

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

2. Revocable Trust - is one where at anytime the power to revest the title to any part
of the corpus of the trust is vested:
(a) in the grantor (creator of the trust) either alone or in conjunction with any
person not having a substantial adverse interest in the disposition of such part of the
corpus or the income therefrom; or
(b) in any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom.
The tax shall be imposed on taxable income of the grantor.
119 General rule: Co-ownership is exempt from income tax because the activities of the

co-owners are usually limited to the preservation of the properties owned in common
and the collection of the income therefrom.
Exceptions: (When co-ownership is subject to tax).
(1) When the income of the co-ownership is invested by the co-owners in other
income-producing properties or income-producing activities, and
(2) When there is no attempt to divide inherited property for more than ten (10) years
and the said property was not under any administration proceedings nor held in trust, an
unregistered partnership is deemed to exist.
Tax liability of co-owners:
The co-owners in exempt co-ownership shall be liable for income tax only in their
separate and individual capacity.
Filing of return:
The owners shall report and include in their respective personal income tax returns
their shares of the net income of the co-ownership.
Test to determine whether co-ownership is a taxable unregistered partnership:
Find out whether the heirs have made substantial improvements on the inherited
property. If so, the implication is that they will engage in business for profit (Evangelista
Doctrine). If that happens, the co-ownership will be taxed as an unregistered partnership.

50
 It is created whenever the ownership of an undivided thing or right
belongs to different persons.

7. Income Taxation

a. Definition

A tax on all yearly profits arising from property, profession, trade or

business, or a tax on persons income, emoluments, profits and the like.120

b. Nature

It is generally regarded as an excise tax. It is not levied upon persons,

property, funds or profits but on the privilege of receiving said income or
profit.

c. General principles

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

derived from sources within and without the Philippines.

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

sources within the Philippines.

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

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

120 Fisher v. Trinidad, GR L-19030, Oct. 20, 1922

51
 4. An alien individual, whether or not a resident of the Philippines, is
taxable only on income derived from sources within the Philippines.

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

sources within and without the Philippines.

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

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

8. Income

a. Definition

It means cash or its equivalent coming to a person within a specified

period, whether as payment for services, interest or profit from
investment. It covers gain derived from capital, from labor, or from both
combined, including gain from sale or conversion of capital assets.121

b. Nature

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

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

specified time, whether as payment for services, interest or profit from
investment. Unless otherwise specified, it means cash or its equivalent.
Income can also be thought of as a flow of the fruits of one's labor.122
Income includes earnings, lawfully or unlawfully acquired,
without consensual
recognition, express or implied, of an obligation to repay and without
restriction as their disposition.

121 It denotes the amount of money or property received by a person or corporation

within a specified time, whether as payment for services, interests, or profits from
investments (Fisher vs. Trinidad, 43 Phil 973)
Income is not merely increase in value of property; but a gain, a profit in excess of
capital as a result of exchange transactions.
122 Conwi v. Court of Tax Appeals

52
 c. When income is taxable

1) Existence of income

There must be gain a value received in the form of cash or its

equivalent as a result of rendition of service or earnings in excess of capital
invested.123

2) Realization of income

a) Tests of Realization

Unless income is deemed realized, then there is no taxable income.

Revenue is generally recognized when both conditions are met:

a. The earning process is complete or virtually complete; and

b. An exchange has taken place.124
b) Actual vis--vis Constructive
receipt

Actual receipt Constructive receipt

Income may be actual receipt or When money consideration or its

physical receipt. equivalent is placed at the control of
the person who
rendered the service without
restriction

123 A mere expectation of profits is not an income

A transaction whereby nothing of exchangeable value comes to or is received by
the taxpayer does not give rise to or create taxable income.
Items or amounts received which do not add to the taxpayers net worth or redound
to his benefits such as amounts merely deposited or entrusted to him are not considered
as gains (CIR vs. Tours Specialist, 183 SCRA 402).
Gain need not be necessarily in cash. It may be in form of payment, reduction or
cancellation of Ts indebtedness, or gain from exchange of property.
124 Manila Mandarin Hotels, Inc. v. CIR

53
 by the payor.125

3) Recognition of income

a. There is income, gain or profit

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

4) Methods of accounting

a) Cash method vis--vis Accrual

method

Cash method Accrual method

Recognition of income and expense Gains and profits are included in

dependent on inflow or outflow of gross income when earned whether
cash.126 received or not, and expenses are
allowed as deductions when
incurred, although not yet paid. It is
the right to receive and not the
actual receipt that determines the
inclusion of the amount in gross
income

125 Sec. 4.108-A, RR 16-2005

Examples of income constructively received:
a. Deposit in banks which are made available to the seller of services without
restrictions
b. Issuance by the debtor of a notice to offset any debt or obligation and
acceptance thereof by the
seller as payment for services rendered
c. Transfer of the amounts retained by the payor to the account of the contractor
d. Interest coupons that have matured and are payable but have not been
encashed
e. Undistributed share of a partner in the profits of a general partnership
126 meaning, you recognize the income when you actually receive the cash payment for

the sale, and you recognize the expense when you actually pay cash for the expense

54
 b) Installment payment vis--vis
Deferred payment vis-vis
127
Percentage completion

Installment Deferred payment Percentage

payment completion

Appropriate when Initial payments exceed Persons whose gross

collections extend over 25% of the gross selling income is derived from
relatively long periods price and such long-term contracts
of transaction shall be shall report such
time and there is a treated as cash sale income upon the basis
strong possibility that which makes the entire of percentage of
full collection will not selling price completion.
be made. taxable in the month of
sale.

d. Tests in determining whether income is earned

for tax purposes

1) Realization test

No taxable income until there is a separation from capital of

something of exchangeable value, thereby supplying the realization or
transmutation which would result in the receipt of income.128

127in long term contracts

128There must be separation from capital of something of exchangeable value (e.g., sale
of asset)

55
 2) Claim of right doctrine or Doctrine of
ownership, command, or control

A taxable gain is conditioned upon the presence of a claim of right to

the alleged gain and the absence of a definite unconditional obligation to
return or repay.

The power to dispose of income is the equivalent of ownership of it.

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

3) Economic benefit test, Doctrine of

proprietary interest

Income realized is taxable only to the extent that the taxpayer is

economically benefited.

Any economic benefit to the employee that increases his net worth is
taxable.

4) Severance test

There is no taxable income until there is a separation from capital of

something which is of exchangeable value129 thereby supplying the
realization or transmutation which would result in the receipt of income.
Thus, income is not taxable unless separated or severed from the capital or
labor that bore it.

129 Eisner vs. Macomer, 252 US 189

56
 9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from

whatever source, whether legal or illegal,130 including the following items:

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

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

130 As such, income includes the following, among others:

1. Treasure found;
2. Punitive damages representing profit lost;
3. Amount received by mistake;
4. Cancellation of the taxpayer indebtedness;
5. Receipt of usurious interest;
6. Illegal gains;
7. Taxes paid and claimed as deduction subsequently refunded;
8. Bad debt recovery.

57
 11. Partner's distributive share from the net income of the general
professional partnership.131
b. Concept of income from whatever source
derived

Implies the inclusion of all income under the law, irrespective of the
voluntary or involuntary action of the taxpayer in producing the gains.132

All income not expressly excluded or exempted from the class of

taxable income, irrespective of the voluntary or involuntary action of the
taxpayer in producing the income.133

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

Taxable Income

Gross Income Net Income or Taxable Income

As to deductions

Allows no deductions Allows deductions

As to exemptions

Grants no exemptions Grants exemptions

As to tax base

131 The above enumeration can be simplified into five (5) categories:
1. Compensation Income - income derived from rendering of services under an
employer-employee relationship.
2. Professional Income - fees derived from engaging in an endeavor requiring special
training as professional as a means of livelihood, which includes, but not limited to, the
fees of CPAs, lawyers, engineers and the like.
3. Business Income - gains or profits derived from rendering services, selling
merchandise, manufacturing products, farming and long-term contracts.
4. Passive Income - income in which the taxpayer merely waits for the amount to
come in, which includes, but not limited to interest income, royalty income, dividend
income, prizes and
winnings.
5. Gains from Dealings in Property It includes all income derived from the disposition
of property whether real, personal or mixed.
132 It includes illegal gains arising from gambling, betting, lotteries, extortion and fraud.
133 Gutierrez v. CIR, CTA case

58
 Gross Income Net Income

Advantages/Disadvantages

Simplifies the income tax Confusing and complex

system process of filing income
tax return

Substantial reduction in corruption Vulnerable to corruption on

and tax account of margin of discretion in
evasion as the exercise of discretion, the grant of deductions
to allow or disallow deductions, is
dispensed with.

More administratively feasible Provides equitable releifs in the

form of
deductions, exemptions and tax
credit

Does away with wastage of Tax audit minimizes fraud

manpower and
supplies

d. Classification of Income as to Source

1) Gross income and taxable income from

sources within the Philippines

1) Interests:

a) Interests derived from sources within the Phils.

b) Interests on bonds, notes or other interest-bearing
obligations of residents, corporate or otherwise.134

134 Sec. 42, (A)( 1)

59
 2) Dividends:

a) From a domestic corporation, and

b) From a foreign corporation 50% or more of the gross
income of which for the 3-year period ending with the close of the
taxable year preceding the declaration of such dividends, or for
such part of such period as the corporation within the Phils.135 has
been in existence, was derived from sources. It must be only in an
amount which bears the same ratio to such dividends as the gross
income of the corporation for such period derived from sources
within the Philippines bears to its gross income from all sources.
3) Compensation for labor or personal services performed in the
136
Phils.

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

any interest in such property, including rentals or royalties for

a) The use of, or the right or privilege to use in the Phils. any
copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or night;
b) The use of, or the right to use in the Phils. any industrial,
commercial or scientific equipment;
c) The supply of scientific, technical, industrial or commercial
knowledge or information;
d) The supply of any assistance that is ancillary and subsidiary
to, and is furnished as a means of enabling the application or
enjoyment of, any such property or right as is mentioned in
paragraph (a), any such equipment as is mentioned in paragraph (b)
or any such knowledge or information as is mentioned in paragraph
(c);

135 Id. (A)(2)

136 Id. (A)(3)

60
 e) The supply of services by a nonresident person or his
employee in connection with the use of property or rights belonging
to, or the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;
f) Technical advice, assistance or services rendered in
connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project or
scheme; and
g) The use of, or the right to use:
1. motion picture films;
2. films or video tapes for use in connection with
television; and
3. tapes for use in connection with radio broadcasting

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

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

as derived entirely from the country where it is sold.137

137Exception to the rule: gain from the sale of shares of stock in a domestic corporation
which is treated as derived entirely from sources within the Phils. regardless of where the
shares are sold.
Passage of title test: it is the prevailing view that in ascertaining the place of sale, the
determination of where and when the title to the goods passes from the seller to the
buyer is decisive.
Enumeration in Section 42 not all-inclusive.
In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149
SCRA 395], the Supreme Court held:
xxx Section 37 (now Section 42) by its language, does not intend the enumeration to
be exclusive. It merely directs that the types of income listed therein be treated as
income from sources within the Phils. a cursory reading of the section will show that it
does not state that it is an all-inclusive enumeration, and that no other kind of income
may be so considered xxx
The Supreme Court further held:
xxx The absence of flight operations to and from the Phils. is not determination of the
source of income on the situs of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the source,
and the source of an income is that activity xxx which produced the income.
Unquestionably the passage documentations in these cases were sold in the Phils. and

61
 2) Gross income and taxable income from
sources without the Philippines

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

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

a. Dividends from foreign corporations in general; and

b. Dividends derived from foreign corporations, 50% or more of
the gross income of which for the 3-year period preceding the
declaration of dividends.

3) Compensation for labor or personal services performed outside

the Phils.

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

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

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

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

located outside the Phils., and

7) Income derived from the purchase of personal property within

and its sale outside the Phils.138

3) Income partly within or partly without

the Philippines

1) Income from transportation such as foreign steamship companies

whose vessel touch the Phil. ports139 and other services rendered partly

the revenue therefrom was derived from a business activity regularly pursued within the
Phils. xxx
138 Sec. 42

62
within and partly outside the Phils. such as foreign corporations carrying on
the business of transmission of telegraph and cable messages between
points outside the Phils.140

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

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

e. Sources of income subject to tax

1) Compensation Income141

All remuneration for services performed by an employee for his

employer, including the cash value of all remuneration paid in any medium
other than cash.142

139 Sec. 163, Regulations

140 Sec. 164, id.
141 Forms of Compensation

a. money
b. in kind
Compensation paid to an employee of a corporation in its stock is to be treated as if
the corporation sold the stock for its market value and paid to the employee in cash.
Living quarters furnished to the employee in addition to cash salary. The rental value
should be reported as income.
Meals given to employee, the value thereof substitutes income.
142 Sec. 78(A)

63
 It includes all remuneration for services rendered by an employee for
his employer unless specifically excluded under the NIRC.143

2) Fringe Benefits144

a) Special treatment of fringe benefits

Applied to fringe benefits given or furnished to managerial or

supervising employees and not to the rank and file.145

b) Definition

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

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

c) Taxable and non-taxable fringe

benefits

It includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances
5. Bonuses
6. Fringe Benefits of rank and file employees
It does not include remuneration paid:
For agricultural labor paid entirely in products of the farm where the labor is
performed, or
For domestic service in a private home, or
For casual labor not in the course of the employer's trade or business, or
For services by a citizen or resident of the Philippines for a foreign govt or an intl
organization.
143 Sec. 2.78.1, RR 2-98
144 Sec. 33

The fringe benefit covered refers to those enjoyed by managerial and supervisory
employees
145 Pursuant to Revenue Regulations No. 3 98 (dated May 21, 1998) implementing

section 33 of the Tax Code.

64
 Taxable fringe benefits Non-taxable fringe benefits

1) Fringe benefits which are

1) Housing Privileges
authorized and exempted from tax
(a) Lease of residential under special laws;
property for the use of the
employee as his usual place of 2) Contributions of the employer for
residence. the benefit of the employee to
retirement, insurance and
(b) Residential Property owned hospitalization benefit plans;
by employer and assigned to
employee as his usual place of 3) Benefits given to the rank and file
residence. employees, whether granted under
a collective bargaining agreement or
(c) Residential property not;
purchased by employer on
installment basis for the use of 4) De minimis benefits;
employer as his usual place of
residence. 5) When the fringe benefit is
required by the nature of, or
(d) Residential property necessary to the trade, business or
purchased by ER and ownership is profession of the employer
transferred to EE as his usual place
of residence. 6) When the fringe benefit is for the
convenience of the employer. This is
(e) Residential property known as Employers Convenience
transferred to employee at less than Rule.155
employers acquisition cost.146

2) Household Expenses refer to

146 Non taxable Housing Fringe Benefits

(a) Housing privilege of military officials of AFP
(b) Housing unit, which is situated inside or adjacent to the premise of a business or
factory. A housing unit is considered adjacent if it is located within the maximum 50
meters from the perimeter of the business premises.
(c) Housing benefit granted to employees on a temporary basis not exceeding three
(3) months
155 Sec. 32, NIRC; Sec. 2.33 [C], RR 3-98

65
expenses of the employee paid by
the employer for household
personnel or other personal
expenses, which shall include:

(a) salaries of household

helper
(b) personal driver of the
employee
(c) payment for homeowner
assoc., etc.
3) Interest on loan at less than
market rate147
4) Expenses for Foreign Travel

General rule:
Expenses for foreign travel
insured by the employee and/or
family members of the employee
borne by the employer shall be
treated as taxable fringe benefits of
the employee.

Except:
Where the expenses for foreign
travel paid by the employer for the
employee are for the purpose of
attending business meeting or

147If the employer lends money to his employee:

Free of interest or at a rate lower than 12% (or prevailing market rate) the interest
foregone by the employer or the difference of the interest assumed by the employer and
the 12% rate shall be treated as taxable fringe benefit.
Applicable to installment payment or loan with interest rate lower than 12% starting
January 1, 1998.

66
convention. The exemption covers
only the following expenses:

a) Inland travel expenses

except lodging cost in hotel
averaging US$ 300 or less per day;148
and

b) Cost of economy or business

class airline ticket.149

5) Membership fees, dues and other

expenses borne by the employer for
his employee, in social or athletic
clubs or other similar
150
organizations.

6) Life or Health Insurance -

General rule:

The cost of life or health

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

Except:

148 Travel expenses should be supported by documents proving the actual occurrences
of the meetings or conventions. Likewise, documents and evidence showing the
business purpose of the employees travel must be presented otherwise, the entire cost
will be considered taxable fringe benefit.
149 However, if the ticket is a first class one, 30% of the cost of the ticket shall be subject to

a fringe benefit tax.

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

67
 a) Contribution of the employer
for the benefits of the employee
pursuant to existing laws.151

b) The cost of premium borne

by the employer for the group
insurance of his employees.

7) Holidays and Vacation Expense

8) Motor Vehicle

a) Motor vehicle purchased by

employer in name of employee.

b) Cash for the purchased

provided by the employer, the
ownership is placed in the name of
the employee

c) Purchase on Installment
basis, the ownership is placed in the
name of the employee

d) Portion of purchased price

shouldered by employer

e) Fleet of motor vehicle

leased by the employer

f) Fleet of Motor vehicles owned

and maintained by employer.152

such as R.A. 8287 (SSS) or R.A. 8291 (GSIS).

151

In case of letters a, b, c and d, regardless of whether the motor vehicle is used for the
152

personal purpose of the employee and partly for the benefit of his employer, the
monetary value shall be the entire value of the benefit.

68
9) Expense Account

a) Expenses incurred by the

employee but paid by his employer.

b) Expenses paid by the

employee but reimbursed by his
employer.153

10) Educational Assistance

General Rule: The cost of the

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

Exception:

a) Education granted to
employee154
Under letters e and f, the fleet of motor vehicles is for the use of the business and the
employees. The value of the benefit shall be the rental payments (e) or the acquisition
cost (f) of all motor vehicles not normally used for sales, freight, delivery service and non-
personal use.
The use of yacht whether owned and maintained or leased by the employer shall be
treated as taxable fringe benefit the value of the benefit shall be measured based on
the depreciation of the Yacht at an estimated useful life of 20 yrs.
The use of aircraft (including helicopters) owned and maintained by the employer
shall be treated as business use and not subject to FBT.
153 Expense account not subject to FBT.

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

b) The expenditures do not partake the nature of personal expenses attributable to
the employee.
Personal expenses of the employee (like groceries) paid for or reimbursed by the
employer are taxable fringe benefits, whether or not duly receipted for in the name of
the EE.
Representation and Transportation Allowances (RATA) refers to fixed amounts which
are regularly received by the employees as part of their monthly compensation income.
They are not treated as Taxable Fringe Benefits but the same are treated as Taxable
Compensation Income.
154 Requisites:

69
 b) Educational Assistance
granted to the dependents of
the employee in the nature
of educational assistance to
the dependents of the
employee through a
competitive scheme under a
scholarship program of the
company.

3) Professional Income

The fees received by a professional from the practice of his

profession, provided that
there is no employer-employee relationship between him and his clients.

4) Income from Business

The income derived from merchandising, mining, manufacturing and

farming operations.

5) Income from Dealings in Property

a) Types of Properties

(1) Ordinary assets

1. Educational grant whereby the study is directly connected with the trade,
business or profession of the ER.
2. And there is a written contract obligating the EE to remain under the employment
for a certain period.

70
 Properties held by the taxpayer in the pursuit of his profession, trade
or business:

i. Stock in Trade;
ii. Property of a kind which would properly be included in the
inventory if on hand at the close of the taxable year;
iii. Property held by the taxpayer primarily for sale to customers
in the ordinary course of trade or business;
iv. Property used in trade or business which in subject to the
allowance for depreciation; and
v. Real property used in trade or business.156

(2) Capital assets

Properties not specifically included in the statutory definition157

constitutes capital assets, the profits or losses on the sale or the exchange
of which are treated as capital gains or capital.158

The statutory definition of "capital assets" practically excludes from

its scope, all property held by the taxpayer if used in connection with his
trade or business.

b) Types of Gains from dealings in

property

(1) Ordinary income vis--vis

Capital gain

156 Sec. 39, [A]

157 Include personal property (not used in trade or business) such as movables in ones
residence, personal vehicles, appliances and furniture for personal use, jewelries etc. as
well as real property (not used in trade or business) such as residential land, idle land not
used in business operations and residential house.
158 Sec. 39, [A]

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

71
 Ordinary gain Capital gain

Any gain from the sale or exchange Any gain from the sale or exchange
of property which is not a capital of property which is a capital asset.
asset.159

(2) Actual gain vis--vis

Presumed gain

Actual gain Presumed gain

Excess of the cost from a sale of Presumption of law that the seller
asset. realized gains, which is taxed at 6%
of the selling price or fair market
value, whichever is higher.

(3) Long term capital gain vis--

vis Short term capital gain

Long term capital gain Short term capital gain

The profit realized from selling or The profit realized from selling or
exchanging a capital asset held for exchanging a capital asset held for
more than a specified period, usu. less than a specified period, usu. one
one (1) year.160 (1) year.161

(4) Net capital gain, Net capital

loss

Net Capital gain Net capital Loss

159 Sec. 22, [Z]

160 Blacks Law Dictionary, 9th Ed.
161 ibid.

72
The excess of the gains from sales or The excess of the losses from sales
exchange of capital assets over the or exchanges of capital assets over
losses from such sales or the gains from such sales or
exchanges.162 exchanges.163

(5) Computation of the amount

of gain or loss

The gain from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or adjusted basis
for determining gain, and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized. The amount
realized from the sale or other disposition of property shall be the sum of
money received plus the fair market value of the property received.164

(a) Cost or basis of the

property sold

Acquired by purchase The cost of the property

Acquired by inheritance The fair market price or value as of

the date of acquisition.

Acquired by gift The same as if it would be in the

hands of the donor or the last
preceding owner by whom it was
not acquired by gift.

162 Sec. 39, [A, 2]

163 Sec. 39, [A, 3]
164 Sec. 40 (A)

73
Acquired for less than an adequate The amount paid by the transferee
consideration for the property.165

(b) Cost or basis of the

property exchanged
in corporate
readjustment

(1) Merger
(2) Consolidation

A merger or consolidation has income tax consequences to the

corporation which is a party to the merger or consolidation, to its
stockholders, and to its security holders. To the corporation, or to its
stockholders, or to its security holders, loss is not recognized from the
merger or consolidation.166

Gain will be recognized only if, on the exchange under the merger or
consolidation, the taxpayer received cash or property. The gain to be
recognized should not exceed the sum of money and the fair market value
of the property received.
(3) Transfer to a
controlled
corporation167

When a taxpayer transfers property to a corporation, in

consideration of stock received for the transfer, as a result of which
transfer, the taxpayer168 gains control of the corporation, no loss is
recognized on the transfer of property.169

165 Id., (B)

166 Id., (C)
167 tax-free exchanges
168 alone or together with others not exceeding four [or a total of five]
169 Id., (C)(2)(c), last par.

Suppose the transfer resulted in a gain to the transferor, will the gain be recognized?
Gain will be recognized only if on the transfer, the taxpayer received cash or property in

74
 (c) Recognition of gain or
loss in exchange of
property

(1) General rule

Upon the sale or exchange or property, the entire amount of the gain
or loss, as the case may be, shall be recognized.170

(a) Where
no gain or
loss shall be
recognized

a) Exchange solely in kind171 in legitimate mergers or consolidations.

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

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

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

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

3) A shareholder exchanges stock in a corporation which is a

party to the merger or consolidation solely for the stock of another
corporation, also a party to the merger or consolidation.

4) A security holder of a corporation which is a party to the

merger or consolidation exchanges his securities in such corporation

addition to the shares received. The gain to be recognized shall not exceed the sum of
money and fair market value of the property received.
If before the transfer to the corporation, the transferor already had control over the
corporation, the gain or loss on the transfer will be recognized
170 Id., (C) (1)
171 exchange of property solely for stocks

75
 solely for stock or securities in another corporation, a party to the
merger or consolidation.

b) Transfer or exchange of property for stock resulting in acquisition

of corporate control.172
(2) Exceptions

(a) Meaning
of merger,
consolidatio
n, control
securities

"Merger" or "consolidation means:

1. the ordinary merger or consolidation, or

2. the acquisition by one corporation of all or substantially all
the properties of another corporation solely for stock.173
"Control means ownership of stocks in a corporation possessing at
least fifty-one percent (51%) of the total voting power of all classes of
stocks entitled to vote.174

(b) Transfer
of a

172 A person exchanges his property for stock or unit of participation in a corporation of
which as a result of such exchange said person, alone or together with others, not
exceeding four persons, gains control of said corporation
Control means ownership of stocks in a corporation possessing at least 51% of the
total voting power of all classes of stock entitled to vote.
The items enumerated above are also called tax-exempt exchanges.
173 Provided:

1. It must be undertaken for a bona fide business purpose and not solely for the
purpose of escaping the burden of taxation
2. In determining whether a bona fide business purpose exists, each and every step of
the transaction shall be considered and the whole transaction or series of transaction
shall be treated as a single unit.
3. In determining whether the property transferred constitutes a substantial portion of
the property of the transferor, the term 'property' shall be taken to include the cash
assets of the transferor.
174 Id., (C)(6)

76
 controlled
corporation
175

(6) Income tax treatment of

capital loss

(a) Capital loss limitation

rule176

Capital losses are deductible only to the extent of capital gains.

(b) Net loss carry-over

rule177

If any taxpayer178 sustains in any taxable year a net capital loss

1. Such net capital loss cannot be deducted from ordinary income
due to the loss limitation rule;
2. Such loss could be carried over to the next taxable year as a
deduction against net capital gain in an amount not in excess of the taxable
income in the year the loss was sustained; and
3. Such loss shall be treated as a loss from the sale or exchange of
capital assets held for not more than twelve (12) months.179
(7) Dealings in real property
situated in the Philippines180

175 supra
176 applicable to both corporations and individuals
177 applicable only to individuals
178 other than a corporation
179 Sec. 39 [D]
180 The real property involved must be considered capital asset. A capital asset is

property held by the taxpayer whether or not connected in his trade or business except:

77
 6% final tax - on the gross selling price, or the current fair market
value at the time of the sale, whichever is higher.181

(8) Dealings in shares of stock

of Philippine corporations

(a) Shares listed and

traded in the stock
exchange

Not subject to income tax but to percentage tax of of 1% of the

gross selling price.

(b) Shares not listed and

traded in the stock
exchange

A final tax at the rates as follows:

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

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

(9) Sale of principal residence

Not liable for capital gains tax when:

a. Sold or disposed of by natural persons.

1. Stock in trade or other property of any kind which would be included in the
inventory of the taxpayer if on hand at the end of the taxable year.
2. Property primarily held for sale to customers in the ordinary course of trade or
business.
3. Property used in trade or business subject to depreciation.
4. Real property used in trade or business.
181 Sec. 24 (D)

78
 b. The proceeds of the sale are fully utilized in acquiring or
constructing a new principal residence within 18 calendar months from the
date of sale or disposition.
c. The Commissioner is duly notified by the taxpayer within 30 days
from the date of sale or disposition through a prescribed return of his
intention to avail of the tax exemption.
d. A deposit is made of the 6% capital gain tax otherwise due, in cash
or managers check, in an interest-bearing account with an Authorized
Agent Bank (AAB), under an Escrow Agreement between the taxpayer and
the Bureau of Internal Revenue that the same shall be released to the
taxpayer when the proceeds of the sale shall have been utilized as
intended.

e. The tax exemption can only be availed of once every 10 years.182

6) Passive Investment Income

a) Interest Income

An earning derived from depositing or lending of money, goods or

credits.183

b) Dividend Income184

(1) Cash dividend

182 Sec. 24 (D)(2)

Conditions for tax exemption of gain from the sale or exchange of principal residence:
1. Proceeds are fully utilized in acquiring or constructing a new principal residence
within18 months from the date of sale or disposition;
2. Historical cost or adjusted basis or the real property sold or disposed shall be carried
over to the new principal residence built or acquired;
3. Notice to the Commissioner of Internal Revenue shall be given within thirty (30) days
from the date of sale or disposition; and
4. If the proceeds of the sale were not fully utilized, the portion of the gain presumed
to have been realized from the sale or disposition shall be subject to capital gains tax
183 General rule: Interest received by a taxpayer, whether usurious or not, is subject to

income tax.
Except: When interest income is exempted by law from income tax.
184 Dividends means any distributions made by a stock corporation to its stockholders

(SHs)) out of its earnings or profits and payable to its SHs in money or other property.

79
 A dividend paid in cash and is taxable to the extent of the cash
received.

(2) Stock dividend

A transfer of a portion of retained earnings to capital stock by action

of stockholders. It simply means the capitalization of retained earnings.185

(3) Property dividend

A dividend paid in property186 held by the corporation and to the

extent of the FMV of the property received at the time of the distribution.

(4) Liquidating dividend

A dividend distributed to the shareholders upon dissolution of the

corporation.

c) Royalty Income

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

80
 Compensation or payment for the use of property and is paid to the
owner of a right.

d) Rental Income

(1) Lease of personal property

(2) Lease of real property

Earnings derived from leasing of real estate as well as personal

property. 187 It includes all other obligations assumed to be paid by the
lessee to the third party in behalf of the lessor.

(3) Tax treatment of

(a) Leasehold
improvements by
lessee

Outright Method Spread Out Method

The fair market value of the building Allocate the depreciated value over
or improvement shall be reported as the remaining term of the lease
additional rent income. contract. Every year, an aliquot part
of the depreciated value
should be reported as additional
rent in addition to the regular rent
income.

Taxes paid by the tenant (lessee) to or for a lessor for a business property are
187

additional rent and constitute income taxable to the lessor.

81
 (b) VAT added to
rental/paid by the
lessee

Any additional amount paid, directly or indirectly, by the lessee in

consideration for the lease is considered rental. Therefore, taxes paid by
the lessee on leased property are part of rental income of the landlord.

(c) Advance rental/long

term lease

Advanced rental is a Security Advance rental is prepaid rental

Deposit which restricts the lessor as received without restriction as to its
to its use use

The amount shall be excluded in The entire amount is taxable in the

the determination of rental income. year it is received.

7) Annuities, Proceeds from life insurance

or other types of insurance

Annuities Amounts payable yearly or at other

regular intervals for a certain or
uncertain period. They also
represent as installment payments
for life insurance sold by insurance
companies.188

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

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

82
Proceeds of life insurance Paid by reason of the death of the
insured to his estate or to any
beneficiary,189 directly or in trust.

Return of insurance premium190

8) Prizes and awards

Contest prizes and awards received are generally taxable. Such

payment constitutes gain derived from labor.191

9) Pensions, retirement benefit, or

separation pay

189 Individual, partnership, or corporation, but not a transferee for a valuable

consideration.
If the proceeds are retained by the insurer, the interest thereon is taxable;
190 If such amounts (when added to amounts already received before the taxable year

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

1. Prizes and awards received in recognition of religious, charitable, scientific,

educational, artistic, literary or civic achievements are exclusions from gross income if:
a. The recipient was selected without any action on his part to enter a contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition
to receiving the prize or award.
2. Prizes and awards granted to athletes in local and intl sports competitions and
tournaments held in the Philippines and abroad and sanctioned by their national
associations shall be exempt from income tax.

83
 Pension refers to allowance paid regularly to a person on his
retirement or to his dependents on his death, in consideration of past
services, meritorious work, age, loss or injury.

Retirement benefits received under RA 7641 and those received by

officials and employees of private firms in accordance with a reasonable
private benefit plan maintained by the employer.192

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

employer as a consequence of separation of such official or employee from
the service of the employer because of death, sickness, other physical
disability or for any cause beyond the control of the employee.193

The social security benefits, retirement gratuities, pensions and other

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

Payments of benefits due or to become due to any person residing in

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

Benefits received from or enjoyed under the Social Security System.

Benefits received from the GSIS, including retirement gratuity

received by government officials and employees.

10) Income from any source whatever

192 Requisites:
1. The retiring employee has been in the service of the same employer for at least 10
years.
2. The retiring employee is not less than 50 years of age at the time of his retirement
3. The benefits shall be availed of by an employee only once.
4. That there be a reasonable private benefit plan as defined below.
193 i.e., the separation of the employee must be involuntary and not initiated by him

84
 All income not expressly excluded or exempted from the class of
taxable income, irrespective of the voluntary or involuntary action of the
taxpayer in producing the income.194

a) Forgiveness of indebtedness

Dependent upon the circumstances, may amount to:

1. income;195
2. a gift;196 or
3. a capital transaction.197

b) Recovery of accounts previously

written off

To 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.198
There is an income tax benefit when the deduction of the bad debt in the
prior year resulted in lesser income and hence, tax savings for the
company.199

194 Gutierrez vs. Collector of Internal Revenue, CTA case no. 65, August 31, 1965.
195 If, for example, an individual performs services for a creditor who, in consideration
thereof cancels the debt, income to that amount is realized by the debtor as
compensation for his service.
196 If, however, a creditor merely desires to benefit a debtor and without any

consideration thereof cancels the debt, the amount of the debt is a gift from the creditor
to the debtor and need not be included in the latters gross income.
197 If a corporation to which a stockholder is indebted forgives the debt, the transaction

has the effect of payment of dividends (Sec. 50, Rev. Reg. 2)

198 Tax Benefit Rule
199 Sec. 4, RR 5-99

85
 c) Receipt of tax refunds or credit200

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

practice of profession is taxable income in the year of receipt to the extent
of the income tax benefit of said deduction.201

d) Income from any source

whatever202
f. Source rules in determining income from within
and without203

Income from sources within the Philippines:

1) Interests

Interests derived from sources within the Philippines, and

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

2) Dividends

The amount received as dividends:

200 Tax credit takes place upon the issuance of a tax certificate or tax credit memo,
which can be applied against any sum that may be due and collected from the
taxpayer.
201 i.e., the tax benefit rule applies

However, the following tax refunds are not to be included in the computation of gross
income:
1. Philippine income tax, except the fringe benefit tax
2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a
credit for such tax in the year it was paid or incurred.
3. Estate and donors taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (Special assessments)
5.ValueAddedTax
6. Fines and penalties due to late payment of tax
7.Final taxes
8. Capital Gains Tax
202 supra
203 Sec. 42

86
 (a) from a domestic corporation; and

(b) from a foreign corporation, unless less than fifty percent

(50%) of the gross income of such foreign corporation for the three-
year period ending with the close of its taxable year preceding the
declaration of such dividends or for such part of such period as the
corporation has been in existence was derived from sources within
the Philippines as determined under the provisions of this Section;
but only in an amount which bears the same ration to such dividends
as the gross income of the corporation for such period derived from
sources within the Philippines bears to its gross income from all
sources.

3) Services

Compensation for labor or personal services performed in the

Philippines.

4) Rentals

Rentals and royalties from property located in the Philippines

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

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

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

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

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

knowledge or information;

87
 (d) The supply of any assistance that is ancillary and subsidiary
to, and is furnished as a means of enabling the application or
enjoyment of, any such property or right as is mentioned in
paragraph (a), any such equipment as is mentioned in paragraph (b)
or any such knowledge or information as is mentioned in paragraph
(c);

(e) The supply of services by a non-resident person or his

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

(f) Technical advice, assistance or services rendered in

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

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

(i) Motion picture films;

(ii) Films or video tapes for use in connection with
television; and
(iii) Tapes for use in connection with radio broadcasting.
5) Royalties204

6) Sale of real property

Gains, profits and income from the sale of real property

located in the Philippines.
7) Sale of personal property
Gains, profits and income from the sale of personal property

204 See 4) Rentals, supra

88
 Items of gross income treated as income from sources without
the Philippines:

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

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

(3) Compensation for labor or personal services performed

without the Philippines;

(4) Rentals or royalties from property located without the

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

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

8) Shares of stock of domestic corporation

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

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

g. Situs of Income Taxation205

h. Exclusions from Gross Income206

205 See Inherent Limitations, Territorial, supra

206 See Sec. 32 (B)

89
 Income received or earned but is not taxable as income because it is
exempted by law or by treaty. Receipts which are not in fact income are
also excluded from Gross Income.207
1) Rationale for the exclusions

They

a. Represent return of capital;

b. Are not income, gain or profit;
c. Are subject to another kind of internal revenue tax;
d. Are income, gain or profit that are expressly exempt from income
tax.208

2) Taxpayers who may avail of the

exclusions

All kinds of taxpayers - individuals, estates, trusts and corporations,

whether citizens, aliens, whether residents or non-residents.

3) Exclusions distinguished from deductions

and tax credit

Exclusions Deductions Tax credit

Income received or The items or amounts An amount subtracted

earned but is not authorized by law to be from an individuals or
taxable because by law subtracted from the entitys tax liability to
or treaty. Such tax pertinent items of gross arrive at the total tax
207 Exclusions are in the nature of tax exemptions, thus, the claimant must establish them
convincingly.
208 under the Constitution, Tax treaty, Tax Code, or general or a special law.

90
free income is not to be income to arrive at liability.211
included in the income taxable income.210
tax return unless
information regarding it
is specifically called
for.209

4) Under the Constitution

a) Income derived by the government

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

From:

1) any public utility; and

2) the exercise of any essential governmental function.212

5) Under the Tax Code

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.213

b) Return of premium paid

209 Sec. 61, Rev. Regs. No. 2

210 Secs. 34 and 35, NIRC
211 M.E. Holding Corp. vs. Commissioner of Internal Revenue, CTA Case No. 5314, prom.

August 17, 1998 citing Blacks Law Dictionary, 6 th Ed.

212 Thus, income from sources other than those mentioned is subject to income tax.
213 Reason for exclusion: The contract of insurance is a contract of indemnity, hence, the

proceeds thereof are considered indemnity rather than a gain or profits.

Instances when proceeds from insurance are taxable:
a) Where proceeds are held by the insurer under an agreement to pay interest. The
interest is included in determination of gross income.
b) Where the transfer is for valuable consideration.

91
 Paid by the insured under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term of the
contract or upon surrender.214

c) Amounts received under life

insurance, endowment or annuity
contracts

If the insured dies, and the beneficiary receives the life insurance
proceeds, these are not taxable income because they are excluded from
gross income.

If the insured does not die and survives the designated period, the
amount pertaining to the premiums he paid are excluded from gross
income, but the excess shall be considered part of his gross income.

d) Value of property acquired by gift,

bequest, devise or descent

The income from such property, as well as gift, bequest, devise, or

descent of income from property, in cases of transfers of divided interest,
shall be included in gross income.

The estate of the testator or the decedent is subject to estate tax,

while the heirs or
beneficiary/ies are not required to pay donees tax as the same was already
abolished. The value of the bequest and/or the devise received by the heirs
or beneficiary/ies is not included in the computation of their gross income
since gifts, bequest and devises are excluded from gross income.215

e) Amount received through accident

or health insurance

214 Reason for the exclusion: The return of premium is a mere return of capital. However,
where the included in the gross amount received exceed the aggregate premiums paid,
the excess shall be income
215 Sec. 32[B], NIRC

92
 As compensation for personal injuries or sickness, plus the amounts
of any damages received, whether by suit or agreement, on the account of
such injuries or sickness.216

f) Income exempt under tax treaty

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

binding upon the Government of the Philippines.217

g) Retirement benefits, pensions,

gratuities, etc.

a) Retirements benefits received under RA 7641 and those received

by officials and employees of private firms in accordance with reasonable
private benefit plan.218
b) Any amount received by an official or employees or by his heirs
from the employer as a consequence of separation from service due to
death, sickness or other physical disability beyond the control of the said
official or employer.

216 Example of damages recovered from personal injuries: Moral damages for personal
injuries.
If the award of damages is to compensate loss of property or an award of damages
to compensate loss of income / profits, such is subject to tax.
217 Sec. 32[B](5), id.
218 Requisites:

1. The retiring official or employees has been in service of the same employer for at
least ten years.
2. Is not less than 50 yrs. of age at the time of his retirement and
3. Available to official or employee only once.
A reasonable private benefit plan means a pension; gratuity, stock bonus or profit
sharing plan maintained by an employer for the benefit of some or all of his employees
a. wherein contributions are made by such employer or employees, or both, for the
purpose of distributing to such employer the earnings and principal of the fund thus
accumulated; and
b. wherein said plan provides that at no time shall any part of the principal or
income of the fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of said employee

93
 c) Terminal leave and other social security benefits.219
d) Benefits received under the US veterans Administration.
e) Benefits received from SSS
f) Benefits received from GSIS.

h) Winnings, prizes and awards,

including those in sports
competition

1) Prizes and Awards - to be excluded, the following conditions must

concur:

a. Prizes and award made primarily in recognition of

religious, charitable, scientific, educational, artistic, literary, or
civic achievement.

b. The recipient was selected without any action on his part

to enter the contest or proceeding.
c. The recipient is not required to render substantial future
services as a condition in receiving the award.
2) Prizes and Awards in Sports Competition

All prizes and award granted to athletes in local and

international sports competitions and tournaments whether held
in the Phils. or abroad and sanctioned by sports associations.
6) Under a Tax Treaty

To the extent required by any treaty obligation binding upon the

Philippine government.

7) Under Special Laws

219The terminal leave pay of government employees whose employment is co-terminus is

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

94
 a) Prizes received by winners in charity horse race sweepstakes from
PCSO.
b) Back pay benefits

c) Income of cooperative marketing association

d) Salaries and stipends in dollars received by non - Filipino citizens
on the technical staff of International Rice Research Institutes (IRRI)
e) Supplemental allowances per diem, benefits received by officer or
employees of the Foreign Service.
f) Income from bonds and securities for sale in the international
market.

95
 i. Deductions from Gross Income220

1) General rules

a) Deductions must be paid or

incurred in connection with the
taxpayers trade, business or
profession

It must be directly connected with trade or business or profession of

the taxpayer.

b) Deductions must be supported by

adequate receipts or invoices221

The claimed deduction must be evidenced by official receipts or

other adequate records.222
2) Return of capital223

a) Sale of inventory of goods by

manufacturers and dealers of
properties

220 These are items or amounts authorized by the law to be subtracted from the pertinent
items of the gross income to arrive at the taxable income.
Basic Principles Governing Tax Deductions:
He who claims it must point to the specific provision of the statute authorizing it, and
he must be able to prove that he is entitled to it.
If the exemption is not expressly stated in the law, the taxpayer must at least be within
the purview of the exemption by clear legislative intent. However, if there is an express
mention in the law or if the taxpayer falls within the purview of the exemption by clear
legislative intent, the rule on strict construction against the taxpayer-claimant will not
apply.
Unlike gross income, there is no catch-all provision for deductions. Deductions must
comply with the substantiation requirement.
221 except standard deduction
222 The evidence must establish the following;

a) the amount of expenses being deducted

b) the direct relation of such to the development, management, operation, and/or
conduct of the trade, business or profession of the taxpayer.
223 cost of sales or services

96
 b) Sale of stock in trade by a real
estate dealer and dealer in
securities

c) Sale of services

3) Itemized deductions224

a) Expenses225

(1) Requisites for deductibility

1. It must be ordinary and necessary.

2. It must be paid or incurred during the taxable year.
3. It must be paid or incurred in carrying on or which are directly
attributable to the development, management, operation and/or conduct
of the trade, business or exercise of a profession.
4. The amount must be reasonable.

224 The following can claim itemized deductions:

a. Corporations, whether domestic or (resident) foreign
b. General Professional Partnerships
c. Individuals engaged in trade, profession or business (citizen, resident alien, non-
resident alien doing business in the Philippines)
d. Estates and trusts engaged in trade or business
e. Proprietary educational institutions and hospitals (non-profit)
f. Government-owned or controlled corporations
Only individuals, except non-resident aliens, can elect between itemized deductions
and optional standard deduction.
225 Sec. 34(A)

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

97
 5. It must be substantiated with sufficient evidence, such as official
receipts or other adequate records, showing:
i. the amount of the expense being deducted, and
ii. the direct connection or relation of the expense being
deducted to the development, management, operation
and/or conduct of the trade, business or profession of the
taxpayer
6. It is not contrary to law, public policy or morals.
7. The tax required to be withheld on the amount paid or payable
must have been paid to the BIR by the taxpayer, who is constituted as a
withholding agent of the government.226

(a) Nature: Ordinary and

necessary227

Ordinary Necessary

When it connotes a payment, which Where the expenditure is

is normal in relation to the business
of the taxpayer and the surrounding
circumstances.
appropriate or helpful in the
development of taxpayers business
or that the same is proper for the
purpose of realizing a profit or
minimizing a loss.

(b) Paid and incurred

during taxable year

226 For instance, withholding tax on compensation income paid to employees, fringe
benefit tax on fringe benefits given to managerial and supervisory employees, etc. (
Sec. 2.58.5, RR 2-98 as amended by Sec. 6, RR 14-2002)
227 The two conditions must concur. A court may decide on when an expense is, or is

not, ordinary, but as much as possible, it will refuse to substitute its judgment for that of
the taxpayer on the necessity of an expense.

98
 Paid Incurred

The payment is on cash receipt The payment thereof is on accrual

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

(2) Salaries, wages and other

forms of compensation for
personal services actually
rendered, including the
grossed-up monetary value
of the fringe benefit
subjected to fringe benefit
tax which tax should have
been paid228

(3) Travel/Transportation
229
expenses

(4) Cost of materials

Materials and supplies are deductible only to the amount actually

consumed or used in the operation during the taxable year.

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

229 For travel expenses, here and abroad, while away from home, in the pursuit of trade,
business or profession.
Include meals and lodging, here and/or abroad.
While away from home means away from principal place of business
If the trip is undertaken for purposes other than business or exercise of profession, the
transportation expenses are personal expenses and the meals and lodging are living
expenses and are not deductible.
Transportation expenses of an employee from his residence to his office and back are
not deductible. They are personal expenses. However, transportation expenses from his
office to his customers place of business and back are deductible. They are business
expenses.

99
 (5) Rentals and/or other
payments for use or
possession of property230

(6) Repairs and maintenance231

(7)Expenses under lease

232
agreements

(8) Expenses for professionals

(9) Entertainment expenses233

(10) Political campaign

expenses

(11) Training expenses

b) Interest234

(1) Requisites for deductibility

a. There must be a valid and existing indebtedness

b. The indebtedness must be that of the taxpayer;
c. The interest must be legally due and stipulated in writing;

230 Required as a condition for the continued use or possession, for purposes of the trade,
business or profession, of property to which the taxpayer has not taken or is not taking
title or in which he has no equity other than that of a lessee, user or possessor.
231 Extraordinary repairs - those in the nature of replacements, alteration, and expansion

to the extent that they arrest deterioration and prolong the life of the property.
Ordinary repairs - those made to keep the property ordinarily efficient working
condition and do not materially add to the value of the property
232 See 5) Rentals, etc., supra
233 Include representation expenses and/or depreciation or rental expense relating to

entertainment facilities. (1st par., Sec. 2, Rev. Regs. 110-2002)

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

connection with the taxpayer's profession, trade or business shall be allowed as

deduction from gross income. (Sec. 34, B (1))

100
 d. The interest expense must be paid or incurred during the taxable
year;
e. The indebtedness must be connected with the taxpayer's trade,
business or exercise of profession;
f. The interest payment arrangement must not be between related
taxpayers;235
g. The interest is not expressly disallowed by law to be deducted
from the taxpayers gross income;236 and
h. The amount of interest deducted from gross income does not
exceed the limit set forth in the law.237

(2) Non-deductible interest

expense

a. Interest on preferred stock, which in reality is dividend

b. Interest on unpaid salaries and bonuses

c. Interest calculated for cost keeping

d. Interest paid where parties provide no stipulation in writing to pay

interest

e. If the indebtedness is incurred to finance petroleum exploration

f. Interest paid on indebtedness between related taxpayers238

235 infra
236 e.g., interest on indebtedness to finance petroleum operations
237 In other words, the taxpayers otherwise allowable deduction for interest expense shall

be reduced by forty-two percent (42%) of the interest income subjected to final tax
beginning November 1, 2005 under R.A. 9337, and that effective January 1, 2009, the
percentage shall be thirty-three percent (33%) (Sec.34(B)(1)
238 1. Members of the same family, brothers and sisters, whether in full or half blood,

spouse, ancestors and lineal descendants

2. Stockholders and a corporation, when he holds more than 50% in value of its
outstanding capital stock, except in case of distribution in liquidation
3. Corporation and another corporation, with interlocking stockholders

101
 g. Interest on indebtedness paid in advance through discount or
otherwise and the taxpayer reports income on cash basis.239

(3) Interest subject to special

rules

(a) Interest paid in

advance

If the indebtedness is payable in periodic amortizations, the amount

of interest which corresponds to the amount of the principal amortized or
paid during the year shall be allowed as deduction in such taxable year.

(b) Interest periodically

amortized240

(c) Interest expense

incurred to acquire
property for use in
trade/business/profe
ssion

At the option of the taxpayer, may be allowed as a deduction or

treated as a capital expenditure.241

c) Taxes242

(1) Requisites for deductibility

4. Grantor and fiduciary in a trust

5. Fiduciary of a trust and fiduciary in another trust, if the same person is a grantor
with respect to each trust
6. Fiduciary of a trust and beneficiary of such trust
239 Interest is allowed as a deduction in the year the indebtedness is paid, not when the

interest was paid in advance.

240 See a), above
241 Sec. 34 (B)(3)
242 The word taxes means taxes proper and no deduction should be allowed for
amounts representing interest, surcharge, or penalties incident to delinquency. (Sec. 80,
RR-2)

102
 1. It must be paid or incurred within the taxable year.
2. It must be paid or incurred in connection with the
taxpayers trade, profession or business.243
3. It must be imposed directly on the taxpayer.
4. It must not be specifically excluded by law from being
deducted from the taxpayers gross income.

(2) Non-deductible taxes

Taxes not allowed as deduction from gross income to arrive at

taxable income:
a. Income tax provided under the NIRC
b. Income taxes imposed by authority of any foreign country244

243 Examples:
1. Import duties
2. Business taxes
3. Occupation taxes
4. Privilege and license taxes
5. Excise taxes
6. Documentary stamp taxes
7. Automobile registration fees
8. Real property taxes
Limitation: In the case of a nonresident alien individual engaged in trade or
business (NRAETB) and a resident foreign corporation (RFC), the deductions for taxes
shall be allowed only if and to the extent that they are connected with income from
sources within the Philippines.
244 Income tax imposed by a foreign country are deductible only if:

a) the taxpayer is qualified to avail of tax credit;

b) He does not signify in its return his desire to avail of the same.

103
 (3)Treatment/of
surcharges/interests/fines/
for delinquency245

(4) Treatment of special

assessment246

Deductible as taxes where these are made for the purpose of:

1. Maintenance or repair of local benefits, if the payment of such

assessment is ordinary and necessary in the conduct of trade, business or
profession

2. Constructing local benefits tending to increase the value of the

property assessed, the payments are in the nature of capital
expenditures.247

The right to deduct income taxes paid to a foreign government is given only as an
alternative or substitute to his right to claim a tax credit for such foreign income taxes.
Limitation on deduction:
a) non resident alien engaged in trade or business in the Phils.
b) resident foreign corporation --- the deductions for taxes shall be allowed only if
and to the extent that they are connected with income from sources within the Phils.
245 See (F)(3)(a)(2), under Tax Remedies under the NIRC, infra
246 An enforced proportional contribution from owners of lands, especially or peculiarly

benefited by public improvements.

247 The burden is on the taxpayer to show the allocation of the amounts assessed to the

different purposes.

104
 (5) Tax credit248 vis--vis
deduction

Tax Credit Tax deduction

Deducted from Phil. income tax Deducted from the gross income

All taxes are allowed to be deducted Only foreign income taxes may be
with the exception of the taxes claimed as credits
expressly excluded

d) Losses

Losses actually sustained during the taxable year and not

compensated for by insurance or other forms of indemnity.249

(1) Requisites for

deductibility250

a) The loss must be that of the taxpayer.251

248 Refers to the taxpayers right to deduct from the income tax due, the amount of tax
he has paid to foreign country.
Persons entitled to tax credit
1 .Resident Citizen of the Philippines
2. Domestic Corp. except General Professional Partnership
3. Members of the GPP
4. Beneficiaries of Estates and Trusts.
Persons not entitled to Tax credit
1. Non Resident Citizen
2. Aliens, whether residents or non residents
3. Foreign Corporation, whether residents or non - residents
249 Sec. 34 D [1]
250 Despite concurrence of requisites, when is loss nonetheless not deductible?
In computing net income, no deductions shall in any case be allowed in respect
of losses from sales or exchanges of property directly or indirectly [between related
taxpayers (Sec. 36 (B)
251 The loss is personal to the taxpayer and is not transferable or usable by another. The

loss of a predecessor partnership is not deductible by a successor corporation. The loss of

the parent company may not be deducted by its subsidiary.

105
 b) There must be an actual loss suffered in a closed and completed
transaction.252
c) The loss must be connected with the taxpayers trade, business or
profession.

d) The loss must not be compensated for by insurance or otherwise.

e) The loss must be actually sustained and charge off during the
taxable year.253
f) In the case of casualty loss, declaration of loss254 must be
filed within 45 days from the occurrence of the casualty loss.255
g) The loss must not be claimed as deduction for estate tax purposes
in the estate tax return.

(2) Other types of losses

(a) Capital losses

Losses from sale or exchange of capital assets. Deductible to the

extent of capital gains only.

(b) Securities becoming

worthless256

252 Closed transaction means that taxable year when the amount of loss was finally
ascertained.
253 The deduction shall be in full or not at all.

However, if the loss is compensated by insurance or otherwise, the loss is postponed

to a subsequent year in which it appears that no compensation at all can be had, or
there is a remaining net loss (or there is no full compensation). Deduction will be
denied if there is a measurable right to compensation for the loss, with ultimate collection
reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer
must seek his redress and may not secure a loss deduction until he establishes that no
recovery may be had. In other words, the taxpayer must first exhaust his remedies to
recover or reduce his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187)
254 Sworn Declaration of Loss
255 RR 12-77
256 Securities which are capital assets ascertained to be worthless and charged-off within

the taxable year.

106
 The loss resulting therefrom to the taxpayer257 is not considered as a
bad debt but as a capital loss.
(c) Losses on wash sales
of stocks or securities

Not deductible when:

1) A taxpayer who is not a dealer of stocks in trade has disposed

shares and
2) Within the period of 60(sixty) days beginning 30 days before the
date of such sale and ending 30 days after such date, the taxpayer has
acquired substantially identical stocks or securities.258
(d) Wagering losses

Deductible only to the extent of the gains from such wagering

transaction. If there is no gain from the wagering transaction, the loss
therefrom cannot be deducted from gross income.259
(e) NOLCO260

It is the excess of allowable deductions over gross income of business

for any taxable year which had not been previously offset as deduction
from gross income.

It shall be carried over as deduction from gross income for the next 3
consecutive years following the year of such loss. Provided that:

1. The taxpayer was not exempt from income tax in the year of such
net operating loss; and

2. There has been no substantial change in the ownership of the

business or enterprise.

257 other than a bank or trust company incorporated under the laws of the Phil.
258 However, if losses from wash sales are claimed by a dealer in securities in the
ordinary course of business, such losses are deductible.
259 Wagering transactions - those in which the outcome is uncertain or those that involve

games of chance.
260 Net Operating Loss Carry over

107
 e) Bad debts

Debts due to the taxpayer when actually ascertained to be

worthless261 and charged-off within the taxable year.262

They refer to those debts resulting from the worthlessness or

uncollectibility, in whole or in part, of amounts due to the taxpayer by
others, arising from money lent or from uncollectible amounts of income
from goods sold or services rendered.263

(1) Requisites for deductibility

1) There must be a valid and subsisting debt.264

2) The same must be connected with the taxpayers trade, business
or practice of profession.
3) The same must not be sustained in a transaction entered into
between related parties.265
4) The same must be actually charged-off the books of accounts of
the taxpayer as of the end of the taxable year.266

261 In general, a debt is not worthless simply because it is of doubtful value or difficult to
collect. Worthlessness is not determined by an inflexible formula or slide rule calculation
but upon the exercise of sound business judgment. The determination of worthlessness in
a given case must depend upon the particular facts and the circumstances of the case.
A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of
ultimate collection or because of a continuance of attempts to collect notes which
have long become overdue, and where there is no showing that the surrounding
circumstances differ from those relating to other notes which were charged off in a prior
year. While a mere hope probably will not justify postponement of the deduction, a
reasonable possibility of recovery will permit the account to be carried along
notwithstanding that the probabilities are that the debt may not be collected at all.
262 Sec.34 [E1]

263 Sec.2 [a], Rev. Regs. No.5-99

264 A valid and subsisting debt is one the collection of which may be enforced in a court

of law. A debt which had prescribed is no longer valid and subsisting.

265 infra
266 A partial writing-off of a bad debt is not allowed; it must be charged-off in full or not at

all (Fernandez Hermanos, Inc. vs. Commissioner, 29 SCRA 552; Philippine Refining Co. vs.
Court of Appeals, 70 SCAD 544, 256 SCRA 667).

108
 5) The same must be actually ascertained to be worthless and
uncollectible as of the end of the taxable year.267
f) Depreciation

The gradual diminution in the useful value of tangible property used

in trade or business resulting from exhaustion, wear and tear, and normal
obsolescence.

The term is also applied to amortization of value of intangible assets

the use of which in trade or business is definitely limited in duration.268

(1) Requisites for deductibility

a) The allowance for depreciation must be reasonable269

b) It must be for property arising out of its use or employment in the
business or trade, or out of its not being used temporarily during
the year270
c) It must be charged-off during the taxable year;271
d) A statement on the allowance must be attached to the return.
e) The property must have a limited useful life.

(2) Methods of computing

depreciation allowance

(a) Straight-line
method272

267 In general, a debt is not worthless simply because it is of doubtful value or difficult to
collect. Worthlessness is determined upon the exercise of a sound business judgment.
The determination of worthlessness in a given case must depend upon the particular
facts and circumstances of the case.
268 Basilan Estates, Inc. vs. Comm., 21 SCRA 17
269 Bacolod-Murcia Milling Co. Inc. vs. Comm., CTA Case No. 1402, Oct. 31, 1969
270 Connel Bros. Co. vs. Collector, CTA Cases No. 411 & 610, April 30, 1966).

271 The deduction must be made in the year in which the wear & tear occurs.

Depreciation may not be accumulated.

272 Fixed Percentage Method

109
 Spreads the total depreciation over the useful life of the asset and
generally results in an equal depreciation per unit of time regardless of the
use to which the properties are put.

(b) Declining-balance
method

Uses a rate to the declining book value of the asset. Depreciation is

largest in amount the first year and declines in the years thereafter.

(c)Sum-of-the-years-digit
method

Requires the application of a changing fraction to the cost basis of

the property, reduced by the estimated residual salvage value.

g) Charitable and other

contributions273

(1) Requisites for deductibility

a) Must actually be paid or made to the Phil. Government or any of

its agencies or political subdivision or to any domestic corporations or
associations.

b) Must be made within the taxable year;

c) Must not exceed 10% of the individuals taxable income and 5% of

the corporations taxable income before deducting the contribution; and
d) Must be evidenced by adequate records or receipts.274

273 Kinds of contributions allowed as deduction:

1) Ordinary or contributions with limit or subject to limitation
2) Special or contributions deductible in full
274 Sec. 34 (H)

110
 (2) Amount that may be
deducted

Subject to limit275 Deductible in full

a) Donations to the Philippine a) Donations to the government of

government or any of its agencies or the Philippines or to any of its
any political subdivision thereof agencies or political subdivisions,
exclusively for public purposes; including fully-owned government
corporations exclusively to finance,
b) Donations to accredited domestic to provide for, or to be used in
corporations or associations undertaking priority activities in:
organized and operated exclusively
for: 1. Education;
2. Health;
1. Religions;
3. Youth and sports development;
2. Charitable;
4. Human settlements;
3. Scientific;

5. Science and culture; and

4. Youth and sports
6. Economic development.
development;
b) Donations to foreign institutions
5. Cultural; or
or international organizations in
6. Educational purposes; or for pursuance or compliance with
agreements, treaties, or
the
commitments entered into by the
7. Rehabilitations of veterans; government of the and the foreign
laws or international organizations
and
or in pursuance of special laws, and
c) Donations to social welfare
institutions or to non-government c) Donations to certain accredited
organizations in accordance with non-government organization.277
rules and regulations promulgated
275 5%/10%
277 Ibid.,( 2)

111
by the Secretary of Finance,
provided no part of the net income
of which inures to the benefit of any
private stockholders or individual.276

h) Contributions to pension trusts

(1) Requisites for deductibility

a) The employer must have established a pension or retirement plan

to provide for the payment of reasonable pensions to its
employees;
b) The pension plan is reasonable and actuarially sound.278
c) It must be funded by the employer;

a) The amount contributed must no longer be subject to its control

or disposition; and
b) The payment has not therefore been allowed as a deduction.
4) Optional standard deduction

a) Individuals, except non-resident

aliens

A maximum of forty percent (40%) of gross sales or gross receipts

during the taxable year.

The cost of sales or the cost of services is not allowed to be

deducted for purposes of determining the basis of the OSD inasmuch as the
law279 is specific as to the basis thereof which states that for individuals, the

276 Sec. 34 (H)(1)

278 Sec. 118, Regs.
279 R.A. 9504, Minimum Wage Earner Law

112
basis of the 40% OSD shall be the gross sales or gross receipts and not
gross income.280

b) Corporations, except non-resident

foreign corporations

Not exceeding forty percent (40%) of their gross income.

5) Personal and additional exemption281

a) Basic personal exemptions

Fifty thousand pesos (P50,000) each individual taxpayer.282

b) Additional exemptions for taxpayer

with dependents

Twenty-five thousand pesos (P25,000) - each dependent283 not

exceeding four (4).284

c) Status-at-the-end-of-the-year rule

1. Taxpayer marries during taxable year - may claim the

corresponding BPE in full for such year.

2. Taxpayer should have additional dependent(s) during taxable year

- may claim corresponding AE in full for such year.

280 Rev. Reg. No. 16-2008

281 R. A. 9504
282 Sec. 4, id.

In the case of married individual where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption.
283 A legitimate, illegitimate or legally adopted child chiefly dependent upon and living

with the taxpayer if such dependent is not more than twenty-one (21) years of age,
unmarried and not gainfully employed or if such dependent, regardless of age, is
incapable of self-support because of mental or physical defect.
284 In the case of legally separated spouses, additional exemptions may be claimed only

by the spouse who has custody of the child or children:

The total amount of additional exemptions that may be claimed by both shall not
exceed the maximum additional exemptions herein allowed. (ibid)

113
 2. Taxpayer dies during taxable year - his estate may still claim BPE
and AE for himself and his dependent(s) as if he died at the close
of such year.

4. If during the taxable year

a. spouse dies, or
b. any of the dependents dies or marries, turns 21 years old or
becomes gainfully employed, taxpayer may still claim same
exemptions as if the spouse or any of the dependents died, or
married, turned 21 years old or became gainfully employed at the
close of such year.285
6) Items not deductible

a) General rules

These items are not related to the trade, business or profession of

the taxpayer.

b) Personal, living or family expenses

These are personal expenses and not related to the conduct of trade
or business.

c) Amount paid for new buildings or

for permanent improvements

These are capital expenditures added to the cost of the property and
the periodic
depreciation is the amount that is considered as deductible expense.286

Sec. 35 (C)
285

Does not apply to intangible drilling and development cost incurred in petroleum
286

operations.

114
 d) Amount expended in restoring
property287

They are capital expenditures or those expenditures that result in

obtaining benefits of a permanent nature.288

e) Premiums paid on life insurance

policy covering life or any other
officer or employee financially
interested

When the taxpayer is directly or indirectly a beneficiary under such

policy.289

f) Interest expense, bad debts, and

losses from sales of property
between related parties

Interest Expense Bad Debts Losses from sales of

property between
related parties

287 major repairs

288 such as lands, buildings and machineries
289 Sec. 36 [A]

115
In general, the amount In general, debts due to (1) Between members
of interest paid or the taxpayer actually of a family;293 or
incurred within a ascertained to be (2) Except in the case of
taxable year on worthless and charged distributions in
indebtedness in off within the taxable liquidation, between an
connection with the year except those not individual and
taxpayer's profession, connected with corporation more than
trade or business.290 profession, trade or fifty percent (50%) in
business and those value of the
sustained in a outstanding stock of
transaction entered which is owned,
into between parties.291 directly or indirectly, by
Recovery of bad debts or for such individual;
previously allowed as or
deduction in the
preceding years shall be (3) Except in the case of
included as part of the distributions in
gross income in the liquidation, between
year of recovery to the two corporations more
extent of the income than fifty percent (50%)
tax benefit of said in value of the
deduction.292 outstanding stock of
which is owned,
directly or indirectly, by
or for the same
individual if either one
of such corporations,
with respect to the
taxable year of the
corporation preceding
the date of the sale of
exchange was under
the law applicable to

290 Sec. 34 (B)

291 supra
292 Id., (E)
293 The family of an individual shall include only his brothers and sisters (whether by the

whole or half-blood), spouse, ancestors, and lineal descendants;

116
 such taxable year, a
personal holding
company or a foreign
personal holding
company;

(4) Between the

grantor and a fiduciary
of any trust; or

(5) Between the

fiduciary of and the
fiduciary of a trust and
the fiduciary of another
trust if the same person
is a grantor with
respect to each trust;
or

(6) Between a fiduciary

of a trust and
beneficiary of such
trust.294

g) Losses from sales or exchange or

property

In general, losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity:

1. If incurred in trade, profession or business;

294 Sec. 36 (B)

117
 2. Of property connected with the trade, business or profession, if
the loss arises from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement.295
h) Non-deductible interest296

i) Non deductible taxes297

j) Non-deductible losses

1. Losses from illegal transactions

2. Losses from sales or exchanges of property between related
taxpayers298 but the gains are taxable
k) Losses from wash sales of stock or
securities299

j. Exempt Corporations

1. General Professional Partnerships300

2. Joint Venture under a service contract with the government301

295 Sec. 34 (D)(1)

296 supra
297 Ibid.
298 ibid
299 Ibid.
300 Any other partnership is liable for corporate income tax.

Two (2) requisites to be exempt from corporate income tax:

1. It is formed by persons for the sole purpose of exercising their common profession;
and
2. No part of the income of which is derived from engaging in any trade or business.

118
 3. Government-owned or controlled corporations:

i. Government Service Insurance System (GSIS),

ii. the Social Security System (SSS),
iii. the Philippine Health Insurance Corporation (PHIC), and
iv. the Philippine Charity Sweepstakes Office (PCSO).

Other exempt corporations:

The following organizations shall not be taxed in respect to income

received by them as such:

(A) Labor, agricultural or horticultural organization not organized

principally for profit;

(B) Mutual savings bank not having a capital stock represented by

shares, and cooperative bank without capital stock organized and operated
for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the

exclusive benefit of the members such as a fraternal organization operating
under the lodge system, or mutual aid association or a non-stock
corporation organized by employees providing for the payment of life,
sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporation or their
dependents;

301A merger of two (2) or more corporations for the purpose of engaging in construction
projects or energy operations pursuant to a consortium agreement or a service contract
with the government. The corporations comprising the joint venture or consortium must
be engaged in the same line of business.
It is only the joint venture or consortium itself which is exempt from corporate income
tax, not the income of each corporation from the joint venture consortium. Thus, each
corporation comprising of the joint venture or consortium is liable for corporate income
tax (Batangas Land Transportation Co. vs. Collector, 102 Phil. 822)

119
 (D) Cemetery company owned and operated exclusively for the
benefit of its members;

(E) Non-stock corporation or association organized and operated

exclusively for religious, charitable, scientific, athletic, or cultural purposes,
or for the rehabilitation of veterans, no part of its net income or asset shall
belong to or inures to the benefit of any member, organizer, officer or any
specific person;

(F) Business league chamber of commerce, or board of trade, not

organized for profit and no part of the net income of which inures to the
benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;

(H) A non-stock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company,

mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character, the income of
which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and

(K) Farmers, fruit growers, or like association organized and operated

as a sales agent for the purpose of marketing the products of its members
and turning back to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the

income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.302

302 Sec. 30

120
 10. Taxation of Resident Citizens, Non-resident Citizens, and
Resident Aliens

a. General rule that resident citizens are taxable

on income from all sources within and without
the Philippines

A citizen of the Philippines residing therein is taxable on all income

derived
from sources within and without the Philippines.

b. Taxation on Compensation Income

1) Inclusions

a) Monetary compensation

(1) Regular salary/wage

121
 Compensation income derived from an employer-employee
relationship in consideration of services rendered, except in the case of a
minimum wage earner.303

(2) Separation pay/retirement

benefit not otherwise
exempt

Separation pay received by an employee who voluntarily resigns is

subject to income tax. Retirements benefits may be subject to tax if it does
not comply with the provision of Sec. 32 (B)(6)(a).304

(3) Bonuses, 13th month pay,

and other benefits not
exempt

Amount in excess of Thirty thousand pesos (P30,000.00).

(4) Directors fees305

b) Non-monetary compensation

(1) Fringe benefit not subject

tax306

(1) Fringe benefits which are authorized and exempted from tax
under special laws;

(2) Contributions of the employer for the benefit of the employee to

retirement, insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not; and

303 infra
304 See Reference
305 See (1) Regular salary/wage, supra
306 Sec. 33, consolidated with Sec. 2.33 (C), RR 03-98

122
 (4) De minimis benefits.307

(5) If the grant of fringe benefits to the employee is required by the

nature of, or necessary to the trade, business, or profession of the
employer.

(6) If the grant of the fringe benefits is for the convenience of the
employer.308

2) Exclusions

a) Fringe benefit subject to tax

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

kind by an employer to an individual employee309 such as, but not limited
to, the following:

(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or other similar
organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and

307 infra
308 Convenience of the employer rule
309 except rank and file employees

123
 (10) Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows.310

b) De minimis benefits

Limited to facilities or privileges furnished or offered by an employer

to his employees that are of relatively small value and are offered or
furnished by the employer as a means of promoting the health, goodwill,
contentment, or efficiency of his employees.

They include:

Monetized unused vacation leave 1. Private employees:

credits of
employees a. Vacation leave - exempt
up to 10 days

b. Sick leave always taxable

2. Government employees:

Vacation and sick leave are

always tax exempt regardless of the
no. of
days.

Medical cash allowance to Not exceeding P750 per

dependents of semester or P125 per month
employees

310A: If the benefit is not tax-exempt and the recipient is:

1. A rank and file employee the value of such fringe benefit shall be considered as
part of the compensation income of such employee subject to tax payable by the
employee.
2. Where the recipient is not a rank and file employee the value shall not be included
in the compensation income of such employee subject to tax. The fringe benefit tax is
instead levied upon the employer who is required to pay. (Sec. 33)

124
Rice subsidy P1,500 or one sack of 50-kg rice per
month amounting to not more than
P1,500

Uniforms and clothing allowances Not exceeding P4,000 per annum

actual medical benefits

Actual medical benefits Not exceeding P10,000 per annum

Laundry allowance Not exceeding P300 per month

Employee achievement awards311 In the form of tangible personal

property other than cash or gift
certificate with an annual monetary
value not exceedingP10,000

Gifts given during Christmas and Not exceeding P5,000 per

major anniversary celebrations employee per annum

Flowers, fruits and books or similar Reasonable value depending

items given to employees under on the employers capacity
certain circumstances

Daily meal allowance for overtime Not exceeding 25% of the basic
work minimum wage.312

311 e.g. for length of service or safety achievement

312 RR 5-2008

125
 c) 13th month pay and other benefits
and payments specifically
excluded from taxable
compensation income

Gross benefits received by officials and employees of public and

private entities, the total exclusion of which shall not exceed Thirty
thousand pesos (P30,000) which shall cover:

(a) Benefits received by officials and employees of the national and

local government.313

(b) Benefits received by employees.314

(c) Benefits received by officials and employees not covered by (b)

(d) Other benefits315

3) Deductions

a) Personal exemptions and

additional exemptions

Basic personal Additional exemption

exemption

Fifty thousand pesos (P50,000) for Twenty-five thousand pesos (25,000)

each individual taxpayer.316 for each dependent not exceeding
four (4).317

313 under R.A. No. 6686;

314 under P.D. No. 851, as amended by Memorandum Order No. 28, dated August 13,
1986
315 such as productivity incentives and Christmas bonus
316 Sec. 35(A), as amended by R.A. 9504

In the case of married individual where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption
317 Sec. 35 (B), id.

The additional exemption for dependents shall be claimed by only one of the spouses
in the case of married individuals.

126
 b) Health and hospitalization
insurance

The amount of premiums not to exceed Two thousand four hundred

pesos (P2,400) per family or Two hundred pesos (P200) a month paid
during the taxable year taken by the taxpayer for himself, including his
family who has a gross income of not more than Two hundred fifty
thousand pesos (P250,000) for the taxable year.

In the case of married taxpayers, only the spouse claiming the

additional exemption for dependents shall be entitled to this deduction.318

c) Taxation of compensation income

of a minimum wage earner

(1) Definition of Statutory

Minimum Wage

The rate fixed by the Regional Tripartite Wage and Productivity

Board, as defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment (DOLE).319
(2) Definition of Minimum
Wage Earner320

(3) Income also subject to tax

exemption: holiday pay,
overtime pay, night shift
differential, and hazard
pay321

In the case of legally separated spouses, additional exemptions may be claimed only
by the spouse who has custody of the child or children:
The total amount of additional exemptions that may be claimed by both shall not
exceed the maximum additional exemptions allowed.
318 Sec. 34 (M)
319 Sec. 22, as amended by R.A. 9504
320 See II. (A) (6), Kinds of Taxpayers, supra
321 Sec. 24(A)(2) as amended by R.A. 9504

127
 c. Taxation of Business Income/Income from
Practice of Profession

Optional Standard Deduction (OSD) or Itemized deductions.

Optional Standard Deductions 10 % of the gross income. May be

availed only by individuals322 who are not purely compensation income
earners. This is in lieu of the itemized deductions.

d. Taxation of Passive Income

1) Passive income subject to final tax

a) Interest income

Interest income derived by a resident individual323 from a depositary

bank under the expanded foreign service deposit system 7.5%.

Interest income from long term deposit or investment evidenced by

certificates prescribed by BSP:

a) Exempt, if investment is held for more than 5 years

b) If investment is pre-terminated, interest income on such
investment shall be subject to the following rates:
20% - If pre-terminated in less than 3 years
12% - If pre-terminated after 3 years to less than 4 years
5% - If pre-terminated after 4 years to less than 5 years

b) Royalties

Royalties, except on books, as well as other literary works and

musical compositions 20%

322 except non-resident aliens

323 non-resident citizen not included

128
 Royalties on books literary works and musical compositions 10%

c) Dividends from domestic

corporation

Cash and or property dividend actually or constructively received

from a domestic corporation or from a joint stock company, insurance or
mutual fund companies and regional operating headquarters of
multinational companies. 10%

d) Prizes and other winnings

Prizes over P10,000 20%

Prizes less than P10,000 are included in the income tax of the
individual subject to the schedular rate of 5% up to P125,000 + 32% of
excess of P500,000.

Other winnings, except PCSO and Lotto, derived from sources within
the Philippines 20%

2) Passive income not subject to final tax

Interest income from long-term deposit or investment in the form of

savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates -
exempt from final tax.324

e. Taxation of capital gains

1) Income from sale of shares of stock of a

Philippine corporation

324 See Sec. 24 (B)(1)

129
 a) Shares traded and listed in the
stock exchange

The gains are not subject to income tax. The tax applicable will be a
business tax known as percentage tax.

A tax at the rate of one-half of one percent (1/2 of 1%) of the gross
selling price or gross value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed which shall be paid by the seller or
transferor.325

b) Shares not listed and traded in the

stock exchange

A final tax as follows::

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

Amount in excess of P100,000.. 10%326

2) Income from the sale of real property

situated in the Philippines

A final tax of six percent (6%) based on the gross selling price or
current fair market value, whichever is higher, upon capital gains presumed
to have been realized from the sale, exchange, or other disposition of real
property classified as capital assets, including pacto de retro sales and other
forms of conditional sales, by individuals, including estates and trusts xxx.327
3) Income from the sale, exchange, or other
disposition of other capital assets

A final tax of 6% on the gross selling price, or the current fair market
value at the time of the sale, whichever is higher.

325 Sec. 127 (A)

326 Sec. 27 (D)(2)
327 Sec. 24 (D)

130
 11. Taxation of Non-resident Aliens Engaged in Trade or
Business

a. General rules

A nonresident alien individual engaged in trade or business in the

Philippines shall be subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on taxable income
received from all sources within the Philippines.328

b. Cash and/or property dividends

10% final tax, on cash and or property dividend actually or

constructively received from a domestic corporation or from a joint stock
company, insurance or mutual fund companies and regional operating
headquarters of multinational companies. 329

c. Capital gains330

12. Individual Taxpayers Exempt from Income Tax

a. Senior citizens

A senior Citizen is:

1. any resident citizen of the Philippines

2. at least sixty (60) years old, including those who have retired from
both government offices and private enterprises, and

3. has an income of not more than sixty thousand pesos (P60,000.00)

per annum subject to the review of the National Economic Development
Authority(NEDA) every three (3) years.

328 A nonresident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any calendar year
shall be deemed a 'nonresident alien doing business in the Philippines (Sec. 25 (A)(1))
329 Id., (A)(2)
330 See e. Taxation of capital gains, supra

131
 b. Exemptions granted under international
agreements

NRAETB331 may deduct personal exemption332 but only to the extent

allowed by his country to Filipinos not residing therein, and shall not exceed
the aforementioned amounts. NRANETB cannot claim any personal or
additional exemption.

13. Taxation of Domestic Corporations333

a. Tax payable

1) Regular tax

Thirty percent (30%)334 of taxable income.

2) Minimum corporate income tax (MCIT)

a) Imposition of MCIT335

Two percent (2%) on the gross income.

331 Non-resident alien engaged in trade or business

332 but not additional exemption
333 The term "corporation" shall include partnerships, no matter how created or organized,

joint-stock companies, joint accounts (cuentas en participacion), association, or

insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the Government. (Sec.
22(B))
334 beginning January 1, 2009 (R.A. 9337)
335 a. It is imposed beginning the fourth (4th) taxable year immediately following the

taxable yr. in which such corporation starts its business operation.

b. It is imposable only if such corporation has zero or negative taxable income or
whenever the amount of MCIT is greater than the Normal Corporate Income Tax (NCIT)
due from such corporation.

132
 b) Carry forward of excess minimum
tax

Any excess of the minimum corporate income tax (MCIT) over the
normal income tax shall be carried forward on an annual basis and credited
against the normal income tax for the three (3) immediately succeeding
taxable years.

c) Relief from the MCIT under certain

conditions

The imposition of MCIT may be suspended, upon showing that the

corporation suffers losses due to any of the following causes:

a. Prolonged labor dispute336

b. Legitimate business reverses337
c. Force majeure338

d) Corporations exempt from the

MCIT

1. Proprietary Educational Institution

2. Non-profit hospitals
3. Depository banks under expended FCDU
4. International carriers
5. Offshore Banking Units
6. ROHQs of resident foreign corp.

336 e.g. strikes for more than 6 months

337 Ibid.
338 e.g. war

133
 e) Applicability of the MCIT where a
corporation is governed both
under the regular tax system and
a special income tax system

Only one may be imposed.

A minimum corporate income tax of 2% of the gross income xxx is

imposed xxx on a corporation339 xxx when the minimum income tax is
greater than the (net income tax)340

b. Allowable deductions

1) Itemized deductions

Business341 expenses which are ordinary and necessary in the

conduct of business.342

2) Optional standard deduction343

May be taken by an individual, in lieu of itemized deductions.344

c. Taxation of Passive Income

339 domestic and resident foreign

340 Secs. 27 (E) and 28 (A)(2)
341 or professional
342 or in the exercise of profession
343 See also (9)(h)(4)(b), supra
344 Section 34(L)

Requisites:
a. Available only to citizens and resident aliens
b. The standard deduction is optional; i.e., unless the taxpayer signifies in his return his
intention to elect this deduction, he is considered as having availed of the itemized
deductions.
c. Such election, when made by the qualified taxpayer, is irrevocable for the year in
which made; however, he can change to itemized deductions in succeeding years.

134
 1) Passive income subject to tax

a) Interest from deposits and yield or

any other monetary benefit from
deposit substitutes and from trust
funds and similar arrangements
and royalties345

Twenty percent (20%) final tax.

b) Capital gains from the sale of

shares of stock not traded in the
stock exchange

On the net capital gain:

Not over P100,000

Final Tax of 5%

On any amount in excess of P100,000

plus 10% Final tax on the excess

c) Income derived under the

expanded foreign currency
346
deposit system

Ten percent (10%) final tax.

Exempt - any income of nonresidents, whether individuals or

corporations, from transactions with depository banks.

d) Intercorporate dividends

345received by domestic corporations derived from sources within the Philippines

346 by a depository bank with local commercial banks, including branches of foreign
banks authorized by the BSP to transact business with foreign currency deposit system
units.

135
 Not subject to tax.

e) Capital gains realized from the

sale, exchange, or disposition of
lands and/or buildings

Six percent (6%) final tax347- on the gross selling price, or the current
fair market value at the time of the sale, whichever is higher.

2) Passive income not subject to tax348

d. Taxation of Capital Gains

1) Income from sale of shares of stock349

2) Income from the sale of real property

situated in the Philippines350

3) Income from the sale, exchange, or other

disposition of other capital assets351

e. Tax on proprietary educational institutions352

and hospitals

Ten percent (10%) on their taxable income.353

347 Tax treatment is the same as that of individuals

348 supra
349 See 10 (e), Taxation of Capital Gains, supra
350 Ibid.
351 See (A)(10)(e)(3), Taxation of Capital Gains, supra
352 A "Proprietary educational institution" is any private school maintained and

administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development Authority (TESDA),
as the case may be, in accordance with existing laws and regulations.
353 except on certain passive incomes (Sec. 27 (D))

136
 Thirty percent (30%) - if gross income from unrelated trade, business
or other activity354 exceeds fifty percent (50%) of the total gross income
derived from all sources.355

f. Tax on government-owned or controlled

corporations, agencies or instrumentalities

Such rate of tax imposed upon corporations or associations engaged

in similar business, industry, or activity, except

1. The Government Service Insurance System (GSIS),

2. The Social Security System (SSS),
3. The Philippine Health Insurance Corporation (PHIC), and
4. The Philippine Charity Sweepstakes Office (PCSO). 356

14. Taxation of Resident Foreign Corporations357

a. General rule

Resident foreign corporations are subject to any or some of the

following:

1. Capital Gains Tax

2. Final Tax on Passive Income

354 The term 'unrelated trade, business or other activity' means any trade, business or
other activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital of its primary purpose or function.
355 Sec. 27 (B)
356 Id., (C)
357 Income subject to Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross

Income Tax (GIT) under the subheading of domestic corporations is equally applicable to
resident foreign corporations, both as to concepts and computations, except that RFCs
are taxed only on income from sources within the Philippines.

137
 3. Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or]
Gross Income Tax (GIT)
4. Branch Profit Remittance Tax
b. With respect to their income from sources
within the Philippines358

c. Minimum corporate income tax359

d. Tax on certain income

(1) Interest from deposits and yield or any

other monetary benefit from deposit
substitutes, trust funds and similar
arrangements and royalties360

(2) Income derived under the expanded

foreign currency deposit system361

(3) Capital gain from sale of shares of stock

not traded in the stock exchange362

(4) Intercorporate dividends363

15. Taxation of Non-resident Foreign Corporations

a. General rule

358 See Tax Payable under Taxation of Domestic Corporations, supra

359 ibid.
The MCIT is imposed on RFCs under the same conditions as domestic corporations
(Sec. 28(A)(2))
360 See Taxation of Passive Income under Taxation of Domestic Corporations, supra
361 ibid.
362 ibid.
363 ibid.

138
 Non-resident foreign corporations are subject to any or some of
the following:

1. Capital Gains Tax

2. Final Tax on Passive Income
3. Final Tax on [Other] Gross Income from sources within the
Philippines

b. Tax on certain income

(1) Interest on foreign loans

Twenty percent (20%) final withholding tax. 364

(2) Intercorporate dividends

Fifteen percent (15%) - as long as the country in which the

nonresident foreign corporation is domiciled allows a tax credit for taxes
deemed paid in the Philippines equivalent to 15%.

Thirty percent (30%) withholding tax - if the country within which the
NRFC is domiciled does not allow a tax credit.365

(3) Capital gains from sale of shares of stock

not traded in the stock exchange366

16. Improperly Accumulated Earnings of Corporations

Every corporation formed or availed for the purpose of avoiding the

income tax with respect to its shareholders or the shareholders of any
other corporation, by permitting earnings and profits to accumulate instead
of being divided or distributed.

364 Sec. 28 (B)(5)(2)

365 Sec. 28 (B)(5)(b)
In other words, the dividends are subject to the third kind of tax: Final Tax on [Other]
Gross Income from sources within the Philippines.
366 See 10 (e)(1)(b), under Taxation of capital gains

139
 17. Exemption from tax on corporations367

18. Taxation of Partnerships368

Rules:

1. Subject to the same rules on corporations,369 but is not subject to

the improperly accumulated earnings tax [IAET]. The partnership must file
quarterly and year-end income tax returns.

2. The taxable income of the partnership, less the normal corporate

income tax thereon, is the distributable net income of the partnership.

3. Ten percent (10%) final tax - the share of a partner in the

partnerships distributable net income of a year deemed to have been
actually or constructively received by the partners in the same taxable year
taxed to them in their individual capacity, whether actually distributed or
not,370 withheld by the partnership.371

19. Taxation of General Professional Partnerships372

367 See Other exempt corporations, supra

368 partnerships wherein all or part of their income is derived from the conduct of trade or
business
369 capital gains tax, final tax on passive income, normal tax, minimum corporate income

tax [MCIT] and gross income tax [GIT]

370 Sec. 73(D)
371 Sec. 24(B)(2)
372 GPP is not a taxable entity The partnership is a mere mechanism or a flow-through

entity in the generation of income by, and the ultimate mechanism distribution of such
income to the individual partners. (Tan v. Commissioner [Oct. 3, 1994]) But, the
partnership itself is required to file income tax returns for the purpose of furnishing

140
 Rules:

1. Not subject to income tax.

2. The partners shall only be liable for income tax only in their
separate and individual capacities.

3. For purposes of computing the distributive share of the

partners, the net income of the GPP shall be computed in the same manner
as a corporation.

4. Each partner shall report as gross income his distributive share,

actually or constructively received, in the net income of the partnership.

5. The share of a partner shall be subject to a creditable withholding

income tax of 15%.373

20. Taxation on Estates and Trusts

a) Application

The tax imposed upon individuals shall apply to the income of estates
or of any kind of property held in trust, including:

1. Income accumulated in trust for the benefit of unborn or

unascertained person or persons with contingent interests, and income
accumulated or held for future distribution under the terms of the will or
trust;

information as to the share in the gains or profits which each partner shall include in his
individual return. (RR 2- 1998)
The share of an individual partner in the net profit of a general professional partnership
is deemed to have been actually or constructively received by the partner in the same
taxable year in which such partnership net income was earned, and shall be taxed to
them in their individual capacities, whether actually distributed or not, at the graduated
income tax ranging from 5% to 32%. Thus, the principle of constructive receipt of
income or profit is being applied to undistributed profits of GPPs. The payment [to the
partners] of such tax-paid profits in another year should no longer be liable to income
tax. (Mamalateo)
373 RR 2- 1998

141
 2. Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is to be
held or distributed as the court may direct;

3. Income received by estates of deceased persons during the period

of administration or settlement of the estate; and

4. Income which, in the discretion of the fiduciary, may be either

distributed to the beneficiaries or accumulated.

b) Exception

The tax shall not apply to employee's trust which forms part of
a pension, stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees:

1. If contributions are made to the trust by such employer, or

employees, or both for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust in
accordance with such plan, and

2. If under the trust instrument it is impossible, at any time prior to

the satisfaction of all liabilities with respect to employees under the trust,
for any part of the corpus or income to be used for, or diverted to,
purposes other than for the exclusive benefit of his employees.374

c) Determination of tax

1) Consolidation of income of two or more

trusts

374Any amount actually distributed to any employee or distributee shall be taxable to

him in the year in which so distributed to the extent that it exceeds the amount
contributed by such employee or distributee.

142
 Where the creator of the trust in each instance is the same person,
and the beneficiary in each instance is the same, the taxable income of
all the trusts shall be consolidated and the tax computed on such
consolidated income, and such proportion of said tax shall be assessed
and collected from each trustee which the taxable income of the trust
administered by him bears to the consolidated income of the several trusts

2) Taxable income375

General rule:

Any amount actually distributed to any employee or distributee shall

be taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.

3) Revocable trusts

Where at any time the power to revest in the grantor title to any
part of the corpus of the trust is vested:

375The taxable income of the estate or trust shall be computed in the same manner and
on the same basis as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of
the estate or trust the amount of the income of the estate or trust for the taxable year
which is to be distributed currently by the fiduciary to the beneficiaries, and the
amount of the income collected by a guardian of an infant which is to be held or
distributed as the court may direct, but the amount so allowed as a deduction shall
be included in computing the taxable income of the beneficiaries, whether distributed
to them or not. Any amount allowed as a deduction under this Subsection shall not be
allowed as a deduction under Subsection (B) of this Section in the same or any
succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the
period of administration or settlement of the estate, and in the case of income which, in
the discretion of the fiduciary, may be either distributed to the beneficiary or
accumulated, there shall be allowed as an additional deduction the amount of the
income of the estate or trust for its taxable year, which is properly paid or credited during
such year to any legatee, heir or beneficiary but the amount so allowed as a deduction
shall be included in computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned
in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount
of any income included in the return of said trust shall not be included in computing
the income of the beneficiaries. (Sec. 61)

143
 a. in the grantor either alone or in conjunction with any person not
having a substantial adverse interest in the disposition of such part of the
corpus or the income therefrom, or

b. in any person not having a substantial adverse interest in the

disposition of such part of the corpus or the income therefrom, the income
of such part of the trust shall be included in computing the taxable income
of the grantor.376
4) Income for benefit of grantor

Where any part of the income of a trust

a. is, or in the discretion of the grantor or of any person not

having a substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution to the grantor,
or

b. may, or in the discretion of the grantor or of any person not

having a substantial adverse interest in the disposition of such part of the
income, be distributed to the grantor, or
c. is, or in the discretion of the grantor or of any person not
having a substantial adverse interest in the disposition of such part of the
income may be applied to the payment of premiums upon policies of
insurance on the life of the grantor, such part of the income of the trust
shall be included in computing the taxable income of the grantor.377

5) Meaning of "in the discretion of the

grantor"

Either alone or in conjunction with any person not having a

substantial adverse interest in the disposition of the part of the income in
question.

21. Withholding tax378

376 Exception
377 ibid
378 also known as taxation at source

144
 a. Concept

The requirement that taxes imposed or prescribed by the NIRC are to

be deducted and withheld by the payor-corporations and/or persons from
payments made to payees-corporations and/or persons for the former to
pay the same directly to the BIR. R. Hence, the taxes are collected
practically at the same time the transaction is made or when the taxable
transaction occurs. It is taxation at source.

b. Kinds

Withholding of final tax of certain Withholding of creditable tax at

income source
As to income subject of the system

1. Passive incomes 1. Compensation Income

2. Fringe benefits 2. Professional/talent fees

3. Rentals

4. Cinematographic film rentals and

other

145
 payments

5.Income payments to certain

contractors

As to whether or not income should be reported as part

of the gross income

The recipient may not report the The employee is required to include
said income in his gross income the income in his gross income
because the tax
withheld constitutes final and full
settlement of the tax liability

As to the effect of the tax withheld

The tax withheld cannot be claimed The tax withheld can be claimed as
as tax credit a tax credit or may be deducted
from the tax due or payable

As to filing of ITR

If the only source of income is There is a necessity to file on

subject to final tax, no need to file the earner
an ITR on the part of the earner

146
 c. Withholding on wages

1) Requirement for withholding

No withholding of a tax where the total compensation income of an

individual does not exceed the statutory minimum wage, or five
thousand pesos (P5,000.00) per month, whichever is higher.379

2) Tax paid by recipient

If the employer fails to deduct and withhold the tax as required, and
thereafter the tax against which such tax may be credited is paid, the tax so
required to be deducted and withheld shall not be collected from the
employer; but in no case relieve the employer from liability for any penalty
or addition to the tax otherwise applicable in respect of such failure to
deduct and withhold.380

3) Refunds or credits

(a) Employer When there has been an

overpayment of tax, refund or credit
shall be made only to the extent that
the amount of such overpayment
was not deducted and withheld by
the employer.

(b) Employees The amount deducted and

withheld during any calendar year
shall be allowed as a credit to the
recipient of such income against the
tax imposed under Section 24(A).381

379 Sec. 79 (A)

380 Id. (B)
381 See Reference

147
 Any excess of the taxes withheld over the tax due from the taxpayer
shall be returned or credited within three (3) months from the fifteenth
(15th) day of April. Refunds or credits made after such time shall earn
interest at the rate of six percent (6%) per annum, starting after the lapse
of the three-month period to the date the refund of credit is made.382

4) Year-end adjustment

On or before the end of the calendar year but prior to the payment
of the compensation for the last payroll period, the employer shall
determine the tax due from each employee on taxable compensation
income for the entire taxable year. The difference between the tax due
from the employee for the entire year and the sum of taxes withheld from
January to November shall either be withheld from his salary in December
of the current calendar year or refunded to the employee not later than
January 25 of the succeeding year.383

5) Liability for tax

The employer shall be liable for the withholding and remittance of

the correct amount of tax required to be deducted and withheld.384

d. Withholding of VAT

(a) The government or any of its political subdivisions,

instrumentalities or agencies, including government-owned or controlled
corporations (GOCCs) shall, before making payment on account of each
purchase of goods and/or services taxed at twelve percent (12%) VAT,
deduct and withhold a final VAT due at the rate of five percent (5%) of the
gross payment thereof.

The five percent (5%) final VAT withholding rate shall represent the
net VAT payable of the seller. The remaining seven percent (7%) effectively

382 Id. (C)

383 Id. (H)
384 See Sec. 80

148
accounts for the standard input VAT for sales of goods or services to
government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs, in lieu of the actual input VAT directly
attributable or ratably apportioned to such sales. Should actual input VAT
attributable to sale to government exceeds seven percent (7%) of gross
payments, the excess may form part of the sellers expense or cost. On the
other hand, if actual input VAT is less than seven percent (7%) of gross
payment, the difference must be closed to expense or account.

(b) The government or any of its political subdivisions,

instrumentalities or agencies, including government-owned or controlled
corporations(GOCCs), as well as private corporations, individuals, estates
and trusts, whether large or non-large taxpayers, shall withhold twelve
percent (12%) VAT, starting February 1, 2006, with respect to the following
payments:

(1) Lease or use of properties or property rights owned by non-

residents; and
(2) Other services rendered in the Philippines by non-residents.385

e. Filing of return and payment of taxes withheld

1) Return and payment in case of

government employees

The return of the amount deducted and withheld upon any wage
shall be made by the officer or employee having control of the payment of

385 RR 16-2005, as amended by RR 4-2007

149
such wage, or by any officer or employee duly designated for the
purpose.386

2) Statements and returns

(A) Every employer required to deduct and withhold a tax

Requirements shall furnish to each such employee in respect of his
employment during the calendar year, on or before
January thirty-first (31st) of the succeeding year, or if
his employment is terminated before the close of such
calendar year, on the same day of which the last
payment of wages is made, a written statement
confirming the wages paid by the employer to such
employee during the calendar year, and the amount of
tax deducted and withheld under this Chapter in
respect of such wages. The statement required to be
furnished by this Section in respect of any wage shall
contain such other information, and shall be furnished
at such other time and in such form as the Secretary of
Finance, upon the recommendation of the
Commissioner, may, by rules and regulation, prescribe.

(B) Annual Every employer required to deduct and withhold the

Information taxes in respect of the wages of his employees shall, on
Returns. or before January thirty-first (31st) of the succeeding
year, submit to the Commissioner an annual
information return containing a list of employees, the
total amount of compensation income of each
employee, the total amount of taxes withheld
therefrom during the year, accompanied by copies of
the statement referred to in the preceding paragraph,
and such other information as may be deemed
necessary.387

386 Sec. 82
387 see Sec. 83

150
 g. Final withholding tax at source388

g. Creditable withholding tax

1) Expanded withholding tax389

2) Withholding tax on compensation

Every employer must withhold from compensation paid, an amount

computed in accordance with the regulations. 390

Exception:

Where such compensation income of an individual:

1. Does not exceed the statutory minimum wages; or

2. Five thousand pesos (P5,000) monthly391 - whichever is
higher

h. Fringe benefit tax

388 Sec. 57 (A), supra

389 Id. (B), supra
390 Elements of Withholding on Compensation:

1. There must be an employer-employee relationship

2. There must be payment of compensation or wages
for services rendered
3. There must be a payroll period
391 P60,000 a year

151
 Final tax of thirty-two percent (32%) - on the grossed-up monetary
value of fringe benefit furnished or granted to the employee392 by the
employer, whether an individual or a corporation, unless the fringe benefit
is required:

1. by the nature of, or necessary to the trade, business or profession

of the employer, or
2. when the fringe benefit is for the convenience or advantage of the
employer.393

B. Estate Tax

1. Basic principles

The estate tax accrues as of the death of the decedent and the
accrual of the tax is distinct from the obligation to pay the same. Upon the
death of the decedent, succession takes place and the right of the State to
tax the privilege to transmit the estate vests instantly upon death.394

Not a direct tax on the property transmitted or transferred although

its amount is based thereon.

2. Definition

392 except rank and file employees

393 Sec. 33 (A)
394 Sec. 3, RR 2-2003

152
 A graduated tax imposed on the privilege of the decedent to transmit
property at death and is based on the entire net estate, regardless of the
number heirs and relations to the decedent.

3. Nature

A tax imposed on the privilege of transmitting property upon the

death of the owner. The liability for estate tax is generated by death and
accrues at the time of death. It is governed by the law in force at the time
of death notwithstanding the postponement of the actual possession or
enjoyment of the estate by the beneficiary. Consequently, all properties
that are included in the taxable estate should be valued at the moment of
death of a decedent.

4. Purpose or object

a) Benefit-Received Theory

For the performance of services rendered by the government in the

distribution of the estate of the decedent and other benefits that accrue to
the estate and the heirs, the state collects the tax.

b) Redistribution of Wealth Theory

A contributing factor to the inequalities in wealth and income. The

imposition of death tax reduces the property received by the successor
bringing about a more equitable distribution of wealth in society.

c) Ability-to pay- theory

The receipt of inheritance places assets in the hands of the heirs and
beneficiaries thereby creating an ability to pay the tax and thus to
contribute to governmental income; and

d) Privilege theory or State Partnership theory

153
 Inheritance is not a right but a privilege granted by the state and
large estates have been acquired only with the protection of the state. The
State, as a passive and silent partner in the accumulation of property has
the right to collect the share which is properly due to it

5. Time and transfer of properties

At the time of death.395

6. Classification of decedent

a) resident decedent
b) non resident alien decedent

7. Gross estate vis--vis Net estate

Gross estate Net estate

The total value of all property, Determined by deducting from the

whether real or personal, tangible or value of the gross estate the
intangible belonging to the decedent following items of deductions:
at the time of his death, situated
within or outside the Philippines, 1. Expenses, losses indebtedness,
where such decedent was a resident and taxes.
or citizen of the Philippines.
2. Property previously taxed.
In the case of a nonresident alien
decedent, it shall include only 3. Transfers for public use.
property situated in the Philippines.
4. The Family Home

5. Standard Deductions

6. Medical Expenses

395 The tax should not be construed as a direct tax on the property of the decedent
although the tax is based thereon.

154
 7. Amount received by heirs under
R.A. 4917

8. Net share of the surviving spouse

in the conjugal partnership or
community property.

8. Determination of gross estate and net estate

Decedent is a resident or Decedent is a non-resident alien

nonresident citizen, or a resident
alien

All properties, real or personal, Only properties situated in the

tangible or
intangible, wherever situated.
Philippines
provided that, intangible personal
property is subject to the rule of
reciprocity provided for under
Section
104 of the NIRC.396

9. Composition of gross estate

Decedent is a resident or Decedent is a non-resident alien

nonresident citizen, or a resident
alien

Value at the time of death Value at the time of death of all:

of all:
1. Tangible personal property
1. Real property wherever situated situated in
the Philippines
2. Personal property, tangible or

396 Sec. 85

155
intangible, 2. Intangible personal property with
wherever situated situs
in the Philippines unless exempted
3. To the extent of the interest on
therein of the the basis of reciprocity
decedent at the time of his death.

10. Items to be included in gross estate

a. Decedent's interest It includes any interest having value

or capable of being valued,
transferred by the decedent at his
death.

b. Transfer in contemplation of A transfer motivated by the thought

death of
impending death although death

156
 may not be
imminent:

1. When the decedent has, at any

time,
made a transfer in contemplation of
or
intended to take effect in possession
or
enjoyment at or after death; or

2. When decedent has, at any time,

made a
transfer under which he has
retained for
his life or for a period not
ascertainable
without reference to his death or
any
period which does not in fact end
before
his death:

a. Possession, enjoyment or
right to
income from the property; or

b. The right alone or in

conjunction
with any other person to designate
the person who will possess or enjoy
the property or income there
from.397

397Sec. 85[B]
The concept of transfer in contemplation of death has a technical meaning. This does
not constitute any transfers made by a dying person. It is not the mere transfer that
constitutes a transfer in contemplation of death but the retention of some type of control

157
c. Revocable transfer
d. Property passing under general The right to designate the person
power appointment
over the property transferred. In effect, there is no full transfer of all interests in the
property inter vivos.
398 Sec. 85(C)(1)
A transfer by trust or otherwise,
where the enjoyment thereof was
subject at the date of his death to
any change through the exercise of a
power to alter or amend or revoke
or terminate such transfer by:
a. Decedent alone;
b. By the decedent in conjunction
with any other person without
regard to when or from what source
the decedent acquired such power,
to alter, amend, revoke or
terminate; or
c. Where any such power is
relinquished in contemplation of the
decedents death other than a bone
fide sale for an adequate and full
consideration in money
or moneys worth.398
who will
succeed to the property of the prior
decedent, in favor of anybody,
including himself, his estate, his
creditors, or the creditors of his
estate. If the donation contains a
provision of reversion to the donor,
158
 this is similar to a revocable
transfer.399

e. Proceeds of life insurance When the beneficiary is:

a. The estate of the decedent, his

executor or administrator regardless
of whether the designation is
revocable or irrevocable; and

b. A third person, other than the

decedents estate, executor, or
administrator provided that the
designation is revocable.400

f. Prior interests All transfers, trusts, estates,

interests, rights,
powers and relinquishment of
powers made,
created, arising existing, exercised or
relinquished before or after the
effectivity of the Tax Code.401

g. Transfers of insufficient Only the excess of the fair market

consideration402 value of the property at the time of

399 A power is not general (specific) if it can be exercised only in favor of one or more
designated
person or classes of persons exclusive of the decedent, his estate, his creditors and
creditors of his estate, or if it expressly not exercisable in favor of the decedent, his estate,
his creditors, or creditors of his estate.
400 Not part of the gross estate when:

a. Proceeds receivable by a beneficiary designated as irrevocable provided that the

beneficiary is not the decedents estate, executor and administrator; and
b. Where the insurance was not taken by the decedent upon his own life and the
beneficiary is not the decedents estate, executor, or administrator. (Section 85(E)
401 Sec.85

159
 the decedents death over the
consideration received shall be
included in the gross estate.

11.Deductions from estate

Decedent is a resident citizen, non- Decedent is a nonresident alien

resident citizen, or resident alien

Ordinary deductions: The deductions allowed to citizens

or residents of the Philippines are
a. Funeral Expenses403 also extended to a non-resident
alien decedent with respect to his
b. Medical expenses404 estates situated in the Philippines at
the time of his death.
c. Judicial expenses of the
testamentary or intestate In case of deductions for expenses,
405
proceedings. losses, indebtedness and taxes, the
402 b, c, d and g - properties not physically in the estate (these have already been
transferred during
the lifetime of the decedent but are still subject to payment of estate tax) - are transfers
inter vivos which
are considered part of gross estate.
403 The amount deductible is equal to 5% of the gross estate or the amount of the actual

funeral expenses whichever is lower, but in no case to exceed P200, 000.

Actual funeral expenses are those which were actually incurred in connection with
the interment or burial of the deceased and paid for from the estate of said deceased.
Funeral expenses include:
a) Costs of coffin, tombstone, mausoleum, and burial lot;
b) Funeral parlor fees;
c) Mourning clothing of the surviving spouse and the unmarried minor children;
d) Costs of obituary notices; and
e) Expenses during the wake
The following cannot be deducted under funeral expenses:
a) Cash advances of the surviving spouse and the heirs;
b) Expenses paid by the relatives and friends; and
c) Expenses after the burial.
404 Provided, that the following requisites are met:

a. Must be incurred by the decedent within one (1) year prior to his death
b. Must be duly substantiated by receipts; and
c. Must not exceed P500, 000.00.
405 Include administration expenses to those actually incurred in the administration of

the estate

160
 amount of the allowable deduction
d. Claims against the decedents is limited only to the proportion of
such deductions with the value of
estate406
such part of his gross estate which at
e. Claims against insolvent the time of his death, is situated in
the Philippines, bears to the value of
persons407
his entire gross estate wherever
408
f. Unpaid mortgages indebtedness situated.415

g. Casualty Losses409

Examples:
a) fees of the executor or administrator;
b) attorneys fees;
c) accountants fees;
d) court fees;
e) salaries of employees; and
All other expense related to the administration of the estate.
Expenses not essential to the proper settlement of the estate but incurred for the
individual benefit of the heirs, legatees, or devisees are not allowed as deductions.
406 Debts or obligations of the decedent that is enforceable against the estate provided

that the following requisites are met:

a) They were contracted in good faith and for an adequate and full consideration in
money or moneys worth.
b) They must be existing against the estate.
c) They must be legally enforceable obligations of the decedent and ought to be
enforced by the claimants.
d) They must be reasonably certain in amount; and;
e) At the time the indebtedness was incurred, the debt instrument was duly notarized
and if the loan was contracted within three (3) years before the death of the decedent,
the administrator or executor shall submit a statement showing the disposition of the
proceeds of the loan.
407 Requisites for deductibility:

a) The amount of said claims has been initially included as part of the gross estate;
and
b) The incapacity of the debtors to pay their obligations is proven and not merely
alleged.
408 Requisites for deductibility:

a. The fair market value of the property mortgaged without deducting the mortgage
indebtedness has been initially included as part of his gross estate; and
b. The mortgage indebtedness was contracted in good faith and for an adequate
and full consideration in money or moneys worth.
409 They include all losses incurred during the settlement of the estate arising from fires,

storms, shipwreck or other casualties or from robbery, theft or embezzlement.

Provided, that the following requisites are met:
a. Losses not compensated by an insurance or otherwise;
b. Losses not have been claimed as a deduction for income tax purposes; and

161
h. Unpaid Taxes410

i. Vanishing deduction411
j. Transfer for public use412

k. Family home413

c. Losses incurred not later than the last day for payment of the estate tax (6 months
from death).
415 Sec. 86 (B)
410 Unpaid income tax on income due or received before death of the decedent, and

real property taxes, which have accrued prior to the death of the decedent (real
property taxes accrued at the beginning of the year but may be paid before or at the
end of each quarter) are deductible.
Income taxes upon income received after the death of the decedent, or property
taxes not accrued before his death, or any estate tax cannot be deducted because
they are chargeable to the income of the estate.
411 Property previously taxed

An amount allowed to reduce the taxable estate of a decedent where the property:
a. received by him from prior decedent by gift, bequest, devise or inheritance, or
b. transferred to him by gift, has been the object of previous transfer deduction.
It is so-called a vanishing deduction because the rate of deduction gradually
diminishes and entirely vanishes depending upon the time interval between the two (2)
successive transfers.
Two (2) factors necessary in vanishing deduction, these are;
a. There are two (2) deceased persons and the first is the donor; and
b. The second decedent dies within five (5) years after the death of the prior
decedent or in the case of gifts the decedent donee dies within the same period after
the date of the gift.
412 Requisites:

a. The disposition must be testamentary in character.

b. To take effect after death.
c. In favor of the government of the Philippines, or any political subdivision thereof.
d. Exclusively for public purpose.
413 Refers to the dwelling house, including the land on which it is situated, where the

husband and wife, or an unmarried person who is the head of the family and members
of their immediate family resides as certified by the Barangay Captain of the locality.
For the purpose of availing of a family home deduction to the extent provided by law,
a person may constitute only one family home.
The amount deductible is equivalent to the current fair market value of the
decedents family home if said current fair market value exceeds P1, 000,000.00., the
excess shall be subject to estate tax.
Requisites to be deductible:
a. The family home must be the actual residential home of the decedent and his
family at the time of his death as certified by the barangay Captain of the locality where
the family is situated.
b. The total value of the family home must be included in the gross estate of the
decedent.

162
l. Standard deduction equivalent to
P1, 000,000.00414

m. Amounts received by heirs under

R.A. No. 4917 from the decedents
employer as a consequence of the
death of the decedent employee
provided that such amount is
included in the gross estate of the
decedent.

n. Net share of the surviving spouse

in the conjugal partnership or
community property.

o. Tax credit for estate tax paid to a

foreign country.

12. Exclusions from estate

The following properties are excluded from gross estate:416

a) Amount receivable by any beneficiary irrevocably designated in

the policy of insurance by the insured.

c. The allowable deduction must be in an amount equivalent to the current fair

market value of the family home as declared or included in the gross estate not
exceeding P1, 000,000.00.
414 does not include the P 200,000.00 exemption
416 In the determination of the gross estate, the nature of the property, whether common

property of the spouses, separate or exclusive property either of the deceased or of the
surviving spouse, becomes of vital importance. What regime of property relations shall
govern the spouses?
Under the Civil Code, the husband and wife who got married before August 3, 1988
are governed by the Conjugal Partnership of Gains, while those who got married on or
after August 3, 1988 are governed by the Absolute Community of Property, unless a
different regime was agreed upon in the marriage settlement.

163
 b) Proceeds of a group insurance policy taken out by a company for
its employees.
c) Proceeds of insurance policies issued by the GSIS to government
officials and employees.
d) Benefits accruing under the Social Security Act.
e) Proceeds of life insurance payable to the heirs of deceased
members of the military personnel of the United States Army or Philippine
Army under laws administered by the United State veterans
Administration.
f) Accident insurance proceeds.417
g) Separate property of the surviving spouse.

13. Tax credit for estate taxes paid in a foreign country

The estate tax imposed by the tax code shall be credited with the
amount of any estate tax paid to a foreign country.

14. Exemption of certain acquisitions and transmissions

a. The first P200, 000.00 value of the estate.418

b. The merger of the usufruct in the owner of the naked title.
c. The transmission from the first heir, legatee, or donee in favor of
another beneficiary in accordance with the desire of the predecessor.
d. All bequest, devises, legacies or transfers to social welfare, cultural
and charitable institutions, no part of the net income of which inured to the
benefit of any individual and provided that not more than 30% of the said
bequest, etc. shall be used by such institution for administration purposes.
e. Intangible personal property of non-resident aliens under the
principle of reciprocity.
417 Items a - f are proceeds of insurance not includible in the gross estate of the
decedent
418 Sec. 84

164
 f. Retirement benefits of employees of private firms from private
pension plans approved by the BIR.
g. Amount received for war damages.
h. Grants and donations to the Intramuros administration.
15. Filing of notice of death

Within two (2) months after the decedents death419 to the

Commissioner of Internal Revenue where the gross value of the estate
exceeds twenty thousand pesos (P 20,000.00).420

16. Estate tax return

To be filed by the executor, administrator, or any of the legal heirs;

In cases of:

1. Transfers subject to tax

2. Where gross value of estate exceeds P200,000

3. Where estate consists of registered or registrable property,

regardless of
Amount.421

419 or within like period after the executor or administrator qualifies as such
420 Sec. 89
421 Sec. 90 (A)

165
 C. Donors Tax

1. Basic principles

It is levied, assessed, collected and paid upon the transfer of any

person, resident or non-resident, of the property by gift inter vivos. It
applies whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or
intangible.422

Donors tax shall be imposed whether the transfer is in trust or

otherwise, whether the gift is direct or indirect and whether the property is
real or personal, tangible or intangible.

A gift is merely subjected to donors tax.

2. Definition

A tax on the privilege of transmitting ones property or property

rights to another or others without adequate and full valuable
consideration.

3. Nature

It is an excise tax on the privilege of the donor to give or on the

transfer of property by way of gift inter vivos. It is not a property tax.

4. Purpose or object

422 Sec. 98

166
 To:

a. Raise revenues

b. Tax the wealthy and to reduce certain other excise taxes

c. Discourage inter vivos transfers of property which could reduce

mortis causa transfers on which a higher tax423 can be collected

d. Prevent avoidance of income tax throughthe device of splitting

income among
numerous donees who are usually members of a family or into many trusts,
with the donor thereby escaping the effect of the progressive rates of
income taxation

5. Requisites of valid donation

a. The donor must have capacity to donate424

b. There must be an intent to donate425
c. There must be delivery, either actual or constructive
d. The donee must accept the donation

6. Transfers which may be constituted as donation

423 estate tax

424 The donors capacity shall be determined as of the time of the making of the
donation (Art. 737, NCC)
425 Donative intent is necessary only in cases of direct gift. If the gift is indirectly taking

place by way of
sale, exchange or other transfer of property as contemplated in cases of transfers for less
than adequate and full consideration (Sec. 100, NIRC), not always essential to constitute
a gift.

167
 a. Sale/exchange/transfer of property for
insufficient consideration426

If bona fide sale No value shall be included in the

gross estate.

If not a bona fide sale
The excess of the fair market value
at the time of death over the value
of the consideration received by the
decedent shall form part of his gross
estate.

If inter vivos transfer is proven Total value of the property at the

fictitious time of death included in the gross
estate.427

b. Condonation/remission of debt

If the creditor condones the indebtedness of the debtor the following

rules apply:

1. On account of debtors services to the creditor the same is in

taxable income to the debtor.

2. If no services were rendered but the creditor simply condones the

debt, it is taxable gift and not a taxable income.

7. Transfer for less than adequate and full consideration

426 Transfers that are not bona fide sales of property for an adequate and full
consideration in money or moneys worth
427 Sec. 85 (G)

168
 The amount by which the fair market value of the property exceeded
the value of the consideration shall be deemed a gift, and shall be included
in computing the amount of gifts made during the calendar year.428

8. Classification of donor

Taxable within and outside Taxable only within the

Philippines Philippines

a. Resident citizen a. Non-resident aliens

b. Non-resident citizen b. Foreign corporation

c. Resident alien

d. Domestic corporation

9. Determination of gross gift

All property, real or personal, tangible or intangible, that was given

by the donor to the donee by way of gift, without the benefit of any
deduction.429

10. Composition of gross gift

Resident citizen, non-resident Non-resident alien

citizen, and resident alien

a. Real property wherever situated; a. Real property situated within the

Philippines;
b. Personal property wherever
situated, tangible or intangible. b. Personal property:

428 Sec. 100

429 Sec. 104

169
 i. Tangible property situated
within the Philippines

ii. Intangible personal property

with situs in the Philippines unless
exempted on the basis of
430
reciprocity.

11. Valuation of gifts made in property

Personal property Real property

The fair market value of the The fair market value at the time of
property given at the time of the donation or the value fixed by the
gift. assessor, whichever is higher.431

12. Tax credit for donors taxes paid in a foreign country

The tax imposed upon a donor who was a citizen or a resident at the
time of donation shall be credited with the amount of any donor's tax of
any character and description imposed by the authority of a foreign
country. 432

13. Exemptions of gifts from donors tax

1. Donation for political campaign purposes433

2. Certain gifts made by residents434

430 Where the decedent or donor was a nonresident alien at the time of his death or
donation, his real and personal property so transferred but which are situated outside the
Philippines shall not be included as part of his "gross estate" or "gross gift (see Sec. 104)
431 Sec. 102.
432 Sec. 101(C)
433 Sec. 99[C]

170
 3. Certain gifts made by non-residents435
4. Donation of intangibles subject to reciprocity436

5. Donation for athletes prizes and awards437

6. Donation under the Adopt-a-School Program438

7. Exemption under other special laws.439

434 (1) Dowries or gifts made on account of marriage and before its celebration or within
one (1) year thereafter by parents to each of their legitimate, recognized natural, or
adopted children to the extent of the first Ten thousand pesos (P10,000):
(2) Gifts made to or for the use of the National Government or any entity created by
any of its agencies which is not conducted for profit, or to any political subdivision of the
said Government; and
(3) Gifts in favor of an educational and/or charitable, religious, cultural or social
welfare corporation, institution, accredited nongovernment organization, trust or
philanthropic organization or research institution or organization. Not more than thirty
percent (30%) of said gifts shall be used by such donee for administration purposes
(Sec.101[A])
For the purpose of the exemption, a 'non-profit educational and/or charitable
corporation, institution, accredited nongovernment organization, trust or philanthropic
organization and/or research institution or organization' is a school, college or university
and/or charitable corporation, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or organization, incorporated as a
non-stock entity, paying no dividends, governed by trustees who receive no
compensation, and devoting all its income, whether students' fees or gifts, donation,
subsidies or other forms of philanthropy, to the accomplishment and promotion of the
purposes enumerated in its Articles of Incorporation.
435 (1) Gifts made to or for the use of the National Government or any entity created by

any of its agencies which is not conducted for profit, or to any political subdivision of the
said Government.
(2) Gifts in favor of an educational and/or charitable, religious, cultural or social
welfare corporation, institution, foundation, trust or philanthropic organization or research
institution or organization. Not more than thirty percent (30%) of said gifts shall be used by
such donee for administration purposes (Sec.101[B])

436 Sec. 104

437 1. The donation must be prizes and awards given to athletes in local and international
tournaments and competitions;
2. held in the Philippines or abroad; and
3. sanctioned by their respective sports association. (Sec. 1, R.A. 7549)
438 Any aid, help, contribution or donation provided by an adopting private entity to a

government school, whether elementary, secondary or tertiary are exempt from donors
taxes. The assistance may be in the form of, but not limited to infrastructure, teaching,
and skills development, learning, support, computer and science laboratories and food
and nutrition (R.A. 8525)
439 1. Donation to International Rice Research Institute (IRRI)

171
 14. Person liable

Any person, resident or nonresident, of the property transferred by

gift.

Any person making a donation unless the donation is specifically

exempted under NIRC or other special laws, is required for every donation
to accomplish under oath a donors tax return in duplicate.

15. Tax basis

The total net gifts made during the calendar year.440

D. Value-Added Tax (VAT)

1. Concept

VAT is a percentage tax imposed at every stage of the distribution

process on the sale, barter, or exchange, or lease of goods or properties,
and on the performance of service in the course of trade or business, or on

2. Donation to Ramon Magsaysay Award Foundation

3. Donation to Philippines Inventors Convention (PIC)
4. Donation to Integrated Bar of the Philippines (IBP)
5. Donation to the Development Academy of the Philippines
6. Donation to social welfare, cultural or charitable institution, no part of the net
income of which inures to the benefit of any individual, if not more than 30% of the
donation shall be used by the done for administration purposes
7. Donation to Aquaculture Department of the Southeast Asian Fisheries
Development Center of the Philippines
8. Donation to the National Museum
9. Donation to the National Library
10. Donation to the National Social Action Council
11. Donation to the Philippine American Cultural Foundation
12. Donation to Task Force on Human Settlement on the donation of equipment,
materials, and services
440 Sec. 99 (A)

172
the importation of goods, whether for business or non-business
purposes.

It is a business tax levied on certain transactions involving a

wide range of goods, properties, and services, such tax being payable by
the seller, lessor, or transferor. The tax is so- called because it is imposed
on the value not previously subjected to VAT.441

It is also an excise tax, or a tax on the privilege of engaging in the

business of selling goods or services, or in the importation of goods.

The taxpayer442 determines his tax liability by computing the tax on

the gross selling price or gross receipt443 and subtracting or crediting the
earlier VAT on the purchase or importation of goods or on the sale of
service444 against the tax due on his own sale.

2. Characteristics

It is an indirect tax, the amount of which may be shifted to or passed

on the buyer, transferee, or lessee of the goods, properties or services.445

It is equitable: The law is equipped with a threshold margin (P1.5M).

Also, basic marine and agricultural products in their original state are still
not subject to tax. Congress also provided for mitigating measures to
cushion the impact of the imposition of the tax on those previously exempt.
Excise taxes on petroleum products and natural gas were reduced.
Percentage tax on domestic carriers was removed. Power producers
are now exempt from paying franchise tax.

VAT, by its very nature, is regressive. But the Constitution does not
really prohibit the imposition of indirect taxes which is essentially

441 De Leon, The National Internal Revenue Code Annotated, 2000 edition
442 seller
443 output tax
444 input tax
445 Sec. 105

This rule shall likewise apply to existing contracts of sale or lease of goods, properties or
services at the time of the effectivity of R.A. No. 9337 (RR 16-2005)

173
regressive. What it simply provides is that Congress shall evolve a
progressive system of taxation.446
Other Characteristics:

a. It is consumption-based
b. It is imposed on the value-added in each stage of distribution
c. It is a credit-invoice method value-added tax
d. It is not a cascading tax.

3. Impact of tax447

The seller448 upon whom the tax has been imposed.

4. Incidence of tax449

It is on the final consumer, the place at which the tax comes to rest.
The tax is shifted to the buyer of the goods, properties, or services.

5. Tax credit method450

446 In Tolentino v. Sec. of Finance, the Court said that direct taxes are to be preferred,
and as much as possible, indirect taxes should be minimized but not avoided entirely
because it is difficult, if not impossible, to avoid them.
The Constitution mandate to evolve a progressive system of taxation simply means
that direct taxes are to be preferred as much as possible, and indirect taxes should be
minimized. Resort to indirect taxes should be minimized but not avoided entirely. Also,
the regressive effects are corrected by the zero rating of certain transactions and
through the exemptions. The transactions which are subject to VAT are those which
involve goods and services which are used or availed of mainly by higher income groups
(Real properties held primarily for sale to customers, right or privilege to use patent,
copyright.)
447 The point on which a tax is originally imposed. In so far as the law is concerned, the

taxpayer is the person who must pay the tax to the government. He is also termed as the
statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the
tax
448 manufacturer
449 That point on which the tax burden finally rests or settle down. It takes place when

shifting has been effected from the statutory taxpayer to another

450 also called invoice method

174
 The input tax shifted by the seller to the buyer is credited against the
buyers output taxes when he in turn sells the taxable goods, properties or
services.

This method relies on invoices, an entity can credit against or

subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.451

If at the end of a taxable period, the output taxes charged by a seller

are equal to the input taxes passed on by the suppliers, no payment is
required. It is when the output taxes exceed the input taxes that the excess
has to be paid. If however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters. Should
the input taxes result from zero-rated or effectively zero-rated transactions
or from acquisition of capital goods, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other internal
revenue taxes.452
6. Destination principle453

Under this doctrine, goods and services are taxed only in the country
where they are consumed. No VAT shall be imposed to form part of the
cost of goods destined outside the territorial border of the taxing authority.
Thus, exports are zero-rated, while
imports are taxed.

Actual shipment of the goods from the Philippines to a foreign

country is a precondition of an export sale following the destination
principle being adhered to by our VAT system.

VAT is imposed in the country in which the products or services are

actually consumed or used. Exports exempt, imports taxable.454

451 Commissioner of Internal Revenue v. Seagate Technology Philippines, G. R. No.

153866, February 11, 2005 citing various cases and authorities; Abakada Guro Party List
(etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases)
452 Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No.

153866, February 11, 2005 citing various cases and authorities

453 or the Cross Border Doctrine
454 Situs: country of Consumption.

Exception to the destination principle:

175
 7. Persons liable455

A. Any person who, in the regular course of trade or business456

1) sells, barters, exchanges goods or properties,

2) leases goods or properties,
3) renders services; and
4) any person who imports goods.457

Consequently, any sale, barter or exchange of goods or services not

in the course of trade or business is not subject to VAT.458

8. VAT on sale of goods or properties

a. Requisites of taxability of sale of goods or

properties:

1. There is an actual or deemed sale, barter or exchange of goods or

personal properties for valuable consideration;

A zero percent VAT rate for services that are performed in the Philippines, "paid for
in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP."
Hence, actual or constructive export of goods and services from the Philippines to a
foreign country
must be zero-rated for VAT; while, those destined for use or consumption within the
Philippines shall be imposed the twelve percent (12%) VAT.
455 whether or not in the regular course of business (Sec. 105)

Present law requires a threshold amount of P1,500,000.00 gross sale or gross receipt to
become liable for value-added tax.
456 The phrase in the course of trade or business means the regular conduct or pursuit of

a commercial or an economic activity, including transactions incidental thereto, by any

person regardless of whether or not the person engaged therein is a non-stock, nonprofit
organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity (Sec. 105)
457 The importer, whether an individual or corporation and whether or not made in
the course of his trade or business, shall be liable to pay VAT. (RR 16-2005)
458 Commissioner v. Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006

176
 2. The sale is in the course of trade or business or exercise of
profession in the Philippines;

3. The goods or properties are located in the Philippines and are for
use or consumption therein; and

4. The sale is not exempt from VAT under Section 109 of NIRC, special
law, international agreement binding upon the government of the
Philippines.459

9. Zero-rated sales of goods or properties, and

effectively zero-rated sales of goods or properties

The gross selling price of goods or properties is multiplied by 0% VAT

rate. Zero-rated sale of goods or properties by a VAT-registered person is a
taxable transaction for VAT purposes but the sale does not result in any
output tax.

However, the input tax on the purchases of goods, properties or

services related to such zero-rated sale shall be available as tax credit or
refund.

Zero-rated sales of goods by a VAT-registered person:

a. Export Sales460

b. Foreign Currency Denominated Sale461

c. Sale to persons or entities which is VAT exempt under special laws
or international agreements to which the Philippines is a
signatory462
d. Transactions subject to zero-rated (0%)463

459 Absence of any of the above requisites exempts the transaction from VAT. However,
percentage taxes
may apply (Section 116, NIRC).
460 as provided in Section 106(A)(2)(a), See Reference
461 id. (A)(2)(b)
462 id. (A)(2)(c)

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 10. Transactions deemed sale464

a. Transfer, use or consumption not in the course

of business of goods/properties originally
intended for sale or use in the course of
business.

e.g. when a VAT-registered person withdraws goods from his

business for his personal use.

b. Distribution or transfer to shareholders,

investors or creditors

1. Shareholders or investors as share in the profits of the VAT-

registered persons; or
2. Creditors in payment of debt.465

c. Consignment of goods if actual sale not made

within 60 days from date of consignment

Consigned goods returned by the consignee within the 60-day period

are not deemed sold.466

d. Retirement from or cessation of business with

respect to inventories on hand

As of the date of such retirement or cessation, whether or not the

business is continued by the new owner or successor. Examples are

463 as provided in Section 108(B)

464 Sec. 106 (B)
The transactions are deemed sale because in reality there is no sale, but still the law
provides that
the following transactions are considered as sale and are thus subject to VAT.
465 Property dividends which constitute stocks in trade or properties primarily held for sale

or lease declared out of retained earnings on or after Jan. 1, 1996 and distributed by the
company to its shareholders shall be subject to VAT based on the zonal value or FMV
at the time of the distribution, whichever is applicable. ( RR 16-2005)
466 RR 16-2005

178
change of ownership of the business467 and dissolution of a partnership
and creation of a new partnership which takes over the business.468

11. Change or cessation of status as VAT-registered

person

VAT shall apply to goods disposed of or existing as of a certain date if

under the circumstances, the status of a person as a VAT-registered person
changes or is terminated.

a. Subject to VAT

Subject to output tax - applicable to goods/properties originally

intended for sale or use in business and capital goods which are existing as
of the occurrence of the following:

1) Change of business activity from VAT

taxable status to VAT-exempt status

2) Approval of request for cancellation of a

registration due to reversion to exempt
status

3) Approval of request for cancellation of

registration due to desire to revert to

467 e.g. when a sole proprietorship incorporates, or the proprietor sells his entire
business
468 RR 16-2005

179
 exempt status after lapse of 3
consecutive years469

b. Not subject to VAT

1) Change of control of a corporation

By the acquisition of the controlling interest of such corporation by

another stockholder or group of stockholders.

The goods or properties used in the business or those comprising the

stock-in trade
of the corporation will not be considered sold, bartered or exchanged
despite the change in the ownership interest. However, exchange of
property by corporation acquiring control for the shares of stocks of the
target corporation is subject to VAT.

2) Change in the trade or corporate name

Change in the trade or corporate name of the business.

3) Merger or consolidation of corporations

The unused input tax of the dissolved corporation, as of the date of

merger or consolidation, shall be absorbed by the surviving or new
corp.

12. VAT on importation of goods

VAT shall be assessed and collected upon goods brought into the
Philippines, whether or not goods are for use in business.

469from the time of registration by a person who voluntarily registered despite being
exempt under Sec. 109 (2)

180
 a. Transfer of goods by tax exempt persons

The subsequent purchasers, transferees or recipients of such

imported goods shall be considered as importers who shall be liable for the
tax on importation.

The tax due on such importation shall constitute a lien on the goods
superior to all charges or liens on the goods, irrespective of the possessor
thereof.470

13. VAT on sale of service and use or lease of properties

a. Requisites for taxability

1. There is a sale or exchange of service or lease or use of property

enumerated in the law or other similar services;

2. The service is performed or to be performed in the Philippines;

3. The service is in the course of trade of taxpayers trade or business

or profession;

4. The service is for a valuable consideration actually or

constructively received; and

5. The service is not exempt under the Tax Code, special law or
international agreement.471

14. Zero-rated sale of services472

1) Processing, manufacturing or repacking goods for other persons

doing business outside the Philippines which goods are subsequently

470 Sec. 107 (B)

471 Absence of any of the requisites renders the transaction exempt from VAT but may be
subject to other percentage tax under Title V of the Tax Code.
472 Ibid. (B)

181
exported, where the services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP.

2) Services other than those mentioned in the preceding paragraph

rendered to a person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed, the consideration
for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP.

3) Services rendered to persons or entities whose exemption under

special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero percent
(0%) rate.

4) Services rendered to persons engaged in international shipping or

international air transport operations, including leases of property for use
thereof;473 Provided, however, that the services referred to herein shall not
pertain to those made to common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place in the Phil. to
another place in the Phil., the same being subject to 12% VAT under Sec.
108.474

5) Services performed by subcontractors and/or contractors in

processing, converting, of manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of total annual production.

6) Transport of passengers and cargo by air or sea vessels from the

Philippines to a foreign country and;

7) Sale of power or fuel generated through renewable sources of

energy such as, but not limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging energy sources using
technologies such as fuel cells and hydrogen fuels.475 Zero-rating shall apply

473 Ibid..
474 supra
475 Ibid.

182
strictly to the sale of power or fuel generated through renewable sources of
energy, and shall not extend to the sale of services related to the
maintenance or operation of plants generating said power.

15. VAT exempt transactions

a. VAT exempt transactions, in general

It involves goods or services which, by their nature, are specifically

listed in and expressly exempted from VAT under the Tax Code, without
regard to the tax status of the party to the transaction.

b. Exempt transactions, enumerated

1. Sale/ import of agricultural, marine food products in original

state; of livestock and poultry.477
476

Polished and/or husked rice, corn grits, raw cane sugar and molasses,
ordinary salt, and copra shall be considered in their original state.

476 Original state including preservation using advanced technological means of

packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other
similar packaging methods (RR 16-2005)
Original state even if they have undergone the simple processes of preparation or
preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or
stripping.
477 Livestock or poultry does not include fighting cocks, race horses, zoo animals and

other animals generally considered as pets

183
 2. Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish,
prawn, livestock and poultry feeds.

3. Import of personal and household effects of Phil resident returning

from abroad and nonresident citizens coming to resettle in the Philippines

4. Import of professional instruments and implements, wearing

apparel, domestic animals, and personal household effects belonging to
persons coming to settle in the Philippines, for their own use and not for
sale, barter or exchange.

5. Services subject to percentage tax.

6. Services by agricultural contract growers and milling for others of

palay into rice, corn into grits and sugar cane into raw sugar;

7. Medical, dental, hospital and veterinary services except those

rendered by professionals.478
8. Educational services rendered by private educational institutions,
duly accredited by DEPED, CHED, TESDA, and those rendered by
government educational institutions.

9. Services rendered by individuals pursuant to an employer-

employee relationship;

10. Services rendered by regional or area headquarters established in

the Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region and do not earn or
derive income from the Philippines;

478Ibid
Laboratory services are exempted. If the hospital or clinic operates a pharmacy or
drug store, the sale of drugs and medicine is subject to VAT. [RR 16-2005]

184
 11. Transactions which are exempt under international agreements
to which the Philippines is a signatory or under special laws, except those
under P.D. No. 529.479

12. Sales by agricultural cooperatives duly registered with the

Cooperative Development Authority to their members as well as sale of
their produce. Exemption includes importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be used
directly and exclusively in the production and/or processing of their
produce.

13. Gross receipts from lending activities by credit or multi-purpose

cooperatives duly registered with the Cooperative Development Authority.

14. Sales by non-agricultural, non- electric and non-credit

cooperatives duly registered with the Cooperative Development Authority
are exempt but their importation of machineries and equipment, including
spare parts thereof, to be used by them are subject to vat.

15. Export sales by persons who are not VAT- registered;

16. Sale of real properties the ff. sales are exempt:

a. Sale of real properties NOT primarily held for sale to

customers or held for lease in the ordinary course of trade or
business.

b. Sale of real properties utilized for low-cost housing480

c. Sale of real properties utilized for socialized housing.481

479 Petroleum Exploration Concessionaires under the Petroleum Act of 1949

480 Low-cost housing" refers to housing projects intended for homeless low-income family
beneficiaries, undertaken by the Government or private developers, which may
either be a subdivision or a condominium registered and licensed by the Housing and
Land Use Regulatory Board/Housing (HLURB) under B.P. Blg. 220, P.D. No. 957 or any other
similar law, wherein the unit selling price is within the selling price ceiling per unit of
P750,000.00 under R.A. No. 7279, and other laws, such as R.A. No. 7835 and R.A. No. 8763.
481 "Socialized housing" refers to housing programs and projects covering houses and lots

or home lots only undertaken by the Government or the private sector for the

185
 d. Sale of residential lot valued at P1.5M and below, or house
& lot and other residential dwellings valued at P2.5M and below,
where the instrument of sale/transfer/disposition was executed on
or after July 1, 2005.482

17. Lease of residential units with a monthly rental per unit not
exceeding P10K, regardless of the amount of aggregate rentals received
by the lessor during the year. Lease of residential units where the
monthly rental per unit exceeds P10K but the aggregate of such
rentals of the lessor during the year do not exceed One Million Five
Hundred Pesos (P1.5M) shall likewise be exempt from VAT, however,
the same shall be subjected to three percent (3%) percentage tax.

In cases where a lessor has several residential units483 for

lease, some are leased out for a monthly rental per unit of not exceeding
P10K while others are leased out for more than P10K per unit, his tax
liability will be as follows:

a. The gross receipts from rentals not exceeding P10K per

month per unit shall be exempt from VAT regardless of the aggregate
annual gross receipts.

underprivileged and homeless citizens which shall include sites and services
development, long-term financing, liberated terms on interest payments, and such other
benefits in accordance with the provisions of RA No. 7279 and RA No. 7835 and RA No.
8763. "Socialized housing" shall also refer to projects intended for the
underprivileged and homeless wherein the housing package selling price is within the
lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent
housing program of the Government, the private sector or non-government
organizations
482 To be adjusted every 3 years from Jan 31, 2009

If two or more adjacent residential lots are sold or disposed in favor of one buyer, for
the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT
only if the aggregate value of the lots does not exceed P1.5M. Adjacent residential
lots, although covered by separate titles and/or separate tax declarations, when sold or
disposed to one and the same buyer, whether covered by one or separate Deed of
Conveyance, shall be presumed as a sale of one residential lot (RR 16-2005)
483 The term 'residential units' shall refer to apartments and houses & lots used for

residential purposes, and buildings or parts or units thereof used solely as dwelling
places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and
hotel rooms.
The term 'unit' shall mean an apartment unit in the case of apartments, house in the
case of residential houses; per person in the case of dormitories, boarding houses and
bed spaces; and per room in case of rooms for rent. [RR 16-2005]

186
 b. The gross receipts from rentals exceeding P10K per month
per unit shall be subject to VAT if the aggregate annual gross receipts
from said units only484 exceeds P1.5M. Otherwise, the gross
receipts will be subject to the 3% tax.

18. Sale, importation, printing or publication of books and any

newspaper, magazine review or bulletin which appears at regular intervals
with fixed prices for subscription and sale and which is not devoted
principally to the publication of paid advertisements;

19. Sale, importation or lease of passenger or cargo vessels and

aircraft, including engine, equipment and spare parts thereof for
domestic or international transport operations.

20. Importation of fuel, goods, and supplies by persons engaged in

international shipping or air transport operations.

21. Services of banks, non-bank financial intermediaries performing

quasi-banking functions and other non-bank financial intermediaries; and

22. Sale or lease of goods or properties or the performance of

services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not exceed
the amount of P1,500,0000.485

16. Input tax and output tax, defined

Input tax Output tax

The VAT due from or paid by a VAT- The VAT due on the sale or lease of
registered person in the course of taxable goods or properties or
his trade or business on services by any person registered or

484 not including the gross receipts from units leased for not more than P10K
485 Sec. 109

187
importation of goods or local required to register under Section
purchase of goods or services, 236489 of the Code.
including lease or use of property,
from a VAT-registered person. It
includes the transitional input tax
determined in accordance with
Section 111486 of this Code.

It includes input taxes which can be

directly attributed to transactions
subject to the VAT plus a ratable
portion of any input tax which
cannot be directly attributed to
either the taxable or exempt
activity. Input tax must be
evidenced by a VAT invoice or
official receipt issued by a VAT-
registered person in accordance
with Secs. 113 and 237487 of the Tax
Code.488

17. Sources of input tax

a. Purchase or importation of goods490

b. Purchase of real properties for which a VAT has

actually been paid

486 Ibid.
487 Ibid.
488 RR 16-2005

489 See Reference

490 (i) For sale; or

(ii) For conversion into or intended to form part of a finished product for sale including
packaging materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for depreciation or amortization is
allowed under this Code, except automobiles, aircraft and yachts. (Sec. 110 (A)(1)

188
 c. Purchase of services in which VAT has actually
been paid

d. Transactions deemed sale491

e. Transitional input tax492

It is an input tax credit allowed to person who becomes liable to

value-added tax or any person who elects to be a VAT-registered person.
The allowed input tax shall be whichever is higher between:

1. 2% of the value of the taxpayers beginning inventory of goods,

materials
and supplies; or

2. The actual value-added tax paid on such goods.493

f. Presumptive input tax

It is an input tax credit allowed to persons or firms engaged in the:

1. processing of:

a. sardines
b. mackerel
c. milk
2. manufacturing of:

a. refined sugar
b. cooking oil
c. packed noodle based instant meals

491 supra
492 See input tax, supra
493 Sec.111 (A)

189
 The allowed input tax shall be equivalent to four percent (4%) of the
gross value in money of their purchases of primary agricultural products
which are used as inputs to their production.494

g. Transitional input tax credits allowed under the

transitory and other provisions of the
regulations495

A person who becomes liable to value-added tax or any person who

elects to be a VAT-registered person shall be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to two
percent (2%) of the value of such inventory or the actual value-added tax
paid on such goods, materials and supplies, whichever is higher, which shall
be creditable against the output tax.496

18. Persons who can avail of input tax credit

(a) Purchaser - upon consummation of sale and on importation of

goods or properties;497 and

(b) Importer - upon payment of the value-added tax prior to the

release of the goods from the custody of the Bureau of Customs.

However, in the case of purchase of services, lease or use of

properties, the
input tax shall be creditable to the purchaser, lessee or licensee upon
payment of the compensation, rental, royalty or fee.498

494 The term "processing" shall mean pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or form or inner substance of a
product in such manner as to prepare it for special use to which it could not have been
put in its original form or condition (Id. (B))
495 See e) Transitional input tax, supra
496 Sec. 111 (A)
497 In the case of purchase of services, lease or use of properties, the input tax shall be

creditable to the purchaser, lessee or licensee upon payment of the compensation,

rental, royalty or fee.
498 Sec. 110 (A)(2)

190
 19. Determination of output/input tax; VAT payable;
Excess input tax credits

a. Determination of output tax

Sellers of goods or properties:

Gross selling price (X) VAT rate

Sellers of service:

Gross receipts (X) VAT rate

b. Determination of input tax creditable

The sum of the excess input tax carried over from the preceding
month or quarter and the input tax creditable to a VAT-registered person
during the taxable month or quarter shall be reduced by the amount of
claim for refund or tax credit for value-added tax and other adjustments,
such as purchase returns or allowances and input tax attributable to
exempt sale.

The claim for tax credit shall include not only those filed with the
Bureau of Internal Revenue but also those filed with other government
agencies.499

c. Allocation of input tax on mixed transactions

499 such as the Board of Investments or the Bureau of Customs (Sec. 110 (C))

191
 A VAT-registered person who is also engaged in transactions not
subject to Vat shall be allowed to recognize input tax credit on transactions
subject to Vat as follows:

1. All the input taxes that can be directly attributed to transactions

subject to VAT may be recognized for input tax credit. Input taxes that can
be directly attributable to VAT taxable sales of goods and services to the
Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations (GOCCs)
shall not be credited against output taxes arising from sales to non-
Government entities; and

2. If any input tax cannot be directly attributed to either a VAT

taxable or VAT-exempt transaction, the input tax shall be pro-rated to the
VAT taxable and VAT-exempt transactions and only the ratable portion
pertaining to transactions subject to VAT may be recognized for input tax
credit.500

d. Determination of the output tax and VAT

payable and computation of VAT payable or
excess tax credits

Output tax
Less: Input tax
VAT payable/ excess tax credits

20. Substantiation of input tax credits501

Transactions Required Support

Input taxes on domestic purchases VAT invoice

of goods or properties made in the

500 Input tax attributable to VAT-exempt sales shall not be allowed as credit against the
output tax but should be treated as part of cost of goods sold.
For persons engaged in both zero-rated sales and nonzero rated sales, the aggregate
input taxes shall be allocated ratably between the zero-rated and non-zero rated sales.
501 RR 16-2005

192
course of trade or
business

Input tax on purchases of real

property
Public instrument502 together with
a. Cash/deferred basis the VAT invoice for the entire selling
price and
non-VAT Official Receipt for the
initial and
succeeding payments.

b. Installment basis
Public instrument and VAT Official
Receipt for every payment

Input tax on domestic purchases of VAT Official Receipt

service

Input tax on importation of goods Import entry or other equivalent

document
showing actual payment of VAT on
the imported goods

Transitional input tax Inventory of goods as

shown in a detailed list to
be submitted to the BIR

Input tax on deemed sale Required invoices

transaction

502 i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc.

193
Input tax from payments made to Monthly Remittance Return of Value
non-residents503 Added
Tax Withheld504 filed by the resident
payor in behalf of the non-resident
evidencing remittance of VAT due
which was withheld by the payor.

Advance VAT on sugar Payment order showing payment of

the advance VAT

21.Refund or tax credit of excess input tax

a. Who may claim for refund/apply for issuance

of tax credit certificate (TCC)

Any VAT-registered person, whose sales are zero-rated or effectively

zero-rated may apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except

503 such as for services, rentals, or royalties

504 BIR Form 1600

194
transitional input tax, to the extent that such input tax has not been applied
against output tax.505

b. Period to file claim/apply for issuance of TCC

Within two (2) years after the close of the taxable quarter when the
sales were made.

c. Manner of giving refund

Upon warrants drawn by the Commissioner or by his duly authorized

representative without the necessity of being countersigned by the
Chairman, Commission on audit, subject to post audit by the Commission
on Audit.506

d. Destination principle or Cross-border

doctrine507

Destination principle Cross border doctrine

Goods and services are taxed only in Mandates that no VAT shall be
the country where these are imposed to form part of the cost of
consumed the goods destined for consumption
outside the territorial border of the
taxing authority.

22. Invoicing requirements

a. Invoicing requirements in general

For every sale, a VAT-registered person shall issue an invoice or

receipt.

505 Sec. 112 (A)

506 Id. (E)
507 See also (D)(7), supra

195
 Aside from the information required under Section 237,508 the
following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed

by his taxpayer's identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay
to the seller with the indication that such amount includes the value-added
tax.

b. Invoicing and recording deemed sale

transactions

Transaction Invoicing Requirement

Transfer, use or consumption Memorandum entry in the

not in the course of business of subsidiary sales journal to record
goods or properties originally withdrawal of goods for personal
intended for sale or for use in use
the course of business

Distribution or transfer to
shareholders/investors or
creditors Invoice, at the time of the
transaction, which should include all
Consignment of goods if actual the info prescribed in Sec. 113 (B)509
sale is not made within 60 days

508 See Reference

509 Ibid.

196
 Retirement from or cessation An inventory shall be prepared and
of business with respect to all submitted to the RDO who has
goods in hand jurisdiction over the taxpayers
principal place of business not later
than 30 days after retirement or
cessation from the business. An
invoice shall be prepared for the
entire inventory, which shall be the
basis of the entry into the subsidiary
sales journal. The invoice need not
enumerate the specific items
appearing in the inventory
regarding the description of the
goods. If the business is to be
continued by the new owners or
successors, the entire amount of
output tax on the amount deemed
sold shall be allowed as input taxes.

c. Consequences of issuing erroneous VAT invoice

or VAT official receipt

1. In case of non-VAT registered person who issues a VAT

invoice/receipt shall be held liable to:

a. payment of percentage tax if applicable;

b. payment of VAT without input tax;

197
 c. 50% surcharge on tax due; and

d. the purchaser shall be allowed to recognize an input tax credit

provided that the invoice/official receipt contains the required information.

2. In case of VAT-registered who issues a VAT invoice/official receipt

for a VAT exempt sale without the words VAT Exempt Sale shall be held
liable to pay 12% VAT.510

23.Filing of return and payment

Every person liable to pay the VAT shall file a quarterly return of the
amount of his gross sales or receipts within 25 days following the close of
each taxable quarter prescribed for each taxpayer.

Required to file VAT return:

1. Every person or entity who in the course of trade or business, sells

or leases goods, properties, and services subject to VAT, if the aggregate
amount of actual gross
sales or receipts exceed P1.5 million for any twelve month period

2. A person required to register as VAT taxpayer but failed to register

3. Any person who imports goods

4. Professional practitioners.511

VAT-registered shall pay the VAT on a monthly basis. The monthly

return shall be filed not later than the 20th day following the end of each
month.

510Sec. 113 (D)

511 Services of Professional Practitioners are subject to:
VAT if the gross professional fees exceed P1.5 million for a 12-month period; or
3% percentage tax if the gross professional fees does not exceed P1.5 million for a
12-month period (RR 16-2005)

198
 24. Withholding of final VAT on sales to government

The Government or any of its political subdivisions, instrumentalities

or agencies,
including government owned or controlled corporations (GOCCs) shall,
before making payment on account of its purchase of goods and/or services
taxed at 12% shall deduct and withhold a final VAT of 5% of the gross
payment.512

512Sec. 114 (C)

The five percent (5%) final VAT withholding rate shall represent the net VAT payable to
the seller
The remaining seven percent (7%) effectively accounts for the standard input VAT for
sales of goods or
services to government or any of its political subdivisions, instrumentalities or agencies
including GOCCs, in lieu of the actual Input VAT directly attributable or ratably
apportioned to such sales.
Should actual input VAT attributable to sale to government exceed seven percent
(7%) of gross payments, the excess may form part of the sellers expense or cost
If actual input VAT attributable to sale to government is less than 7% of gross
payment, the difference must be closed to expense or cost.

199
 E. Compliance Requirements (Internal Revenue Taxes)

1. Administrative requirements

a. Registration requirements

1) Annual registration fee

Five hundred pesos (P500) - upon registration and every year

thereafter on or before the last day of January for every separate or distinct
establishment or place of business.513

2) Registration of each type of internal

revenue tax

Every person who is required to register with the Bureau of Internal

Revenue shall register each type of internal revenue tax for which he is

513 Cooperatives, individuals earning purely compensation income, whether locally or

abroad, and overseas workers are not liable to the registration fee herein imposed.
The registration fee shall be paid to an authorized agent bank located within the
revenue district, or to the Revenue Collection Officer, or duly authorized Treasurer of the
city of municipality where each place of business or branch is registered.
Sec. 236 (B)

200
obligated, shall file a return and shall pay such taxes, and shall update such
registration of any changes.514

3) Transfer of registration

In case a registered person decides to transfer his place of business

or his head office or branches, it shall be his duty to update his registration
status by filing an application for registration information update in the
form prescribed therefor.515

4) Other updates

Any person registered shall, whenever applicable, update his

registration information with the Revenue District Office where he is
registered, specifying therein any change in type and other taxpayer
details.516

5) Cancellation of registration

The registration of any person who ceases to be liable to a tax type

shall be cancelled upon filing with the Revenue District Office where he is
registered an application for registration information update in a form
prescribed therefor.517
6) Power of the Commissioner to suspend
the business operations of any person
who fails to register

The temporary closure of the establishment shall be for the duration

of not less than five (5) days and shall be lifted only upon compliance with

514 in accordance with Subsection (E), Id., (C)

515 Id., (D)
516 Id., (E)
517 Id., (F)

Other instances where a VAT registered person may apply for cancellation of
Registration:
1. A change of ownership, in case of a single proprietorship
2. Dissolution of a partnership or corporation
3. Merger or consolidation with respect to the dissolved corporation
4. A person who has registered prior to commencement of a planned business, but
failed to actually start his business

201
whatever requirements prescribed by the Commissioner in the closure
order.518

b. Persons required to register for VAT

1) Optional registration for VAT of exempt

person

Any person who is not required to register for VAT519 may elect to
register for VAT by registering with the RDO that has jurisdiction over the
head office of that person, and paying the annual registration fee.520

2) Cancellation of VAT registration

Requirements:

1. The VAT-registered person makes written application and

demonstrates to the
Commissioners satisfaction that his gross sales or receipts for the following
12 months, other than those that are exempt,521 will not exceed P1.5
million.

2. He has ceased to carry on his trade or business and does not

expect to recommence any trade or business within the next 12 months.522

3) Changes in or cessation of status of a

VAT-registered person523

c. Supplying taxpayer identification number (TIN)

A taxpayer must have only one TIN. Any person who secures more
than one TIN shall be criminally liable.524
518 Sec. 115
519 under Subsection G
520 Sec. 236 (H)
521 under Sec. 109 1A to U
522 Sec. 236 (F2)
523 supra
524 Sec. 236

202
 d. Issuance of receipts or sales or commercial
invoices

All persons subject to an internal revenue tax shall, for each sale or
transfer of merchandise or for services rendered valued at 25 pesos or
more, issue duly registered receipts or sales or commercial invoices,
prepared at least in duplicate, showing the date of transaction, quantity,
unit cost and description of merchandise or nature of service.525

1) Printing of receipts or sales or

commercial invoices

Receipts must be serially numbered and shall show the name, style,
TIN and the business address of the person.526

2) Invoicing requirements for VAT

a) Information contained in the VAT

invoice or VAT official receipt

1. A statement that the seller is a VAT-registered person, followed by

his taxpayer's identification number (TIN); and

2. The total amount which the purchaser pays or is obligated to pay

to the seller with the indication that such amount includes the value-added
tax.

a. The amount of the tax shall be shown as a separate item in

the invoice or
receipt;

525 Sec. 237

526 Sec. 238

203
 b. If the sale is exempt from value-added tax, the term "VAT-
exempt sale" shall be written or printed prominently on the invoice
or receipt;

c. If the sale is subject to zero percent (0%) value-added tax,

the term "zero-rated sale" shall be written or printed prominently on
the invoice or receipt;

d. If the sale involves goods, properties or services some of

which are subject
to and some of which are VAT zero-rated or VAT exempt, the invoice
or receipt shall clearly indicate the breakdown of the sale price
between its taxable, exempt and zero rated components, and the
calculation of the value added tax on each portion
of the sale shall be shown on the invoice or receipt. The seller may
issue separate invoices or receipts for the taxable, exempt, and zero
rated components of the sale.

3. The date of transaction, quantity, unit cost and description of the

goods or properties or nature of the service; and

4. In the case of sales in the amount of one thousand pesos (P1, 000)
or more where
the sale or transfer is made to a VAT registered person, the name, business
style, if any, address and taxpayer identification number (TIN) of the
purchaser, customer or client.527
b) Consequences of issuing erroneous
VAT invoice or official receipts528

e. Exhibition of certificate of payment at place of

business

The certificate or receipts showing payment of taxes issued to a

person engaged in a business subject to an annual registration fee shall be
kept conspicuously exhibited in plain view in or at the place where the

527 Sec. 113 (B)

528 supra

204
business is conducted. Peddlers are required to show the certificate upon
demand.529

f. Continuation of business of deceased person

The person interested in the estate should submit to the BIR

inventories of goods and stocks had at the time of such death, transfer or
change of name. No additional payment shall be required for the residue of
the term of which the tax was paid.530

g. Removal of business to other location

Any business for which the annual registration fee has been paid may
be removed and continued in any other place without the payment of
additional tax during the term for which the payment was made.531

529 Sec. 241

530 Sec. 242
531 Sec. 243

205
 2. Tax returns

A tax return is a report made by the taxpayer to the BIR on all gross
income received during the taxable year, the allowable deduction including
exemptions, the net taxable income, the income tax rate, the income tax
due, the income tax withheld, if any, and the income tax still to be paid or
refundable.

a. Income Tax Returns

1) Individual Tax Returns

a) Filing of individual tax returns

(1) Who are required to file

Resident citizens receiving income a. Individuals deriving compensation

from sources within or outside the income
Philippines from 2 or more employers,
concurrently or
successively at anytime during the
taxable year;

b. Employees deriving compensation

income
regardless of the amount, whether
from a single or several employers
during the calendar year, the income
tax of which has not been withheld
correctly resulting to collectible or
refundable return;

c.Employees whose monthly gross

compensation income does not

206
 exceed 5,000
or the statutory minimum wage,
whichever is higher, and opted for
non-withholding of tax on said
income;

d. Individuals deriving non-business,

non- professional related income in
addition to compensation income
not otherwise subject
to a final tax;

e. Individuals receiving purely

compensation
income from a single employer,
although the income of which has
been correctly withheld, but whose
spouse is not entitled to substituted
filing.

Non-resident citizens receiving

income from sources within the
Philippines.

Citizens working abroad receiving

income from sources within the
Philippines.

Aliens, whether resident or not,

receiving income from sources
within the Philippines.

(a) Return of husband

and wife

207
 Married individuals, whether citizens, resident or nonresident aliens,
who do not derive income purely from compensation, shall file a return for
the taxable year to include the income of both spouses.

Where it is impracticable for the spouses to file one return, each

spouse may file a separate return of income but the returns so filed shall be
consolidated by the Bureau for purposes of verification for the taxable
year.532

(b) Return of parent to

include income of
children

The income of unmarried minors derived from property received

from a living parent shall be included in the return of the parent, except

(1) when the donor's tax has been paid on such property, or
(2) when the transfer of such property is exempt from donor's tax.533

(c) Return of persons

under disability

May be made by his duly authorized agent or representative or by

the guardian or other person charged with the care of his person or
property, the principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties provided for
erroneous, false or fraudulent returns.534

532 Id., (D)

533 Id., (E)
534 Id., (F)

208
 (2) Who are not required to file

(a) An individual whose gross income does not exceed his total
personal and additional exemptions for dependents.535

(b) An individual with respect to pure compensation income536

derived from sources within the Philippines, the income tax on which has
been correctly withheld.537

(c) An individual whose sole income has been subjected to final

withholding tax;538 and
(d) A minimum wage earner or an individual who is exempt from
income tax.539

b) Where to file

With an authorized agent bank, Revenue District Officer, Collection

Agent or duly authorized Treasurer of the city or municipality in which such
person has his legal residence or principal place of business in the
Philippines.

If there be no legal residence or place of business in the Philippines,

with the Office of the Commissioner.540

535 under Sec. 35, supra

A citizen of the Philippines and any alien individual engaged in business or practice of
profession within the Philippine shall file an income tax return, regardless of the amount of
gross income.
536 Compensation for services in whatever form paid, including, but not limited to fees,

salaries, wages, commissions, and similar items.

537 under the provisions of Sec. 79, supra

An individual deriving compensation concurrently from two or more employers at any

time during the taxable year shall file an income tax return.
An individual whose compensation income derived from sources within the
Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return;
538 pursuant to Sec. 57(A), supra
539 Id., (A)(2)

Individuals not required to file an income tax return may nevertheless be required to
file an information return. Under R.A. 9504, minimum wage earners are granted full tax
exemption from paying income tax.
540 Id., (B)

209
 c) When to file

On or before the fifteenth (15th) day of April of each year covering

income for the preceding taxable year.

However, individuals who are self-employed or in practice of a

profession are required to file and pay estimated income tax every quarter
as follows:

1. First Quarter - April 15

2. Second Quarter - August 15
3. Third Quarter - November 15
4. Final Quarter - April 15 of the following year541

2) Corporate Returns

a) Requirement for filing returns

Every corporation subject to tax under the NIRC shall file a corporate
tax return,
except foreign corporations not engaged in trade or business in the
Philippines.542

(1) Declaration of quarterly

corporate income tax

Every corporation shall file in duplicate a quarterly summary

declaration of its gross income and deductions on a cumulative basis for the
preceding quarter or quarters upon which the income tax shall be levied,
collected and paid. The tax so computed shall be decreased by the amount

541 Individuals subject to tax on capital gains;

(a) Sale or exchange of shares of stock not traded thru a local stock exchange -
within thirty (30) days after each transaction and a final consolidated return on or before
April 15 of each year covering all stock transactions of the preceding taxable year; and
(b) Sale or disposition of real property - within thirty (30) days following each sale or
other disposition. (Sec. 52)
542 Ibid.

210
of tax previously paid or assessed during the preceding quarters and shall
be paid not later than sixty (60) days from the close of each of the first
three (3) quarters of the taxable year, whether calendar or fiscal year.543

(a) Place of filing

With the authorized agent banks or Revenue District Officer or

Collection Agent or duly authorized Treasurer of the city or municipality
having jurisdiction over the location of the principal office of the
corporation filing the return or place where its main books of accounts and
other data from which the return is prepared are kept.544

(b) Time of fling

Within sixty (60) days following the close of each of the first three (3)
quarters of the taxable year.

(2) Final adjustment return

It is a return that covers the total taxable income of a corporation for

the preceding calendar or fiscal year. The quarterly tax payments are in the
nature of advances or portions of the annual income tax due. They have to
be adjusted at the end of the calendar or fiscal year through the Final
Adjustment return.
(a) Place of filing545

(b) Time of filing

On or before the fifteenth (15th) day of April, or on or before the

fifteenth (15th) day of the fourth (4th) month following the close of the
fiscal year, as the case may be.546

(3) Taxable year of

corporations

543 Sec. 75
544 Sec. 77 (A)
545 See Sec. 77 (A), supra
546 Id., (B)

211
 A corporation may employ either calendar year or fiscal year as a
basis for filing its annual income tax return.

The corporation shall not change the accounting period employed

without prior approval from the Commissioner.547

(4)Extension of time to file

return

The Commissioner may, in meritorious cases, grant a reasonable

extension of time for filing returns of income.548

b) Return of corporation
contemplating dissolution or
reorganization

Within thirty (30) days after the adoption by the corporation of a

resolution or plan for its dissolution, or for the liquidation of the whole or
any part of its capital stock, including a corporation which has been notified
of possible involuntary dissolution by the Securities and Exchange
Commission, or for its reorganization.549

c) Return on capital gains realized

from sale of shares of stock not
traded in the local stock exchange

Within thirty (30) days after each transactions and a final

consolidated return of all transactions during the taxable year on or before
the fifteenth (15th) day of the fourth (4th) month following the close of the
taxable year.

3) Returns of receivers, trustees in

bankruptcy or assignees

547 in accordance with the provisions of Sec. 47 (See Reference)( Sec. 52 (B))
548 or final and adjustment returns in case of corporations, subject to the provisions of
Section 56 (Sec. 53)
549 Sec. 52 (C)

212
 In the same manner and form as the corporation whose properties
and businesses they operate is required to make returns, and any tax due
on the income as returned by receivers, trustees or assignees shall be
assessed and collected in the same manner as if assessed directly against
the organizations of whose businesses or properties they have custody or
control.550

4) Returns of general partnerships

In duplicate, setting forth the items of gross income and of

deductions allowed, and the names, Taxpayer Identification Numbers (TIN),
addresses and shares of each of the partners.551

5) Fiduciary returns

In duplicate, a return of the income of the person, trust or estate for

whom or which the fiduciary act, which apply to individuals in case such
person, estate or trust has a gross income of Twenty thousand pesos
(P20,000) or over during the taxable year.552

b. Estate Tax Returns

1) Notice of death to be filed

a. In all cases of transfers subject to tax; or

b. Even if exempt from tax, if gross value of estate exceeds Twenty

thousand pesos (P20,000).553

2) Estate tax returns

a) Requirements

550 Sec. 54
551 Sec. 55
552 Sec. 65
553 Sec. 89

213
 An estate tax return is required:

1. In all cases of transfers subject to tax;

2. Even though exempt, where gross value of estate exceeds

P200,000;

3. When the gross estate consists of registered or registrable

property,
regardless of amount.554

b) Time of filing and extension of

time

Within six (6) months after the decedent's death.

The Commissioner shall have authority to grant, in meritorious cases,

a reasonable extension not exceeding thirty (30) days for filing the
return.555

c) Place of filing

Resident Decedent Non-Resident Decedent

1. Authorized Agent Bank (AAB) or 1. Office of the CIR

2. Revenue District Officer (RDO), 2. Revenue District Officer or

Collection Officer, or
3. Philippine Embassy or Consulate
3. Duly authorized Treasurer of the in the country where decedent is

554 Sec. 90 (A)

555 id., (B)(C)

214
city or municipality in which the residing at the time of his/her death
decedent was domiciled at the time
of his death, or 4. Any other place where the CIR
permits the estate tax return to be
4. Any other place where the CIR filed.
permits the estate tax return to be
filed.556

3) Discharge of executor or administrator

from personal liability

The executor or administrator must:

a. File a written application to the Commissioner for the

determination of the amount of the estate tax and further stating his desire
to be absolved or to be discharged from the liability.

b. The Commissioner must notify the executor or administrator

Return was filed No return filed

Within one (1) year after the return Within one (1) year after the making
is filed of such application.557

3. The executor or administrator, upon payment of the amount of

which he is notified, shall be discharged from personal liability for any
deficiency in the tax thereafter found to be due and shall be entitled to a
receipt or writing showing such discharge.558
a) Definition of deficiency

556 Id., (D)

557 But not after the expiration of the period prescribed for the assessment of the tax in
Section 203.
558 Sec.92

215
 (a) The amount by which the estate tax imposed exceeds the amount
shown as the tax by the executor, administrator or any of the heirs upon his
return; or

(b) If no amount is shown as the tax by the executor, administrator or

any of the heirs upon his return, or if no return is made by the executor,
administrator, or any heir, then the amount by which the tax exceeds the
amounts previously assessed559 as a deficiency.560

c. Donors Tax Returns

1) Requirements

Notice of donation is not required.

Except:

1. Donation to NGO worth at least P50, 000, provided, not more than
30% of which will be used for administration purposes.

2. Donation to any candidate, political party, or coalition of parties

2) Time and place of filing

Within thirty (30) days after the date the gift is made.

The return must be filed with:

1. AAB, RDO, RCO, or duly authorized treasurer of the City or

municipality where the donor was domiciled at the time of the transfer;

2. If there is no legal residence in the Philippines, with the office of

the

559Ibid.
560Sec. 93
Deficiency occurs when one files a return and pay the tax but the tax paid is less than
the amount of tax due, or if a return is filed but the taxpayer did not pay the tax, or when
one did not file the return nor paid the tax.

216
Commissioner;

3. For gifts made by non-residents, with the Phil embassy or

Consulate in the country where he is domiciled at the time of the transfer
or directly with the office of the Commissioner.561

d. VAT Returns

1) In general

A quarterly return of the amount of a taxpayers gross sales or

receipts filed within twenty-five (25) days following the close of each
taxable quarter. VAT-registered persons shall pay the value-added tax on a
monthly basis.

Any person, whose registration has been cancelled shall file a return
and pay the tax due thereon within twenty-five (25) days from the date of
cancellation of registration. Only one consolidated return shall be filed by
the taxpayer for his principal place of business or head office and all
branches.562

2) Where to file the return

With an authorized agent bank, Revenue Collection Officer or duly

authorized city or municipal Treasurer in the Philippines located within the
revenue district where the taxpayer is registered or required to register.563

e. Withholding Tax Returns

1) Quarterly returns and payments of taxes

withheld

561 Sec.103 (B)

562 Sec. 114 (A)
563 Id., (B)

217
 Taxes deducted and withheld shall be covered by a return and paid
to an authorized Treasurer of the city or municipality where the
withholding agent has his legal residence or principal place of business, or
where the withholding agent is a corporation, where the principal office is
located.

The taxes deducted and withheld shall be held as a special fund in

trust for the government until paid to the collecting officers. 564

2) Annual information return

Containing the list of payees and income payments, amount of taxes

withheld from each payee and such other pertinent information as may be
required.

In the case of final withholding taxes, the return shall be filed on or

before January 31 of the succeeding year, and for creditable withholding
taxes, not later than March 1 of the year following the year for which the
annual report is being submitted.565

3. Tax payments

a. Income Taxes

1) Payment, in general; time of

payment

Pay-as-you-file system.

The total amount of income tax imposed shall be paid by the person
subject thereto at the time the return is filed.

In the case of tramp vessels, the shipping agents and/or the

husbanding agents, and in their absence, the captains thereof are required
564The return for final withholding tax shall be filed and the payment made within twenty-
five (25) days from the close of each calendar quarter, while the return for creditable
withholding taxes shall be filed and the payment made not later than the last day of the
month following the close of the quarter during which withholding was made (Sec. 58)
565 Sec. 144 (C)

218
to file the return and pay the tax due thereon before their departure. Upon
failure of the said agents or captains to file the return and pay the tax, the
Bureau of Customs is authorized to hold the vessel and prevent its
departure until proof of payment of the tax is presented or a sufficient
bond is filed to answer for the tax due.566

2) Installment payment

When the tax due is in excess of Two thousand pesos (P2,000), the
taxpayer567 may elect to pay the tax in two (2) equal installments, the first
installment to be paid at the time the return is filed and the second
installment, on or before July 15 following the close of the calendar year.

If any installment is not paid on or before the date fixed for its
payment, the whole amount of the tax unpaid becomes due and payable,
together with the delinquency penalties.568

3) Payment of capital gains tax

On the date the return is filed by the person liable thereto.569

b. Estate Taxes

1) Time of payment

566 Sec. 56 (A)(1)

567 other than a corporation
568 Sec. 56 (A)(2)
569 Sec.56 [A] [3]

If the seller submits proof of his intention to avail himself of the benefit of exemption of
capital gains under existing special laws, no such payment shall be required.
In case of failure to qualify for exemption, the tax due on the gains realized from the
original transaction shall immediately become due and payable, and subject to the
penalties prescribed under the rules and the NIRC.
If the seller, having paid the tax, submits such proof of intent within 6 months from the
registration of the document transferring the real property, he shall be entitled to a
refund of such tax upon verification of his compliance with the requirements for such
exemption.
In case the taxpayer elects and is qualified to report the gain by installments (under
Sec. 249), the tax due from each installment shall be paid within 30 days from receipt of
such payments.

219
 At the time the return is filed and before delivery to any heir or
beneficiary, of his distributive share of the estate.570

a) Extension of time

An extension for the payment of the estate tax may be granted by

the Commissioner on meritorious cases.571

Judicial settlement of estate Extra judicial settlement of

estate

Not exceeding five (5) years Not exceeding two (2) years.572

2) Liability for payment

a) Discharge of executor
or administrator from
personal liability573

b) Definition of
deficiency574

570 Sec. (91) (A)

Philippines implement the Pay as you file system.
571 There can be no extension of the period of payment if there is negligence, intentional

disregard of rules and regulations or fraud.

The amount shall be paid on or before expiration of the extension and running of the
statute of limitations for assessment shall be suspended for the period of any
of such extension.
The CIR may require a bond not exceeding double the amount of the tax and with
such sureties as the CIR deems necessary when the extension of payment is granted.
Any amount paid after the statutory due date of the tax, but within the extension
period, shall be subject to interest but not to surcharge.
572 Sec.91 [B]
573 supra
574 Ibid.

220
 3) Payment before delivery by
executor or administrator

No judge shall authorize the executor or judicial administrator to

deliver a distributive share to any party interested in the estate unless a
certification from the Commissioner that the estate tax has been paid is
shown.575

a) Payment of tax
antecedent to the
transfer of shares,
bonds or rights

A certification from the Commissioner that the taxes due thereon

have been paid must be shown before any transfer to any new owner in
the books of any corporation, sociedad anonima, partnership, business, or
industry organized or established in the Philippines of any share, obligation,
bond or right by way of gift inter vivos or mortis causa, legacy or
inheritance.576

4) Duties of certain officers and

debtors

Registers of Deeds shall not register in the Registry of Property any

document transferring real property or real rights therein or any chattel
mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance,
unless a certification from the Commissioner that the tax actually due
thereon had been paid is shown, and they shall immediately notify the
Commissioner, Regional Director, Revenue District Officer, or Revenue

575 Sec. 94
576 Sec. 97

221
Collection Officer or Treasurer of the city or municipality where their offices
are located, of the non-payment of the tax discovered by them.

Any lawyer, notary public, or any government officer who, by reason

of his official duties, intervenes in the preparation or acknowledgment of
documents regarding partition or disposal of donation inter vivos or mortis
causa, legacy or inheritance, shall have the duty of furnishing the
Commissioner, Regional Director, Revenue District Officer or Revenue
Collection Officer of the place where he may have his principal office, with
copies of such documents and any information whatsoever which may
facilitate the collection of the aforementioned tax.

Neither shall a debtor of the deceased pay his debts to the heirs,
legatee, executor or administrator of his creditor, unless the certification of
the Commissioner that the tax fixed in this Chapter had been paid is shown;
but he may pay the executor or judicial administrator without said
certification if the credit is included in the inventory of the estate of the
deceased.577

5) Restitution of tax upon

satisfaction of outstanding
obligations

If after the payment of the estate tax, new obligations of the

decedent shall appear, and the persons interested shall have satisfied them
by order of the court, they shall have a right to the restitution of the
proportional part of the tax paid.578

c. Donors Taxes

1) Time and place of payment

Donors tax is paid at the time the return is filed since the Philippine
Tax system observes the Pay as you file system.

577 Sec. 95
578 Sec. 96

222
 Donors tax is paid with the

1. Authorized agent bank, Revenue district officer, Revenue

Collection Officer, or
duly authorized treasurer of the City or municipality where the donor was
domiciled at the time of the transfer;

2. If there is no legal residence in the Philippines, with the office of

the Commissioner;

3. For gifts made by non-residents, with the Phil embassy or

Consulate in the country where he is domiciled at the time of the transfer
or directly with the office of the Commissioner.579

d. VAT

1) Payment of VAT580

2) Where to pay the VAT

With an authorized agent bank, Revenue Collection Officer or duly

authorized city or municipal Treasurer in the Philippines located within the
revenue district where the taxpayer is registered or required to register.581

F. Tax Remedies under the NIRC

1. Taxpayers Remedies

579 Sec. 103 (B)

580 supra
581 Sec. 114 (B)

223
 a. Assessment

1) Concept of assessment

The notice that the amount therein stated is due as a tax, with a
demand for payment within a stated period of time.582

The official action of the administrative officer in determining the tax

due from a taxpayer.583

a) Requisites for valid assessment

The assessment must:

582 A notice of assessment contains not only a computation of tax liabilities but also a
demand for the payment within a prescribed period. It also signals the time when
penalties and interests begin to accrue.
583 The following are not considered assessments:

1. A letter containing a computation of supposed liabilities, giving the taxpayer an

opportunity to show the incorrectness of the findings, or urging the taxpayer to produce
his books or records for verification, or to present his side.
2. A letter-notice that did not provide, even in a general way, reasons why
deficiency taxes were being collected
3. An affidavit by a revenue officer stating the tax liabilities of a taxpayer and
attached to a criminal complaint for tax evasion.
4. A pre-assessment notice signed by a revenue official.
5. A deficiency assessment outside the scope of the letter of authority (a nullity).
The following may be considered assessments:
1. A letter from the Commissioner demanding the amount of a rubber check
previously paid by a taxpayer, if it declares the tax to be payable and demands the
settlement thereof.
2. A preliminary collection letter, if it was the initial notice received by the taxpayer
regarding his internal revenue tax liabilities,
a. and if it can be proven that the taxpayer did not receive any assessment
notice,
b. and no follow up letter was sent nor was a preliminary conference arranged.
An assessment is relevant:
1. as an essential step towards the initiation of administrative proceeding or judicial
action to collect taxes,
2. to enforce taxpayer liabilities and matters relating to it (imposition of surcharges
and interest),
3. to apply the statute of limitations,
4. to the establishment of tax liens,
5. in estimating the revenues that may be collected by the government in the
coming year.

224
 1. Be in writing and signed by the BIR;
2. Contain the law and the facts on which the assessment is made;
and
3. Contain a demand for payment within the prescribed period.584
b) Constructive methods of income
determination

1. 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.

2. Net worth method 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

584 Sec. 228

225
 presumed to be income not declared
for tax purposes.585

The bank records of the taxpayer are

3. Bank deposit method
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.

Assumes that the excess of a

4. Cash expenditure method
taxpayers expenditures during the
tax period over his reported income
for that period is taxable to the
extent not disproved otherwise

The determination or verification of

5. Unit and value method
gross receipts may be computed by
applying price and profit figures to
the known ascertainable quality of
business of the taxpayer.

6. Third party information or access The BIR may require third parties,
to records method public or private to supply
information to the BIR, and thus,

585The 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.

226
 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.586

A letter sent by the Bureau of

7. Surveillance and assessment
Internal Revenue to a taxpayer
method 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.587

586Sec. 5 (B), NIRC of 1997

587As a general rule, the BIR could not issue an assessment notice without first issuing a
pre-assessment notice because it is part of the due process rights of a taxpayer to be
given notice in the form of a pre-assessment notice, and for him to explain why he should
not be the subject of an assessment notice.

227
 c) Inventory method588 for income
determination589

d) Jeopardy assessment

A delinquency tax assessment made without the benefit of a

complete or partial investigation by a belief that the assessment and
collection of a deficiency tax will be jeopardized by delay caused by the
taxpayers failure to:

a. Comply with audit and investigation requirements to present his

books of accounts and/or pertinent records, or

b. Substantiate all or any of the deductions, exemptions or credits

claimed in his return.

An assessment made demanding immediate payment of the tax due

without the usual formalities in instances when the Commissioner believes
that if the tax will be collected under normal procedures, the collection of
such tax is at risk which might result in loss to the government. 590

588 also called Net Worth Method

589 See table
590 This is issued when the revenue officer finds himself without enough time to conduct

an appropriate or thorough examination in view of the impending expiration of the

prescriptive period for assessment. To prevent the issuance of a jeopardy assessment,
the taxpayer may be required to execute a waiver of the statute of limitations.
Instances when jeopardy assessment may be issued:
When it shall come to the knowledge of the Commissioner that a taxpayer is:
1. retiring from business subject to tax; or
2. intending
a. to leave the Philippines or remove his property therefrom; or
b. to hide or conceal his property;
3. performing any act tending
a. to obstruct the proceedings for the collection of the tax for the past or current
quarter or year; or

228
 e) Tax delinquency and tax deficiency

Delinquency Tax Deficiency Tax

A taxpayer is considered delinquent a. The amount by which the tax

in the payment of taxes when: imposed by law as determined by
the CIR or his authorized
a. Self-assessed tax per return filed representative exceeds the amount
by the taxpayer on the prescribed shown as tax by the taxpayer upon
date was not paid at all591 or only his return;592 or
partially paid; or
b. If no amount is shown as tax by
b. Deficiency tax assessed by the BIR the taxpayer upon his return is made
becomes final and executory. by the taxpayer, then the amount by
which the tax593 exceeds the
amounts previously assessed or
collected without
assessment as deficiency.

Collection

b. to render the same totally or partly ineffective unless such proceedings are
begun immediately (Sec. 6 (D), R.A. 8424)
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]

591 The taxpayer did not file a return

592 The taxpayer filed a return but the same was deficient. Deficiency is the difference
between the tax due and the tax paid.
593 as determined by the CIR or his authorized representative

229
Can immediately be collected
administratively through the
issuance of a warrant of distraint
and levy, and/or judicial action

Civil Action

The filing of a civil action for the
collection of the delinquent tax in
the ordinary court is a proper
remedy
The filling of a civil action at the
ordinary court for collection during
the pendency of protest may be the
subject of a motion to dismiss. In
addition to a motion to dismiss, the
taxpayer must file a petition for
review with the CTA to toll the
running of the
prescriptive period

Penalties

A delinquent tax is subject to A deficiency tax is generally not

administrative subject to the 25% surcharge,
penalties such as 25% surcharge, although subject to interest and
interest, and compromise penalty compromise penalty

2) Power of the Commissioner to make

assessments and prescribe additional
requirements for tax administration and
enforcement

a) Power of the Commissioner to

obtain information, and to
summon/examine, and take
testimony of persons

230
 The Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be
relevant or material to such inquiry;

(B) To obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit or
investigation, or from any office or officer of the national and local
governments, government agencies and instrumentalities, including the
Bangko Sentral ng Pilipinas and government-owned or -controlled
corporations, any information such as, but not limited to, costs and volume
of production, receipts or sales and gross incomes of taxpayers, and the
names, addresses, and financial statements of corporations, mutual fund
companies, insurance companies, regional operating headquarters of
multinational companies, joint accounts, associations, joint ventures of
consortia and registered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return,
or any officer or employee of such person, or any person having possession,
custody, or care of the books of accounts and other accounting records
containing entries relating to the business of the person liable for tax, or
any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons
and to produce such books, papers, records, or other data, and to give
testimony;

(D) To take such testimony of the person concerned, under oath, as

may be relevant or material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from

time to time of any revenue district or region and inquire after and
concerning all persons therein who may be liable to pay any internal
revenue tax, and all persons owning or having the care, management or
possession of any object with respect to which a tax is imposed.

231
 The Commissioner has no authority to inquire into bank deposits
other than as provided for in Section 6(F)594 of this Code.595

3) When assessment is made

When it is released, mailed or sent by the collector of internal

revenue to the taxpayer within the three-year or ten-year period, as the
case may be.596

a) Prescriptive period for assessment

(1) False, fraudulent, and non-filing

of returns

Ten (10) years from the discovery of the falsity, fraud or omission to
file the return.597

b) Suspension of running of statute of

limitations

1) Periods suspended:

(a) periods for assessment

(b) beginning of distraint or levy
(c) proceeding in court for collection
2) Grounds for suspension of prescriptive periods:

594 see Reference

595 Sec. 5
596 CIR v. Pascor, G.R. 128315, June 29, 1999
597 Sec. 222

232
 a) Commissioner is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court and for 60 days
thereafter

b) Taxpayer requests for Reinvestigation which is granted598

c) Taxpayer cannot be located in the address given in the

return filed, except if the taxpayer informs the Commissioner of a
change in address the prescriptive period will not be suspended

d) When the warrant is duly served upon the taxpayer and no

property could be located599

e) When the taxpayer is out of the Phils.600

f) When there is an Answer filed by the BIR to the petition for

review in the CTA601 where the court justified this by saying that in
the answer filed by the BIR, it prayed for the collection of taxes.
4) General provisions on additions to the
tax

a) Civil penalties
b) Interest602

Additions to the tax consist of the:

(1) civil penalty, otherwise known as surcharge, which may either be

25% or 50 % of the tax depending upon the nature of the violation;

(2) interest either for a deficiency tax or delinquency as to

payment603

598 A request for reconsideration alone does not suspend the period to assess/collect.
599 proper only for suspension of the period to collect
600 Sec. 223
601 Hermanos v. CIR, GR. No. L-24972. Sept.30, 1969
602 This is an increment on any unpaid amount of tax, assessed at the rate of twenty

percent (20%) per annum, or such higher rate as may be prescribed y rules and
regulations, from the date prescribed for payment until the amount is fully paid. (Sec. 249
[A], 1997 NIRC)

233
 (3) other civil penalties or administrative fines such as for failure to
file certain information returns and violations committed by withholding
agents.604

5) Assessment process605

a) Tax audit

603 Interest is classified into:

1.Deficiency interest
Any deficiency in the tax due shall be subject to the interest of 20% per annum, or
such higher rate as may be prescribed by rules and regulations, which shall be assessed
and collected from the date prescribed for its payment until the full payment thereof
(Sec. 249 [B], 1997 NIRC)
2.Delinquency interest
This kind of interest is imposed in case of failure to pay:
a. The amount of the tax due on any return required to be filed, or
b. The amount of the tax due for which no return is required, or
c. A deficiency tax, or any surcharge or interest thereon on the due date
appearing in the notice and demand of the Commissioner.
604 General Considerations on the Addition to tax

a. Additions to the tax or deficiency tax apply to all taxes, fees, and charges imposed
in the Tax Code.
b. The amount so added to the tax shall be collected at the same time, in the same
manner, and as part of the tax.
c. If the withholding agent is the government or any of its agencies, political
subdivisions or instrumentalities, or a government owned or controlled corporation, the
employee thereof responsible for the withholding and remittance of the tax shall be
personally liable for the additions to the tax prescribed (Sec. 247[b], 1997 NIRC) such as
the 25% surcharge and the 20% interest per annum on the delinquency (Secs. 248 and
249 [C], 1997 NIRC)
605 Assessments prima facie correct. Tax assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has the duty to prove otherwise. (Sy Po v.
CTA, GRN L- 81446 August 18, 1988.)

234
 The process of examining, going over, or scrutinizing the books and
records of the taxpayer to ascertain the correctness of the tax declared and
paid by the taxpayer.

It can only be performed upon a Letter of Authority issued by the

Commissioner or Regional Director.

b) Notice of informal conference

A written notice informing a taxpayer that the findings of the audit

conducted on his books of accounts and accounting records indicate that
additional taxes or deficiency assessments have to be paid.

If, after the culmination of an audit, a Revenue Officer recommends

the imposition of deficiency tax assessments, this recommendation is
communicated by the Bureau to the taxpayer concerned during an informal
conference called for this purpose, the taxpayer shall have 15 days from
receipt of the notice of informal conference to explain his side.

c) Issuance of preliminary assessment

notice (PAN)

Communication issued by the Regional Assessment Division or any

other concerned BIR office, informing a taxpayer who has been audited of
the findings of the Revenue Officer, following the review of these findings.
The assessment shall be in writing, and should inform the taxpayer of the
law and the facts on which the assessment is made; otherwise, the
assessment is void.

d) Exceptions to Issuance of PAN

(a) 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

235
 (b) A discrepancy has been determined between the tax withheld
and the amount actually remitted by the withholding agent; or

(c) A taxpayer who opted to claim a refund or tax credit of excess

creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against
the estimated tax liabilities for the taxable quarter or quarters of the
succeeding taxable year; or

(d) The excise tax due on excisable articles has not been paid; or

(e) The article locally purchased or imported by an exempt person,

such as, but not limited to, vehicles, capital equipment, machineries and
spare parts, has been sold, traded or transferred to non-exempt persons.606

e) Reply607 to PAN

Within 15 days, the taxpayer has to file a written reply contesting the
proposed assessment if he disagrees with the findings of the PAN.

Failure of the taxpayer to file a reply would now enable the RO to

issue a FAN.608 However no liability for additional or deficiency tax arises
from such failure.

f) Issuance of formal letter of demand

and assessment notice/final
609
assessment notice
606 Sec. 3.1.3, RR 12-99
607 For purposes of contesting a PAN, the regulations used the word reply to distinguish it
from the written objections to a FAN wherein the generic word protest or specific term
request for reconsideration or request for reinvestigation is used.
608 If fails to respond, he shall be considered in default. A formal letter of demand or

assessment notice shall be issued by the Assessment Division of the Revenue Regional
Office or the Commissioner or his authorized representative.
609 General rule: Taxes are self-assessing and do not require the issuance of an

assessment notice in
order to establish the tax liability of a taxpayer.
Exceptions:
1. Tax period of a taxpayer is terminated (Sec. 6 (d), NIRC)
2. Deficiency tax liability arising from a tax audit conducted by a BIR (sec 56b, NIRC)
3. Tax lien (Sec. 219, NIRC)

236
 Notice of Assessment is a formal letter of demand where a
declaration of deficiency taxes is issued to a taxpayer who fails to respond
to a pre-assessment notice within the prescribed period of time, or whose
reply to the PAN was found to be without merit.610

g) Disputed assessment

When the taxpayer, indicates its protest against the delinquent

assessment of the RO and requests for reconsideration, through a letter.
After the request is filed and received by the BIR, the assessment becomes
a disputed assessment.611

.
j) Administrative decision on a
disputed assessment

The taxpayer may elevate the protest to the CIR within 30 days from
receipt of the decision for a request for reconsideration and that his case is
referred to the Bureaus Appellate Division. Otherwise, it becomes final and
appeal to the CTA may be taken. 612

6) Protesting assessment

4. Dissolving Corporation (Sec. 52 (c), NIRC)

610 This is commonly known as the Final Assessment Notice. An assessment contains not
only a computation of underdeclaration of taxable sales, receipts or income, or a
substantial overstatement of deductions.
611 CIR v. Isabela Cultural Corp., GR 135210, July 11, 2001
612 But where the taxpayer adversely affected has not received the decision or ruling, he

could not appeal the same to the CTA within 30 days from notice. Hence, it could not
become final and executory (Republic vs. De la Rama, 18 SCRA 861)
Motion for reconsideration suspends the running of the 30 - day period of perfecting
an appeal. Must advance new grounds not previously alleged to toll the reglementary
period; otherwise, it would be merely pro-forma (Roman Catholic Archbishop vs. Coll., L-
16683, Jan. 31, 1962)

237
 It is the act by the taxpayer of questioning the validity of the
imposition of the corresponding delinquency increments for internal
revenue taxes as shown in the notice of assessment and letter of demand.

a) Protest613 of assessment by
taxpayer

(1) Protested assessment

The taxpayer files an administrative protest against the assessment.

Such protest may either be a request for reconsideration or for
reinvestigation.

Prescriptive period provided by law to make collection by distraint or

levy or by a proceeding in court is interrupted once a taxpayer protests the
assessment and requests for its cancellation.

(2) When to file a protest

Within thirty (30) days from receipt of assessment.

(3) Forms of protest

Request for reconsideration Request for reinvestigation

A claim for re-evaluation of the A claim for re-evaluation of the

assessment based on existing
records without need of additional
evidence. It may involve a question
of fact or law or both. It does not toll
the statute of limitations.
assessment based on newly-
discovered or additional evidence. It
may also involve a question of fact
or law or both. It tolls the statute of
limitations.

613A vital document which is a formal declaration of resistance of the taxpayer. It is a

repository of all arguments. It can be used in court in case of administrative remedies
have been exhausted. It is also the formal act of the taxpayer questioning the official
actuations of the CIR. This is equivalent to a pleading.

238
 b) Submission of documents within
60 days from filing of protest

All relevant documents should be filed, otherwise assessment

becomes final and cannot be appealed.614

c) Effect of failure to protest

It makes the FAN final and executory, and the taxpayer loses his right
to contest the assessment, at the administrative and judicial levels.615

7) Rendition of decision by Commissioner

a) Denial of protest

Direct Denial Indirect Denial

The decision of the Commissioner or a. Commissioner did not rule on the

his duly rep. shall taxpayers MR of the assessment it
was only when respondent received
a. state the facts, applicable law, summons on the civil action for the
rules and regulations or collection of deficiency income tax
jurisprudence on which his protest is that the period to appeal
based, otherwise the protest shall commenced to run.617
be considered void and without
force and effect, in which case the b. Referral by the Commissioner of
same shall not be considered a request for reinvestigation to the
decision a disputed assessment and Solicitor General618

b. that the same is his final c. Reiterating the demand for

614 Sec. 228

Submission of documents within the 60 days period is optional to the taxpayer. The
relevant supporting documents mentioned in the law refers to such documents which
the taxpayer feels would be necessary to support his protest and not what the
Commissioner feels should be submitted, otherwise the taxpayer would always be at the
mercy of the BIR which may require production of such documents which taxpayer
could not produce. (Standard Chartered Bank v. CTA, Case No. 5696, Aug. 16, 2001)
615 Thus, the filing of the protest within 30 days from the receipt of the assessment would

be mandatory for the taxpayer to use the other administrative and judicial remedies.

239
decision.616 immediate payment of the
deficiency tax due to taxpayers
continued refusal to execute
waiver619

d. Preliminary collection letter may

serve as assessment notice620

(1) Commissioners actions

equivalent to denial of
protest

(a) Filing of criminal

action against
taxpayer
(b) Issuing a warrant of
distraint and levy

These actions of the CIR serve as bases for appeal to the CTA.

(2) Inaction by Commissioner

The protest is not acted upon by the Commissioner within 180 days
from submission of documents.

8) Remedies of taxpayer to action by

Commissioner

a) In case of denial of protest

Appeal the decision to the Court of Tax Appeals (CTA) within 30 days
from receipt of decision denying the protest.621

617 CIR vs. Union Shipping Corp.

618 Republic vs. Lim Tian Teng Sons
616 Sec. 3.1.5, RR 12-99
619 CIR vs. Ayala Securities Corp
620 United Intl Pictures vs. CIR

240
 b) In case of inaction by
Commissioner within 180 days
from submission of documents

The taxpayer has two alternative options:

1. File a petition for review with the CTA within 30 days after the
expiration of the
180-day period; or

2. Wait for the final decision of the CIR on the disputed assessment
and appeal the
final decision to the CTA within 30 days from the receipt of the decision.

c) Effect of failure to appeal

1. The decision or assessment becomes final and executory.

2. In an action for the collection of the tax by the government, the

taxpayer is barred from re-opening the question already decided.

3. The assessment is considered correct which may be enforced by

summary or judicial remedies.

4. In a proceeding for collection of tax by judicial action, the

taxpayers defenses are similar to those of the defendant in a case for the
enforcement of a judgment by judicial action.

5. The assessment which has become final and executory cannot be

superseded by a
new assessment.

b. Collection

621If the taxpayer elevates his protest to the CIR within 30 days from date of receipt of
the final decision of the CIRs duly authorized representative, such decision will not be
final and executory.

241
 1) Requisites

Collection is only allowed when there is already a final assessment

made for the determination of the tax due.

Assessments are deemed final when:

1. The taxpayer failed to file a protest 30 days from receipt of the

assessment

2. After the 180 day period and the CIR has not yet acted on the
protest the taxpayer fails to appeal it

3. After 30 days from the receipt of the decision of the CIR the
taxpayer fails to appeal.

2) Prescriptive periods

Assessment was made False or fraudulent return or failure

to file
a return,

By distraint or levy or by a A proceeding in court for the

proceeding in court - within three (3)
years following the assessment
released, mailed, or sent.622
collection of such tax may be filed
without assessment - at any time
within ten (10) years after the
discovery of the falsity, fraud or
omission.623

622 BPI v. CIR, G.R. 139736, Oct. 17, 2005

623 Sec.222 [a]

242
 3) Distraint of personal property including
garnishment

a) Summary remedy of distraint of

personal property

(1) Procedure for distraint and

garnishment

a. The officer serving the warrant shall make an account of the goods
distrained. A copy signed by him shall be left with the owner or to the
person in possession of the goods to which list shall be added a statement
of the sum demanded and note of the time and place of sale.

b. Stocks and securities warrant of distraint shall be served upon

the taxpayer and upon the president, manager, treasurer or other
responsible officer of cooperation, company or association, which issued
the said stocks.

c. Debts and Credits serving the warrant of distraint upon the

taxpayer and the person owing such debts. Such warrant is sufficient
authority to the person owning the debts or having possession or under his
control any credits. The warrant of distraint is sufficient authority to such
person to pay the Commissioner;

d. Bank Accounts serving the warrant upon the taxpayer and upon
the president, manager, treasurer and other responsible officer of the
bank. Upon receipt of the warrant, the bank shall turn over to the
Commissioner the amount sufficient to satisfy the claim.624

624 Sec. 208

243
 (2) Sale of property distrained
and disposition of proceeds

a. Notice of the sale must specify the time and place of sale and the
articles distrained;

b. The Notice must be exhibited in not less than 2 public places; one
of such places shall be at the Office of the Mayor;

c. The time of sale shall not be less than 20 days after notice to the
owner or possessor of the property and the publication or posting of such
notice.

d. The sale shall be at public auction to the highest bidder for cash or
with the approval of the Commissioner, through duly licensed commodity
or stock exchanges.

e. In case of stocks or securities, the officer making the sale shall

execute a bill of sale which shall deliver to the buyer and a copy thereof
furnished the corporation, company, or association which issued the stocks
or other securities.

f. Residue over and above what is required to pay the entire claim,
including expenses, shall be returned to the owner of the property sold.625

(a) Release of distrained

property upon
payment prior to sale

If at any time prior to the consummation of the sale, all proper

charges are paid to the officer conducting the sale, the goods or effects
distrained shall be restored to the owner.626

625 Sec. 209

626 Sec. 210

244
 (3) Purchase by the
government at sale upon
distraint

a. When the amount for the bid property under distraint is not equal
to the amount of the tax;
b. When the amount for the bid is very much less than the actual
market value of the articles for sale;
The property purchased may be resold by the Commissioner or his
deputy.627

(4) Report of sale to BIR

Within two (2) days after the sale, the officer making the same shall
make a report of his proceedings in writing to the Commissioner and shall
himself preserve a copy of such report as an official record.628

(5) Constructive distraint to

protect the interest of the
government

The Commissioner may place under constructive distraint the

property of a delinquent taxpayer or any taxpayer who, in his opinion, is
retiring from any business subject to tax, or is intending to leave the
Philippines or to remove his property therefrom or to hide or conceal his
property or to perform any act tending to obstruct the proceedings for
collecting the tax due or which may be due from him.

The constructive distraint of personal property shall be affected by

requiring the taxpayer or any person having possession or control of such
property to sign a receipt covering the property distrained and obligate
himself to preserve the same intact and unaltered and not to dispose of the

627 Sec. 212

628 Sec. 211

245
same ;in any manner whatever, without the express authority of the
Commissioner.

In case the taxpayer or the person having the possession and control
of the property sought to be placed under constructive distraint refuses or
fails to sign the receipt herein referred to, the revenue officer effecting the
constructive distraint shall proceed to prepare a list of such property and,
in the presence of two (2) witnesses, leave a copy thereof in the premises
where the property distrained is located, after which the said property shall
be deemed to have been placed under constructive distraint.629

4) Summary remedy of levy on real

property

a) Advertisement and sale

1. Twenty days after levy, the officer conducting the proceedings

shall proceed to advertise the property or a usable portion thereof as may
be necessary to satisfy the claim and cost of the sale and such
advertisement shall be for a period of at least 30 days.
2. The notice of sale shall:
a. Be posted at the main entrance of the municipal building; and
b. public and conspicuous place in the barrio or district; and
c. be published once a week for three consecutive weeks in a
newspaper of general circulation.

3. Right of Pre-emption At any time before the day fixed for the
sale, the taxpayer may discontinue all proceedings by paying the taxes,
penalties, and interest.
4. 5 days after the sale, a return by the distraining or levying officer
of the proceedings shall be entered upon the records of the Revenue
Collection Officer (RCO), the RDO and Revenue Regional Director.
5. A certificate of sale shall be delivered to the purchaser.
629 Sec. 206

246
 6. Excess of the proceeds of the sale shall be delivered to the
taxpayer.630
b) Redemption of property sold

Within one (1) year from the date of sale, the delinquent taxpayer, or
any one for him, shall have the right of paying to the Revenue District
Officer the amount of the public taxes, penalties, and interest thereon from
the date of delinquency to the date of sale, together with interest on said
purchase price at the rate of fifteen percent (15%) per annum from the
date of purchase to the date of redemption, and such payment shall entitle
the person paying to the delivery of the certificate issued to the purchaser
and a certificate from the said Revenue District Officer that he has thus
redeemed the property, and the Revenue District Officer shall forthwith
pay over to the purchaser the amount by which such property has thus
been redeemed, and said property thereafter shall be free from the lien of
such taxes and penalties.
The owner shall not, however, be deprived of the possession of the
said property and shall be entitled to the rents and other income thereof
until the expiration of the time allowed for its redemption.631

c) Final deed of purchaser

In case the taxpayer shall not redeem the property, the Revenue
District Officer shall, as grantor, execute a deed conveying to the purchaser
so much of the property as has been sold, free from all liens of any kind
whatsoever, and the deed shall succinctly recite all the proceedings upon
which the validity of the sale depends.632

5) Forfeiture to government for want of

bidder

a) Remedy of enforcement of
forfeitures

630 Sec. 213

631 Sec. 214
632 Sec. 202

247
 (1) Action to contest forfeiture
of chattel

In case of the seizure of personal property under claim of forfeiture,

the owner desiring to contest the validity of the forfeiture may, at any time
before sale or destruction of the property, bring an action against the
person seizing the property or having possession thereof to recover the
same, and upon giving proper bond, may enjoin the sale; or after the sale
and within six (6) months, he may bring an action to recover the net
proceeds realized at the sale.633

b) Resale of real estate taken for

taxes

The Commissioner shall have charge of any real estate obtained by

the Government of the Philippines in payment or satisfaction of taxes,
penalties or costs or in compromise or adjustment of any claim therefore,
and said Commissioner may, upon the giving of not less than twenty (20)
days notice, sell and dispose of the same of public auction or dispose of
the same at private sale.

In either case, the proceeds of the sale shall be deposited with the
National Treasury, and an accounting of the same shall be rendered to the
Chairman of the Commission on Audit.634

c) When property to be sold or

destroyed

633 Sec. 231

634 Sec. 216

248
 Upon forfeiture, distilled spirits, liquors, cigars, cigarettes, other
manufactured products of tobacco, and all apparatus used in or about the
illicit production of such articles may be destroyed by order of the
Commissioner, when the sale of the same for consumption or use would be
injurious to public health or prejudicial to the enforcement of the law.635

Forfeited property shall not be destroyed until at least twenty (20)

days after seizure.636

d) Disposition of funds recovered in

legal proceedings or obtained
from forfeiture

All judgments and monies recovered and received for taxes, costs,
forfeitures, fines and penalties shall be paid to the Commissioner or his
authorized deputies as the taxes themselves are required to be paid and
shall be accounted for and dealt with the same way.637

6) Further distraint or levy

The remedy by distraint of personal property and levy on realty may

be repeated if necessary until the full amount due, including all expenses, is
collected.638

7) Tax lien639

635 All other articles subject to excise tax, which have been manufactured or removed in
violation of the Code, as well as dies for the printing or making of internal revenue stamps
and labels which are in imitation of or purport to be lawful stamps, or labels may, upon
forfeiture, be sold or destroyed in the discretion of the Commissioner (Sec. 225)
636 ibid.
637 Sec. 226
638 Sec. 217

Otherwise, a clever taxpayer who is also able to conceal most of the valuable part of
his property would escape payment of his tax liability by sacrificing an insignificant
portion of his holdings.
639 Nature:

A lien in favor of the government of the Philippines when a person liable to pay a tax
neglects or fails to do so upon demand.
Duration:
Exists from time assessment is made by the CIR until paid, with interests, penalties and
costs.

249
 A legal claim or charge on property, either real or personal,
established by law as a security in default of the payment of taxes.

8) Compromise640

a) Authority of the Commissioner to

compromise and abate taxes641

Compromise the payment of any Abate or cancel a tax liability

internal revenue tax

When: When:

1. There is reasonable doubt as to 1. The tax or any portion thereof

the validity of the claim against the appears to be unjustly or excessively
taxpayer; or assessed; or

2. The financial position of the 2. The administration and collection

taxpayer demonstrates a clear costs involved do not justify the
inability to pay the assessed tax.642 collection of the amount due.

Extent:
Upon all property and rights to property belonging to the taxpayer.
Effectivity against third persons:
Only when notice of such lien is filed by the CIR in the Register of Deeds concerned.
640 Contract whereby the parties, by making reciprocal concessions, avoid litigation or

put an end to one already commenced.

641 The power to compromise or abate shall not be delegated by the Commissioner

except in the following cases:

1. Assessments issued by the Regional Offices involving basic tax of P 500,000 or less;
2. Minor criminal violations
All criminal violations may be compromised except: (a) those already filed in court,
or (b) those involving fraud (Sec. 204 (A)(B))
All criminal violations may be compromised except: (a) those already filed in court, or
(b) those involving fraud (Sec. 204 (A)(B))
642 Minimum Compromise Amounts:

1. Financial incapacity 10% of the basic tax assessed;

2. Other cases 40% of the basic tax assessed
When approval of Evaluation Board necessary:

250
 9) Civil and criminal actions

a) Suit to recover tax based on false

or fraudulent returns

If tax is collected under an assessment that the list, statement or

return is false/fraudulently made, it cannot be recovered by any suit unless
it is proved that the said list, statement or return was not false nor
fraudulent & did not contain any understatement or undervaluation.643

c. Refund644

1) Grounds and requisites for refund

Grounds Requisites

a. Tax is erroneously or illegally a. There must be a written claim

collected. with the CIR, as it would enable the
CIR to correct the errors of his
b. Sum collected is excessive or in subordinate and to notify the
any manner wrongfully collected. government;

c. Penalty is collected without b. Must be a categorical claim for

authority. refund or
credit;

c. Must be filed within 2 years after

1. The basic tax involved exceeds one million pesos;

2. Where the settlement offered is less than the prescribed minimum rate.
643 Not applicable to statements or returns made or to be made in good faith regarding

annual depreciation of oil or gas wells & mines.

644 A suit or proceedings for tax refund may be maintained whether or not such tax,

penalty or sum has been paid under protest or duress (Sec. 229)
Similarly, payment under protest is not necessary in refund for local taxes. (Sec. 196
LGC),
however, under protest is necessary to claim for
a. real property taxes (Sec. 252, LGC)
b. custom duties (Sec. 2308, TCC)

251
 the payment of the tax or penalty
otherwise no refund or credit could
be taken. No suit or proceeding shall
be instituted after the expiration of
the 2 year period regardless of any
supervening cause that may arise
after payment; and

d. Present proof of payment of the

tax.

2) Requirements for refund as laid down by

cases

a) Necessity of written claim for

refund

This requirement is mandatory.645

Except:

Where on the face of the return upon which payment is made, such
payment appears clearly to have been erroneous.646

b) Claim containing a categorical

demand for reimbursement

c) Filing of administrative claim for

refund and the suit/proceeding
before the CTA within 2 years from

645 Reasons:
a. to afford the commissioner an opportunity to correct the action of subordinate
officer and
b. to notify the government that the taxes sought to be refunded are under question
and that, therefore, such notice should then be borne in mind in estimating the
revenue available for expenditure (Bermejo vs. CIR, 87 Phil 96)
646 Sec. 229

252
 date of payment regardless of any
supervening cause647

The requirement is a condition precedent and non-compliance

therewith bars recovery.648

It refers not only to the administrative claim that the taxpayer

should file within 2 years from date of payments with the BIR, but also the
judicial claim or the action for refund the taxpayer should commence
with the CTA.649

3) Legal basis of tax refunds

Legal principle of quasi-contracts or solutio indebiti.650

The Government is within the scope of the principle of solutio
indebiti.651
4) Statutory basis for tax refund under the
Tax Code

a) Scope of claims for refund

The Commissioner may credit or refund taxes:

a) Erroneously or illegally assessed or collected internal

revenue taxes
b) Penalties imposed without authority
c) Any sum alleged to have been excessive or in any manner
wrongfully collected.652

647 Secs.204 (c) & 229

648 Phil. Acetylene Co. Inc, vs. Commissioner, CTA Case No. 1321, Nov. 7, 1962
649 see Gibbs vs.. Collector of Internal Revenue, 107 Phil 232
650 see Art. 2142 & 2154, CC
651 CIR vs. Firemans Fund Insurance Co
652 Secs. 204 and 209

253
 b) Necessity of proof for claim or
refund

Refund claim partakes of the nature of an exemption which cannot

be allowed unless granted in the most explicit and categorical
language.653

Failure to discharge burden of giving proof is fatal to claim.

It must be shown that payment was an independent single act of

voluntary payment of a tax believed to be due, collectible and accepted
by the government, and which therefore, become part of the state
moneys subject to expenditure and perhaps already spent or
654
appropriated.

c) Burden of proof for claim of refund

Written claim for refund or tax credit filed by the taxpayer with the
Commissioner.

d) Nature of erroneously paid

tax/illegally assessed collected

Taxpayer pays under the mistake of fact, as for instance in a case

where he is not aware of the existing exemption in his favor at the time
payments were made.

A tax is illegally collected if payments are made under duress.

e) Tax refund vis--vis tax credit655

Tax refund Tax credit

653 CIR vs. Johnson and Sons

654 CIR vs. Li Yao, L-11875,Dec. 28, 1963
655 It may be that there is no essential difference between a tax refund and a tax credit

since both are moves of recovering taxes erroneously or illegally paid to the government.
(Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440,
September 1, 2004)

254
Requires a physical return of the Generally refers to an amount that is
sum erroneously paid by the subtracted directly from ones total
taxpayer. tax liability, an allowance against the
tax itself, or a deduction from what
is owned.
The taxpayer to whom the tax is
refunded would have the option, Reduces the tax due, including
among others, to invest for profit whenever applicable the income
the returned sum, an option not tax that is determined after applying
proximately available if the taxpayer the corresponding tax rates to
chooses instead to receive a tax taxable income.657
credit.656

f) Essential requisites for claim of

refund

1. The claim is filed with the Commissioner of Internal Revenue

within the two-year period from the date of the payment of the tax.
2. It is shown on the return of the recipient that the income payment
received was declared as part of the gross income; and
3. The fact of withholding is established by a copy of a statement
duly issued by the payee showing the amount paid and the amount of tax
withheld therefrom.658
5) Who may claim/apply for tax refund/tax
credit

a) Taxpayer/withholding agents of
non-resident foreign corporation

656 Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, ibid.

657 Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No.
159647, April 15,2005
658 Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No.

155682, March 27, 2007

255
 A withholding agent is subject to and liable for deficiency
assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been
withheld under the law.

A person liable for tax has been held to be a person subject to

tax and properly considered a taxpayer. xxx By any reasonable standard,
such a person should be regarded as a party in interest, or as a person
having sufficient legal interest, to bring a suit for refund of taxes.659

6) Prescriptive period for recovery of tax

erroneously or illegally collected

Two (2) years from the date of payment of the tax or penalty.

7) Other consideration affecting tax refunds

a) Taxpayer may file an action for refund in the CTA even before the
Commissioner decides his pending claim in the BIR.660

b) Suspension of the 2-year prescriptive period may be had when:

i. there is a pending litigation between the two parties

(government and taxpayer) as to the proper tax to be paid and of the
proper interpretation of the taxpayers charter in relation to the
disputed tax; and

ii. the commissioner in that litigated case agreed to abide by

the decision of the Supreme Court as to the collection of taxes
relative thereto.661

c) Even if the 2-year period has lapsed, the same is not jurisdictional
and may be suspended for reasons of equity and other special
circumstances.662

659 CIR vs. Procter and Gamble PMC, 204 SCRA 377
660 Commissioner of Internal Revenue vs. Palanca, Jr., L-16626, Oct. 29, 1966
661 Panay Electric Co., Inc. vs. Collector of Internal Revenue, 103 Phil. 819
662 CIR vs. Phil. American Life Ins. Co., G.R. No. 105208, May 29, 1995

256
 d) 2-year prescriptive period for filing of tax refund or credit claim
computed from date of payment of tax of penalty except in the following:

i. Corporations:

2-year prescriptive period for overpaid quarterly income

tax is counted not from the date the corporation files its
quarterly income tax return, but from the date the final
adjusted return is filed after the taxable year.663

ii. Taxes payable in installment:

2-year period is counted form the payment of the last

installment.664

iii. Withholding Taxes

Prescriptive period counted not from the date the tax is

withheld and remitted to the BIR, but from the end of the
taxable year.665

iv. VAT Registered Person whose sales are zero-rated or

effectively zero-rated

2-year period computed from the end of the taxable

quarter when the sales transactions were made.666

e) Interest on Tax Refund:

The Government cannot be required to pay interest on taxes

refunded to the taxpayer unless:
i. The Commissioner acted with patent arbitrariness667

663 Commissioner of Internal Revenue vs. TMX Sales, Inc., G.R. No.83736, Jan. 15, 1992
664 CIR vs. Palanca, Jr., supra
665 Gibbs vs. Commissioner of Internal Revenue, supra
666 Sec. 112 (A)

257
 ii. In case of Income Tax withheld on the wages of
employees.668

2. Government Remedies

a. Administrative remedies

1) Tax lien669

2) Levy and sale of real property

Levy - is the seizure of real property and interest in or rights to such

properties for the satisfaction of taxes due from the delinquent taxpayer.

The requisites are the same as that of distraint.670

3) Forfeiture of real property to the

government for want of bidder671

667 Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions (CIR

vs.Victorias Milling Corp., Inc. L-19607, Nov. 29,1966)
668 Any excess of the taxes withheld over the tax due from the taxpayer shall be returned

or credited within 3 months from the fifteenth (15th) day of April. Refund or credit after
such time earn interest at the rate of 6% per annum, starting after the lapse of the 3-
month period to the date the refund or credit is made (Sec 79 (c) (2))
669 supra
670 Ibid.
671 Effect: Transfer the title to the specific thing from the owner to the government.

When available:
a. No bidder for the real property exposed for sale.
b. If highest bid is for an amount insufficient to pay the taxes, penalties and costs.
- Within two days thereafter, a return of the proceeding is duly made.
How enforced:

258
 Implies a divestiture of property without compensation, in
consequence of a default or offense.

Includes the idea of not only losing but also having the property
transferred to another without the consent of the owner and wrongdoer.

4) Further distraint and levy672

5) Suspension of business operation673

6) Non-availability of injunction to restrain

collection of tax

No court shall have the authority to grant an injunction to restrain

the collection of any national internal revenue tax, fee or charge imposed
by the Code.674

Exception:
Injunction may be issued by the CTA in aid of its appellate
jurisdiction.675

b. Judicial remedies676

a. In case of personal property by seizure and sale or destruction of the specific

forfeited property.
b. In case of real property by a judgment of condemnation and sale in a legal
action or proceeding, civil or criminal, as the case may require.
672 supra
673 Ibid.
674 Sec. 218
675 Under Sec. 11 of R.A. 1125, (as amended by RA 9282) - when in the opinion of the

Court the collection may jeopardize the interest of the Government and/or the taxpayer,
the Court, at any stage of the proceeding, may suspend the said collection and require
the taxpayer either to deposit the amount claimed or to file a surety bond for not more
than double the amount with the Court.
676 Civil and Criminal Actions:

1. Brought in the name of the Government of the Philippines.

2. Conducted by Legal Officer of BIR

259
 Civil Action677 Criminal Action678

1. By filing a civil case679 to collect Generally resorted to by the BIR

internal revenue taxes in regular when the summary remedies for the
courts680 collection of taxes have proven
ineffective and futile.682
2. By filing an answer to the
petition for review filed by the Instituted not to demand payment
681
taxpayer with the CTA but to penalize taxpayer for the
violation of the NIRC.

3. Statutory Offenses and Penalties

3. Must be with the approval of the CIR, in case of action, for recovery of taxes, or
enforcement of a fine, penalty or forfeiture.
677 For tax remedy purposes, these are actions instituted by the government to collect

internal
revenue taxes in the regular courts after assessment by CIR has become final and
executory.
It includes, however, the filing by the government of claims against the deceased
taxpayer with the
probate court.
678 The criminal charge is filed directly with the Department of Justice with the approval

of the CIR.
The information should be filed:
1. CTA - on criminal offenses arising from violations of the NIRC or Tariff and Customs
Code and other laws administered by the BIR and the BOC where the principal amount
of taxes and fees, exclusive of charges and penalties claimed is P1 million and above.
2. RTC, MTC, MeTC - on criminal offenses arising from violations of the NIRC or Tariff
and Customs Code and other laws administered by the BIR and the BOC where the
principal amount of taxes and fees, exclusive of charges and penalties claimed is less
than P1 million. (Sec. 7, R.A. 9282)
679 within 5 years from the date of the assessment
680 RTC or MTCs, depending on the amount involved

When assessment made has become final and executory for failure or taxpayer to:
a. Dispute same by filing protest with CIR
b. Appeal adverse decision of CIR to CTA
Jurisdiction:
If case involves collection of assessed principal taxes amounting to 1M or more- CTA
If lower than 1M- RTC and other lower courts
681 If Commissioner files the case- Republic of the Phils. is the party plaintiff; when it is the

taxpayer who files a petition for review in CTA, the respondent is the Commissioner.
682 A direct mode of collection of taxes, the judgment of which shall not only impose the

penalty but also order payment of taxes.

An assessment of a tax deficiency is not necessary to a criminal prosecution for tax
evasion, provided there is a prima facie showing of willful attempt to evade.

260
 a. Civil penalties

They are imposed in addition to the tax required to be paid.

1) Surcharge

A civil penalty imposed by law as an addition to the main tax required

to be paid. It is not a criminal penalty but a civil administrative sanction
provided primarily as safeguard for the protection of the State revenue and
to reimburse the government for the expenses of investigation and the loss
resulting from the taxpayers fraud.683

A surcharge added to the main tax is subject to interest.

2) Interest

a) In General

Assessed and collected on any unpaid amount of tax at the rate of

twenty percent (20%) per annum from the date prescribed for payment
until the amount is fully paid.684

b) Deficiency interest

The interest due on any amount of tax due or installment thereof

which is not paid on or before the date prescribed for its payment
computed at the rate of 20% per annum,685 from the date prescribed for its
payment until it is fully paid.

c) Delinquency interest

The interest of 20% per annum required to be paid in case of failure

to pay:

683 A surcharge added to the main tax is subject to interest.

684 Sec. 249 (A)
685 or such higher rate as may be prescribed by the rules and regulations

261
 (1) The amount of the tax due on any return to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due
date appearing in the notice and demand of the Commissioner.686

d) Interest on extended payment

If any person required to pay the tax is qualified and elects to pay
the tax on installment but fails to pay the tax or any installment hereof, or
any part of such amount or installment on or before the date prescribed for
its payment, or where the Commissioner has authorized an extension of
time within which to pay a tax or a deficiency tax or any part thereof, there
shall be assessed and collected interest at the rate prescribed on the tax or
deficiency tax or any part thereof unpaid from the date of notice and
demand until it is paid.687

4. Compromise and Abatement of taxes688

a. Compromise

Involves a mere reduction of the tax.

b. Abatement

A cancelation of the entire liability.

686 Id., (C)

687 Id., (D)
688 supra

262
 G. Organization and Function of the Bureau of Internal
Revenue

1. Rule-making authority of the Secretary of Finance

a. Authority of Secretary of finance to promulgate

rules and regulations

Upon recommendation of the Commissioner, for the effective

enforcement of the provisions of the Code.689

b. Specific provisions to be contained in rules and

regulations

689 Sec. 244

263
 (1) The time and manner in which Revenue Regional Director shall
canvass their respective Revenue Regions for the purpose of discovering
persons and property liable to national internal revenue taxes, and the
manner in which their lists and records of taxable persons and taxable
objects shall be made and kept;

(2) The forms of labels, brands or marks to be required on goods

subject to an excise tax, and the manner in which the labelling, branding or
marking shall be effected;

(3) The conditions under which and the manner in which goods
intended for export, which if not exported would be subject to an excise
tax, shall be labelled, branded or marked;

(4) The conditions to be observed by revenue officers respecting the

institutions and conduct of legal actions and proceedings;

(5) The conditions under which goods intended for storage in bonded
warehouses shall be conveyed thither, their manner of storage and the
method of keeping the entries and records in connection therewith, also
the books to be kept by Revenue Inspectors and the reports to be made by
them in connection with their supervision of such houses;

(6) The conditions under which denatured alcohol may be removed

and dealt in, the character and quantity of the denaturing material to be
used, the manner in which the process of denaturing shall be effected, so
as to render the alcohol suitably denatured and unfit for oral intake, the
bonds to be given, the books and records to be kept, the entries to be
made therein, the reports to be made to the Commissioner, and the signs
to be displayed in the business ort by the person for whom such denaturing
is done or by whom, such alcohol is dealt in;
(7) The manner in which revenue shall be collected and paid, the
instrument, document or object to which revenue stamps shall be affixed,
the mode of cancellation of the same, the manner in which the proper
books, records, invoices and other papers shall be kept and entries therein
made by the person subject to the tax, as well as the manner in which

264
licenses and stamps shall be gathered up and returned after serving their
purposes;

(8) The conditions to be observed by revenue officers respecting the

enforcement of Title III imposing a tax on estate of a decedent, and other
transfers mortis causa, as well as on gifts and such other rules and
regulations which the Commissioner may consider suitable for the
enforcement of the said Title III;

(9) The manner in which tax returns, information and reports shall be
prepared and reported and the tax collected and paid, as well as the
conditions under which evidence of payment shall be furnished the
taxpayer, and the preparation and publication of tax statistics;

(10) The manner in which internal revenue taxes690 shall be paid

through the collection officers of the Bureau of Internal Revenue or
through duly authorized agent banks which are hereby deputized to receive
payments of such taxes and the returns, papers and statements that may
be filed by the taxpayers in connection with the payment of the tax.

c. Non-retroactivity of rulings

If the revocation, modification or reversal will be prejudicial to the

taxpayers, except:

(a) Where the taxpayer deliberately misstates or omits material facts

from his return or any document required of him by the Bureau of Internal
Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal

Revenue are materially different from the facts on which the ruling is
based; or

(c) Where the taxpayer acted in bad faith.691

690 such as income tax, including withholding tax, estate and donor's taxes, value-added
tax, other percentage taxes, excise taxes and documentary stamp taxes
691 Sec. 246

265
 2. Power of the Commissioner to suspend the business
operation of a taxpayer692

III. Local Government Code of 1991, as amended

A. Local Government Taxation693

1. Fundamental principles694

a. Taxation shall be uniform695 in each LGU

b. Taxes, fees, charges and other impositions shall be:

692 supra
693 The power to tax which may be exercised by local legislative bodies is no longer
merely by nature of a valid delegation as before but pursuant to direct authority
conferred by Sec. 5, Art. X of the Constitution (Mactan Ceby Intnl Airport vs. Marcos,
G.R. No. 120082, Sept 11, 1996)
Where there is neither a grant nor a prohibition by statute, the tax power must be
deemed to exist although Congress may provide statutory limitations and guidelines. The
basic rationale for the current rule is to safeguard the viability and self-sufficiency of local
government units by directly granting them general and broad tax power (MERALCO vs.
Prov. of Laguna, G.R. No 131359, May 5, 1999
694 also known as the requisites of municipal taxation
695 Uniformity of Taxation Equality and uniformity of local taxation is that all taxable

articles of the same class shall be taxed at the same rate within the same territorial
jurisdiction of the taxing authority.

266
 1. Equitable and based on the taxpayers ability to pay.
2. For public purpose.696
3. Not unjust, excessive, oppressive or confiscatory.
4. Not contrary to law, public policy, national economic policy,
or in restraint of trade.
c. The collection of local taxes, fees, charges and other impositions
shall in no case be Let to any private person;

d. The revenue collected pursuant to the provisions of the LGC shall

Inure solely
to the benefit of, and be subject to the disposition by, the local government
unit levying the tax, fee, charge or other imposition unless otherwise
specifically provided herein; and

e. Each LGU shall, as far as practicable, evolve a progressive system

of taxation.697

2. Nature and source of taxing power

a. Grant of local taxing power under the Local

Government Code

696 Public Purpose Proceeds obtained are to be used to support the existence of the
LGU.
697 Just Taxation Municipal corporations are allowed a wide range in determining tax

rates of imposable taxes and license fees.

267
 Each local government unit shall exercise its power to create its own
sources of revenue and to levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local government
units.698

b. Authority to prescribe penalties for tax

violations

The sanggunian of a local government unit is authorized to prescribe

fines or other penalties for violation of tax ordinances but in no case shall
such fines be less than One thousand pesos (P1,000.00) nor more than Five
thousand pesos (P5,000.00), nor shall imprisonment be less than one (1)
month nor more than six (6) months. Such fine or other penalty, or both,
shall be imposed at the discretion of the court.

The sangguniang barangay may prescribe a fine of not less than One
hundred pesos (P100.00) nor more than One thousand pesos
(P1,000.00).699

c. Authority to grant local tax exemptions

Local government units may, through ordinances duly approved,

grant tax exemptions, incentives or reliefs under such terms and conditions
as they may deem necessary.700

d. Withdrawal of exemptions

Tax exemptions or incentives granted to, or presently enjoyed by all

persons, whether natural or juridical, including government-owned or -
controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and

698 Sec. 129

699 Sec. 516
700 Sec. 192

The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to
regulatory fees which are levied under the police power of the LGU.

268
educational institutions, are hereby withdrawn upon the effectivity of this
Code.701

e. Authority to adjust local tax rates

LGUs are given authority to adjust the tax rates, but the adjustment
should be made not oftener than once every 5 years but in no case shall the
adjustment exceed 10% of the rates fixed under the LGC.702
f. Residual taxing power of local governments

LGUs may exercise the power to levy taxes, fees or charges on any
base or subject not otherwise specifically enumerated herein or taxed
under the

1. Local Government Code;

2. National Internal Revenue Code; or
3. Other applicable laws.703

g. Authority to issue local tax ordinances

The power to impose a tax, fee, or charge or to generate revenue

shall be exercised by the sanggunian of the local government unit
concerned through an appropriate ordinance.704

3. Local taxing authority

a. Power to create revenues exercised thru LGUs

Local governments are authorized to impose and collect the

following charges:

1. Reasonable fees and charges for services rendered.705

701 Sec. 193

702 Sec 191
703 Sec. 186
704 Sec. 132

269
 2. Public Utility Charges if:
a. Owned, operated and maintained
b. Within their jurisdiction706

3. Tools, Fees or Charges for:

a. Use of public road, pier or wharf, waterway bridge, ferry

or telecommunication system
b. Funded and constructed by the local government707

b. Procedure for approval and effectivity of tax

ordinances

1. The procedure applicable to local government ordinances in

general should be observed.708

The following procedural details must be complied with:

a. Necessity of quorum

b. Submission for approval by the local chief executive

c. The matter of veto and overriding the same

d. Publication and effectivity709

705 Sec. 153

706 Sec. 154
707 Sec. 155
708 Sec. 187
709 Secs. 54, 55, and 59

270
 2. Public hearings are required before any local tax ordinance is
enacted.710

3. Within 10 days after their approval, publication in full for 3

consecutive days in a newspaper of general circulation. In the absence of
such newspaper in the province, city or municipality, then the ordinance
may be posted in at least two conspicuous and publicly accessible places.711

4. Scope of taxing power

a. Each local government unit shall exercise its power to create its
own sources of revenue and to levy taxes, fees, and charges, consistent
with the basic policy of local autonomy. Such taxes, fees, and charges shall
exclusively accrue to it.712

b. All local government units are granted general powers to levy

taxes, fees or charges on any base or subject not otherwise specifically
enumerated herein or taxed under the provisions of the NIRC, as amended,
or other applicable laws. The levy must not be unjust, excessive,
oppressive, confiscatory or contrary to a declared national economic
policy.713

c. No such taxes, fees or charges shall be imposed without a public

hearing having been held prior to the enactment of the ordinance.714

d. Copies of the provincial, city, and municipal tax ordinances or

revenue measures shall be published in full for three consecutive days in a
newspaper of local circulation or posted in at least two conspicuous and
publicly accessible places.715
5. Specific taxing power of local government unit (LGUs)

a. Taxing powers of provinces

710 Sec. 187

711 Sec. 188 & 189
712 Sec. 129
713 Sec. 186
714 Sec. 187
715 Sec. 188

271
 1) Tax on transfer of real property716
ownership

Transaction taxed Sale, barter, or any other mode of transferring

ownership of, or title to, real property

Rate At not more than 50% of 1% total

consideration.717

Exception from tax The sale, transfer or other disposition of real

property pursuant to R.A. 6657.718

2) Tax on business of printing and

publication

Transaction taxed Business of printing and publication of books,

cards, posters, leaflets, handbills, certificates,
receipts, pamphlets, and other similar nature

Tax Rate Not exceeding 50% of 1% of the gross annual

receipts for the preceding calendar year, in the
case of newly started business, not to exceed
1/20 of 1% of the capital investment

716 Real Property refers only to lands, buildings, and machineries intended by the owner
of the land or building for an industry or works which may by carried on in a building or
on a piece of land and which tend directly to meet the needs of the industry or works.
717 Tax base

1. total consideration or
2. fair market value, whichever is higher
718 Comprehensive Agrarian Reform Law

272
Exception The receipts from the printing and/ or
publishing of books or other reading materials
prescribed by the DECS as school text or
references are not subject to the tax imposed

3) Franchise tax719

Franchise Generally refers to a privilege conferred by

the government on an individual or
corporation, which does not belong to the
citizens by common right

Tax Rate Not exceeding 50% of 1%, if newly started

business, 1/20 of 1 %

Tax base Gross annual receipts of preceding

calendar year based on:

a) Incoming receipts, or
b) Realized within territorial jurisdiction.

4) Tax on sand, gravel and other quarry

services720

719 Purpose of Franchise Tax to be in addition to the franchise tax imposed by the
national government on business which are holders of franchise except when otherwise
prohibited by law.719
720 Distribution of the Proceeds The proceeds of the tax shall be distributed as follows

a. Province 30%
b. Component city or municipality where the sand, etc are extracted 30%
c. Barangay where the sand, etc. are extracted 40%

273
 Tax Rate Not more than 10% of fair market value

Issuance of Permit To permit to extract the sand, gravel and

other quarry resources shall be issued
exclusively by the provincial governor
pursuant to the ordinance of the
sangguniang panlalawigan

5) Professional tax721

Tax rate In such as Sanggunian may determine and

in no case to exceed P300

When paid On or before Jan. 20

721 Profession a calling w/c requires the passing of an appropriate government board or
bar examination, such as the practice of law, medicine, public accounting, engineering,
etc.
Nature of Tax professional tax applies only to natural or physical persons and not to
juridical entities. Said tax is fixed on the privilege of exercising or engaging in a profession.
The tax is not based on the amount of earnings of the taxpayer.

274
 Where Paid on the place where you practice your
profession.722

6) Amusement tax723

Tax Rate Not more than 30% of the gross receipt

from admission fees

Exemption Operas, concerts, dramas, recitals,

painting and art exhibitions, flower
shows, musical programs, literary and
oratorical presentation

Exceptions to Pop, rock, or similar concert.

exemption

7) Tax on delivery truck/van

Transaction taxed Use of truck, van vehicle in the delivery or

distribution of distilled spirits, fermented
liquors, softdrinks, cigar and cigarettes
and other products, determined by the
Sanggunian to sales outlets or consumers.

Tax rate Not exceeding P500 for every truck, van

722government employees are exempted from paying PT

723Amusement pleasurable diversion and entertainment
Amusement Place includes theaters, cinemas, concert halls, circuses and other
places of amusement where one seeks admission to entertain himself by seeing or
viewing the show or performance (Sec 131 (c))

275
 or any vehicle used

Exemption Exempt from tax on peddlers.

b. Taxing powers of cities

Cities are authorized specifically to impose taxes, fees and charges

that provinces and municipalities may levy.

Rate: May be above the maximum established

for provinces and municipalities but not
exceeding 50% of such maximum rates
except the rates of professional and
amusement taxes

c. Taxing powers of municipalities

Municipality may levy taxes, fees and charges not otherwise levied by
provinces and cities

1) Tax on various types of businesses

Rate

Manufacturers, assemblers, At graduated annual fixed tax

repackers of liquors, distilled spirits based on gross sales or receipts
and wines for the preceding calendar year in
an amount not to exceed P6.5 M
or more, a rate not exceeding 37
of 1% is imposed

Wholesalers, distributors or dealers Graduated annual fixed rate

in any article of Commerce based on gross sales or receipts

276
 not exceeding P2M or more, the
rate not exceeding 50% of 1%

Exporters, manufacturers, millers, Not exceeding of the rates

producers of essential commodities prescribed in (a) and (b)724

Contractors and other independent Graduated annual fixed rate

contractors when the gross receipts exceeds
P2M the rate is not exceeding
50% of 1%

Banks and other financial institutions Not exceeding 50% of 1% on the

gross receipts of preceding
calendar year

Peddlers Not exceeding 50% per peddler

annually

Any business not otherwise specified As the Sanggunian may deem

proper. When subject to excise,
VAT or percentage tax, it shall
not exceed 2% of gross receipts
of the preceding calendar year.725

2) Ceiling on business tax impossible on

municipalities within Metro Manila

The municipalities within the Metropolitan Manila Area may levy

taxes at rates which shall not exceed by fifty percent (50%) the maximum
rates prescribed in the preceding Section.726

724 supra
725 Sec. 143
726 Sec. 144

277
 3) Tax on retirement on business

A business subject to tax shall, upon termination thereof, submit a

sworn statement of its gross sales or receipts for the current year. If the tax
paid during the year be less than the tax due on said gross sales or receipts
of the current year, the difference shall be paid before the business is
considered officially retired.

If the tax paid during the year be less than the tax due on said gross
sales of receipts of the current year, the difference shall be paid before the
business is considered officially retired.727

4) Rules on payment of business tax

a. It shall be payable for every separate or distinct establishment or

place where the business subject to the tax is conducted and one line of
business does not become exempt by being conducted with some other
business for which such tax has been paid.

b. The tax on a business must be paid by the person conducting the

same.

c. In cases where a person conducts or operates 2 or more of the

businesses:

1. subject to the same rate of tax - the tax shall be computed

on the combined total gross sales or receipts of the said 2 or more
related businesses.

2. subject to different rates of tax - the gross sales or receipts

of each business shall be separately reported for the purpose of
computing the tax due from each business.

5) Fees and charges for regulation &

licensing

727 Sec. 145

278
 The municipality may impose and collect such reasonable fees and
charges on business and occupation except professional taxes reserved for
provinces.728

a. Fees for Sealing and Licensing of Weights and Measures729

b. Fishery Rentals, Fees and Charges, including the authority to grant

fishery privileges within municipal waters, as well as issue licenses for the
operation of fishing vessels of three tons or less.

c. The sanggunian may penalize the use of explosives, noxious or

poisonous substances, electricity, muro ami, and other deleterious
methods of fishing and prescribe a criminal penalty therefore.730

6) Situs of tax collected

728 Sec. 147

729 Sec. 148
730 Sec. 149

279
Situation Recognition of sale
Payment of tax
The tax shall be payable
With branch or sales All sales made in the to the city or
office or warehouse locality where the municipality where the
branch or office or same is located.
warehouse is located

Where there is no The municipality where The tax shall accrue to

branch or sales the sale or transaction the city or municipality
office or warehouse is made. where said principal
. office is located
The sale shall be
recorded in
the principal office
along with the sales
made by said principal
office

Branch office a fixed place in a locality which conducts operations of the

business as an extension of the principal office.

Principal office head or main office of the business appearing in pertinent

documents submitted to the SEC and specifically mentioned in the Articles
of Incorporation.

Where there is a Of all sales recorded in

factory, project office, the principal office:
plant or plantation in
pursuit of business 1. 30% taxable to the
city or municipality

280
 where the principal
If plantation is at a office is located.
place other than where All sales shall be
the factory is located recorded in the 2. 70% taxable to the
principal office city or municipality
where the factory,
plant, etc. is located.
If manufacturer,
contractor, etc. has The 70% (above) shall
two or more factories, be divided as follows:
project offices, plants
or plantations located 1. 60% to the city or
in different localities. municipality where the
factory is.

2. 40% to the city or

municipality where the
plantation is located.

d. Taxing powers of barangays

Taxes on stores / retailers with fixed Rate: Not exceeding 1% on such

business establishment with gross gross sales or receipts
sales or receipts of the preceding
calendar year of P50,000 or less in
the cities & municipalities

Service Fees/ Charges It may collect reasonable fees or

charges for services rendered in
connection with the regulation or
the use of barangay owned property
or service facilities

281
Barangay Clearance No city municipality may issue any
license/ permit for any business /
activity is located. For such
clearance, the sangguniang brgy.
may impose reasonable fee.

Other fees & charges The brgy. may levy reasonable fees
& charges

a) On commercials breeding of
fighting cocks & cockpits;

b) On places of recreation w/c

charge admission fees; and

c) On billboards, signs boards, neon

signs and outdoor advertisement

e. Common revenue raising powers

1) Service fees and charges

282
 LGUs may impose and collect such reasonable fees and charges for
services rendered.731

2) Public utility charges

LGUs may fix the rates for the operation of public utilities owned,
operated and maintained by them within their jurisdiction.732

3) Toll fees or charges

The sanggunian concerned may prescribe the terms and conditions

and fix the rates for the imposition of toll fees or charges for the use of any
public road, pier, or wharf,waterway, bridge, ferry or telecommunication
system funded and constructed by the local government unit concerned.733

f. Community tax

The community tax, which replaced the residence tax, is essentially a

poll or capitalization tax. It is of fixed amount imposed upon certain
inhabitants of the country without regard to the property/ occupation in
which they may be engaged.

Who are authorized to levy Cities or municipalities may levy a

community tax, as well as the rates
& accrual of the proceeds thereof.734

Persons liable to tax 1. Individuals

Rate: P5.00 an annual additional tax

of P1.00 for every P1,000 income
regardless of whether from
business, exercise of profession or

731 Sec. 153

732 Sec. 154
733 Sec. 155
734 Sec 156

283
 from property w/c in no case shall
exceed P5,000.

2. Corporations -

Rate: Annual community tax of P500

and an annual additional tax w/c in
no case shall exceed P10,000
Exemptions from the Community
Tax 1. Diplomatic and consular
representatives and

2. Transient visitors when their stay

in the Phil. Does not exceed 3 mos.

Estates of deceased persons, being neither corporations nor

individuals, are not subject to the tax, but the heirs must declare their
proportionate shares of their income.

Community Tax Certificate shall be issued to every person or

corporation upon payment of the community tax. It may also be issued to
any corporation/person not subject to the community tax.735

735 Sec 162

284
 6. Common limitations on the taxing powers of LGUs736

Unless otherwise provided herein, the exercise of the taxing power

of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:

1. Income tax737
2. Documentary Stamp Tax

3. Tax on estates, inheritance, gifts, legacies and other acquisitions

mortis causa738

4. Excise taxes on articles enumerated under the NIRC,739 as

amended, and taxes, fees or charges on petroleum products.

736 Sec 133

737 Exception: banks and other financial institutions
738 Exception: tax on transfer of real property ownership
739 Taxable Articles embodied in the NIRC are:

1. Alcoholic products
2. Tobacco products

285
 5. Percentage or VAT on sales, barters or exchanges or similar
transactions on goods or services exchanges or similar transactions on
goods or services except as otherwise provided herein740

6. Taxes on the gross receipts of transportation of contractors and

persons engaged in the transportation of passengers or freight by hire and
common carriers by air, land or water except as provided by the code.741
7. Taxes, fees and charges imposed under the Tariff and Customs
Code and other Special Laws

8. Customs duties, registration fees of vessels and wharfage on

wharves, tonnage dues and all other kinds of customs fees, charges and
dues, except wharfage on wharves constructed and maintained by LGU
concerned.

9. Taxes, fees and charges and other Impositions which contravene

Existing Government Policies or which are violative of the Fundamental
Principles of Taxation.

10.Taxes, fees, and charges and other impositions upon goods

carried into or out of, or passing through, the territorial jurisdiction of LGU
in the guise of charges for wharfage, tolls for bridges or otherwise, or other
taxes, fees or charges in any form whatever upon such goods or
merchandise.

11. Taxes, fees, or charges on agricultural and aquatic products when

sold by marginal farmers or fishermen.

3. Petroleum products
4. Miscellaneous articles
5. Mineral products
Local governments can tax the selling of these finished products or the raw materials.
740 Percentage of taxes imposed when there is set of ration between the amount of tax

and the volume of sales.

741 Transportation contractors including persons who transport passengers for hire and

other domestic carriers by land, air or water for transport of passengers, except owners of
bancas and owners of animal drawn two-wheeled vehicle are subject to 3% percentage
tax on their gross quarterly receipt (Sec 117, NIRC)
Sec. 117 of NIRC specifies that the gross receipt of common carriers derived from their
incoming and outgoing freight shall not be subjected to local taxes imposed under LGC.

286
 12. Taxes on business enterprises certified to by the Board of
Investment as pioneer or non-pioneer who enjoy tax holidays742 for a
period of 6 and 4 years, respectively from the date of registration

13. Taxes on premiums paid by way of reinsurance or retrocession.

14. Taxes, fees or other charges on Philippine products actually

exported, excepted otherwise provided herein in the LGC.

15. Taxes, fees or charges on Countryside and Baranggay Business

Enterprises and Cooperative duly registered under RA No. 6810 and RA
6938 otherwise known as the Cooperative Code of the Phil. Respectively.

16. Taxes, fees or charges of any kind on the National Government,

its agencies and instrumentalities and LGU.

17. Taxes, fees, and charges imposed under special laws.

18. Taxes, fees or charges for registration of motor vehicles.743

742 exemption from income tax only

743 Exception: Tricycles

287
 7. Collection of business tax

a. Tax period and manner of payment

The calendar year,744 which may be paid in quarterly installments.745

b. Accrual of tax

On the 1st day of January of each year.746

New taxes, fees or charges or changes accrue on the 1st day of the
quarter next following the effectively of the ordinance imposing such new
rates.747

c. Time of payment

Within the first 20 days of January or of each subsequent quarter.748

Not exceeding 6 months in case of extension of payment.749

d. Penalties on unpaid taxes, fees or charges

A surcharge not exceeding 27% of the amount of taxes, fees or

charges and an interest at the rate not exceeding 2% per month until such
amount is fully paid.

In no case the total interest on the unpaid amount or portion thereof

exceed 36 months750

744 unless otherwise provided

745 Sec. 165
746 unless otherwise provided
747 Sec 166
748 unless otherwise provided
749 Sec 167
750 Sec 168

288
 e. Authority of treasurer in collection and
inspection of books

All local taxes, fees, and charges shall be collected by the provincial,
city, municipal, or barangay treasurer, or their duly authorized deputies.
The provincial, city or municipal treasurer may designate the barangay
treasurer as his deputy to collect local taxes, fees, or charges. In case a
bond is required for the purpose, the provincial, city or municipal
government shall pay the premiums thereon in addition to the premiums of
bond that may be required under this Code.751

The provincial, city, municipal or barangay treasurer may, by himself

or through any of his deputies duly authorized in writing, examine the
books, accounts, and other pertinent records of any person, partnership,
corporation, or association subject to local taxes, fees and charges in order
to ascertain, assess, and collect the correct amount of the tax, fee, or
charge. Such examination shall be made during regular business hours, only
once for every tax period, and shall be certified to by the examining official.
Such certificate shall be made of record in the books of accounts of the
taxpayer examined. In case the examination herein authorized is made by a
duly authorized deputy of the local treasurer, the written authority of the
deputy concerned shall specifically state the name, address, and business
of the taxpayer whose books, accounts, and pertinent records are to be
examined, the date and place of such examination, and the procedure to be
followed in conducting the same. For this purpose, the records of the
revenue district office of the Bureau of Internal Revenue shall be made
available to the local treasurer, his deputy or duly authorized
representative.752

8. Taxpayers remedies

a. Periods of assessment and collection of local

taxes, fees or charges753

751 Sec. 170

752 Sec. 171
753 Suspension of the running of the prescriptive Period -

a. Treasurer legally prevented from the making the assessment or collection

b. Taxpayer requests for reinvestigation and executes waiver in writing

289
 Assessment Collection

- within five years from the date - within 5 years from the date of
they become due. assessment by administrative or
judicial action
- within 10 years, in case of fraud of
intent to evade payment

b. Protest of assessment

a. Assessment made by the local Treasurer

b. Taxpayer has 60 days from receipt to file written protest with

Treasurer, otherwise it shall become final and executory

c. Treasurer has 10 days within which to decide.754

c. Claim for refund of tax credit for erroneously or

illegally collected tax, fee or charge

A written claim for refund or credit is filed with the local Treasurer
within 2 years from the date of payment of such tax, fee, or charge, or from
the date the taxpayer is entitled to a refund or credit

9. Civil remedies by the LGU for collection of revenues

c. Taxpayer out of the country

d. Taxpayer cannot be located
754 Treasurer cancels assessment

Treasurer denies protest

- Taxpayer appeals within 30 days after receipt of denial
Treasurer does not act within 60 days
- Taxpayer has 30 days from the lapse of 60 days to appeal

290
 a. Local governments lien for delinquent taxes,
fees or charges

1. Superior to all items, charges or encumbrances in favor of any

person, enforceable by the administrative of judicial action
2. Covers not only property or rights subject to the lien but also
upon property used in business.
b. Civil remedies, in general

1) Administrative action

1. Distraint of goods, chattels or effects and other personal property

of whatever character
2. Levy upon real property and interest in or rights to real property
2) Judicial action

Either of these remedies or all may be pursued concurrently or

simultaneously at the discretion of local government unit concerned.755

c. Procedure for administrative action

1) Distraint of personal property

(a) Seizure Upon failure of the person owing any local tax,
fee, or charge to pay the same at the time
required, the local treasurer or his deputy may,
upon written notice, seize or confiscate any
personal property belonging to that person or
any personal property subject to the lien in
sufficient quantity to satisfy the tax, fee, or
charge in question, together with any increment
thereto incident to delinquency and the expenses

755 Sec 174

291
 of seizure. In such case, the local treasurer or his
deputy shall issue a duly authenticated certificate
based upon the records of his office showing the
fact of delinquency and the amounts of the tax,
fee, or charge and penalty due. Such certificate
shall serve as sufficient warrant for the distraint
of personal property aforementioned, subject to
the taxpayer's right to claim exemption under the
provisions of existing laws. Distrained personal
property shall be sold at public auction in the
manner hereon provided for.

(b) Accounting of The officer executing the distraint shall make or

distrained goods. cause to be made an account of the goods,
chattels or effects distrained, a copy of which
signed by himself shall be left either with the
owner or person from whose possession the
goods, chattels or effects are taken, or at the
dwelling or place or business of that person and
with someone of suitable age and discretion, to
which list shall be added a statement of the sum
demanded and a note of the time and place of
sale.

(c) Publication The officer shall forthwith cause a notification to

be exhibited in not less than three (3) public and
conspicuous places in the territory of the local
government unit where the distraint is made,
specifying the time and place of sale, and the
articles distrained. The time of sale shall not be
less than twenty (20) days after the notice to the
owner or possessor of the property as above
specified and the publication or posting of the
notice. One place for the posting of the notice
shall be at the office of the chief executive of the

292
 local government unit in which the property is
distrained.

(d) Release of distrained If at any time prior to the consummation of the

property upon payment sale, all the proper charges are paid to the officer
prior to sale conducting the sale, the goods or effects
distrained shall be restored to the owner.

(e) Procedure of sale
At the time and place fixed in the notice, the
officer conducting the sale shall sell the goods or
effects so distrained at public auction to the
highest bidder for cash. Within five (5) days after
the sale, the local treasurer shall make a report
of the proceedings in writing to the local chief
executive concerned.756

(f) Disposition of The proceeds of the sale shall be applied to

proceeds satisfy the tax, including the surcharges, interest,
and other penalties incident to delinquency, and
the expenses of the distraint and sale. The
balance over and above what is required to pay
the entire claim shall be returned to the owner of
the property sold. The expenses chargeable upon
the seizure and sale shall embrace only the actual
expenses of seizure and preservation of the
property pending the sale, and no charge shall be
imposed for the services of the local officer or his
deputy. Where the proceeds of the sale are
insufficient to satisfy the claim, other property
may, in like manner, be distrained until the full

756Should the property distrained be not disposed of within one hundred and twenty
(120) days from the date of distraint, the same shall be considered as sold to the local
government unit concerned for the amount of the assessment made thereon by the
Committee on Appraisal and to the extent of the same amount, the tax delinquencies
shall be cancelled.

293
 amount due, including all expenses, is
collected.757

2) Levy of real property, procedure

After the expiration of the time required to pay the delinquent tax,
fee, or charge, real property may be levied on before, simultaneously, or
after the distraint of personal property belonging to the delinquent
taxpayer. To this end, the provincial, city or municipal treasurer, as the case
may be, shall prepare a duly authenticated certificate showing the name of
the taxpayer and the amount of the tax, fee, or charge, and penalty due
from him. Said certificate shall operate with the force of a legal execution
throughout the Philippines.

Levy shall be effected by writing upon said certificate the description

of the property upon which levy is made. At the same time, written notice
of the levy shall be mailed to or served upon the assessor and the Register
of Deeds of the province or city where the property is located who shall
annotate the levy on the tax declaration and certificate of title of the
property, respectively, and the delinquent taxpayer or, if he be absent from
the Philippines, to his agent or the manager of the business in respect to
which the liability arose, or if there be none, to the occupant of the
property in question.

In case the levy on real property is not issued before or

simultaneously with the warrant of distraint on personal property, and the
personal property of the taxpayer is not sufficient to satisfy his
delinquency, the provincial, city or municipal treasurer, as the case may be,
shall within thirty (30) days after execution of the distraint, proceed with
the levy on the taxpayer's real property.

A report on any levy shall, within ten (10) days after receipt of the
warrant, be submitted by the levying officer to the sanggunian
concerned.758

757 Sec. 165

758 Sec. 166

294
 3) Further distraint or levy

The remedies by distraint and levy may be repeated if necessary until

the full amount due, including all expenses, is collected.759

4) Exemption of personal property from

distraint or levy

(a) Tools and implements necessarily used by the delinquent

taxpayer in his trade or employment;

(b) One (1) horse, cow, carabao, or other beast of burden, such as
the delinquent taxpayer may select, and necessarily used by him in his
ordinary occupation;

(c) His necessary clothing, and that of all his family;

(d) Household furniture and utensils necessary for housekeeping and

used for that purpose by the delinquent taxpayer, such as he may select, of
a value not exceeding Ten thousand pesos (P10,000.00);

(e) Provisions, including crops, actually provided for individual or

family use sufficient for four (4) months;

(f) The professional libraries of doctors, engineers, lawyers and

judges;

(g) One fishing boat and net, not exceeding the total value of Ten
thousand pesos (P10,000.00), by the lawful use of which a fisherman earns
his livelihood; and

(h) Any material or article forming part of a house or improvement of

any real property.760

759 Sec. 184

760 Sec. 185

295
 5) Penalty on local treasurer for failure to
issue and execute warrant of distraint or
levy

Any local treasurer who fails to issue or execute the warrant of

distraint or levy after the expiration of the time prescribed, or who is found
guilty of abusing the exercise thereof by competent authority shall be
automatically dismissed from the service after due notice and hearing.761

d. Procedure for judicial action

1) In any court of competent jurisdiction

2) Filed by local Treasurer
3) Within 5 years from the date taxes, fees or charges become due

761 Sec. 177

296
B. Real Property Taxation

1. Fundamental principles

a) Real property shall be appraised at its current and fair market

value.
b) Real property shall be classified for assessment purposes on the
basis of its actual use.

c) Real property shall be assessed on the basis of a uniform standard

within each local government unit.
d) The appraisal, assessment, and collection of real property tax shall
not be let to any private person; and

297
 e. ) The appraisal and assessment of real property shall be
equitable762
2. Nature of real property tax

Property taxes are assessed on all property, or all property of a

certain class located within a certain territory on a specified date in
proportion to its value or in accordance with some other reasonable
method of apportionment.763

In the Philippines, a real property tax is an annual ad valorem tax

imposed by LGUs on real property within their jurisdiction, determined on
the basis of a fixed proportion of the value of the property.

3. Imposition of real property tax

a. Power to levy real property tax

A province or city or a municipality within the Metropolitan Manila

Area may levy an annual ad valorem tax on real property such as land,
building, machinery, and other improvement not hereinafter specifically
exempted.764

b. Exemption from real property tax765

762 Sec. 198

763 The function of a property tax is to raise revenue. Such tax does not impose any
condition nor does it place any restriction upon the use of the property taxed.
764 Sec. 232
765 Real properties of review schools are subject to tax (why? Considered an ordinary

corporation)
Non-stock, nonprofit private schools are exempt.

298
 1. Real property owned by the Republic of the Philippines or any of
its political subdivisions except when the beneficial use thereof has been
granted to a taxable person;
2. Charitable institutions, churches, parsonages, or convents
appurtenant thereto, mosques, non profit or religious cemeteries, and all
lands, buildings, and improvements actually, directly and exclusively used
for religious, charitable, or educational purposes.

3. All pieces of machinery and equipment that are actually, directly,

and exclusively used by local water districts, and government owned or
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power.

4. All real property owned by duly registered cooperatives,766 and

5. Machinery and equipment used for pollution control and

environmental protection.

4. Appraisal and assessment of real property tax

a. Rule on appraisal of real property at fair market

value

All real property, whether taxable or exempt, shall be appraised at

the current and fair market value prevailing in the locality where the
property is situated.767

b. Declaration of real property

Proprietary schools (stock and profit) duly accredited by DECS or CHED are exempt, if
property is actually, directly and exclusively used for educational purposes.
The term exclusively under the Constitution does not mean solely but only
primarily (Roman Catholic Church v. Hastings, 5 Phil 701, Province of Abra v. Hernando,
107 SCRA 104 & other cases).
766 as provided for under R.A. 6938
767 Sec. 201

299
 It shall be the responsibility of the owner, administrator or their
representatives to declare, under oath, the true value of real property,
taxable or exempt, within 60 days after the acquisition. The sworn
declaration shall be filed once every 3 years before June 30th of the year
commencing 1992. The failure or refusal to make that declaration within
the prescribed period would authorize the provincial or city assessor to
declare the property in the name of the defaulting owner, if known, or
against an unknown owner as the case may be, and to assess the property
for taxation.768

c. Listing of real property in assessment rolls

(a) In every province and city, including the municipalities within the
Metropolitan Manila Area, there shall be prepared and maintained by the
provincial, city or municipal assessor an assessment roll wherein shall be
listed all real property, whether taxable or exempt, located within the
territorial jurisdiction of the local government unit concerned. Real
property shall be listed, valued and assessed in the name of the owner or
administrator, or anyone having legal interest in the property.

(b) The undivided real property of a deceased person may be listed,

valued and assessed in the name of the estate or of the heirs and devisees
without designating them individually; and undivided real property other
than that owned by a deceased may be listed, valued and assessed in the
name of one or more co-owners. Such heir, devisee, or co-owner shall be
liable severally and proportionately for all obligations and the payment of
the real property tax with respect to the undivided property.

(c) The real property of a corporation, partnership, or association

shall be listed, valued and assessed in the same manner as that of an
individual.

768 Secs. 201-204

300
 (d) Real property owned by the Republic of the Philippines, its
instrumentalities and political subdivisions, the beneficial use of which has
been granted, for consideration or otherwise, to a taxable person, shall be
listed, valued and assessed in the name of the possessor, grantee or of the
public entity if such property has been acquired or held for resale or
lease.769

d. Preparation of schedules of fair market value

Before any general revision of property assessment is made, there

shall be prepared a schedule of fair market values by the provincial, city
and municipal assessor of the municipalities within the Metropolitan
Manila Area for the different classes of real property situated in their
respective local government units for enactment by ordinance of the
sanggunian concerned. The schedule of fair market values shall be
published in a newspaper of general circulation in the province, city or
municipality concerned or in the absence thereof, shall be posted in the
provincial capitol, city or municipal hall and in two other conspicuous public
places therein.770

1) Authority of assessor to take evidence

For the purpose of obtaining information on which to base the

market value of any real property, the assessor of the province, city or
municipality or his deputy may summon the owners of the properties to be
affected or persons having legal interest therein and witnesses, administer
oaths, and take deposition concerning the property, its ownership, amount,
nature, and value.771

2) Amendment of schedule of fair market

value

The provincial, city or municipal assessor may recommend to the

sanggunian concerned amendments to correct errors in valuation in the

769 Sec. 205

770 Sec. 212
771 Sec. 213

301
schedule of fair market values. The sanggunian concerned shall, by
ordinance, act upon the recommendation within ninety (90) days from
receipt thereof.772

e. Classes of real property

For purposes of assessment, real property shall be classified as

residential, agricultural, commercial, industrial, mineral, timberland or
special.

The city or municipality within the Metropolitan Manila Area,

through their respective sanggunian, shall have the power to classify lands
as residential, agricultural, commercial, industrial, mineral, timberland, or
special in accordance with their zoning ordinances.773

f. Actual use of property as basis of assessment

Regardless of where located, whoever owns it, and whoever uses

774
it.

g. Assessment of real property

1) Assessment levels

The assessment levels to be applied to the fair market value of real

property to determine its assessed value shall be fixed by ordinances of the
sangguniang panlalawigan, sangguniang panlungsod or sangguniang
bayan of a municipality within the Metropolitan Manila Area, at the rates
not exceeding the following:

(a) On Lands:

CLASS ASSESSMENT LEVELS

772 Sec. 214

773 Sec. 215
774 Sec. 217

302
 Residential 20%
Agricultural 40%
Commercial 50%
Industrial 50%
Mineral 50%
Timberland 20%

(b) On Buildings and Other Structures:

(1) Residential
Fair market Value

Over Not Over Assessment Levels

P175,000.00 0%
P175,000.00 300,000.00 10%
300,000.00 500,000.00 20%
500,000.00 750,000.00 25%
750,000.00 1,000,000.00 30%
1,000,000.00 2,000,000.00 35%
2,000,000.00 5,000,000.00 40%
5,000,000.00 10,000,000.00 50%
10,000,000.00 60%

(2) Agricultural

Fair Market Value

Over Not Over Assessment Levels

P300,000.00 25%
P300,000.00 500,000.00 30%
500,000.00 750,000.00 35%
750,000.00 1,000,000.00 40%
303
1,000,000.00 2,000,000.00 45%
2,000,000.00 50%

(3) Commercial / Industrial

Fair Market Value

Over Not Over Assessment
Levels

P300,000.00 30%
P300,000.00 500,000.00 35%
500,000.00 750,000.00 40%
750,000.00 1,000,000.00 50%
1,000,000.00 2,000,000.00 60%
2,000,000.00 5,000,000.00 70%
5,000,000.00 10,000,000.00 75%
10,000,000.00 80%

(4) Timberland

Fair Market Value

Over Not Over Assessment
Levels

P300,000.00 45%
P300,000.00 500,000.00 50%
500,000.00 750,000.00 55%
750,000.00 1,000,000.00 60%
5,000,000.00 2,000,000.00 65%
2,000,000.00 70%

(c) On Machineries

Class Assessment Levels

304
 Agricultural 40%
Residential 50%
Commercial 80%
Industrial 80%

(d) On Special Classes: The assessment

levels for all lands buildings,
machineries and other improvements;

Actual Use Assessment Level

Cultural 15%
Scientific 15%
Hospital 15%
Local water districts 10%
Government-owned or controlled
corporations engaged in the supply and
distribution of water and/or generation and
transmission of electric power
10%775

2) General revisions of assessments and

property classification

Within two (2) years after the effectivity of this Code and every three
(3) years thereafter, the provincial, city or municipal assessor shall
undertake a general revision of real property assessments.776
3) Date of effectivity of assessment or
reassessment

Made after the first (1st) day of January of any year - shall take effect
on the first (1st) day of January of the succeeding year.777

775 Sec. 218

776 Sec. 219

305
 4) Assessment of property subject to back
taxes

Real property declared for the first time shall be assessed for taxes
for the period during which it would have been liable but in no case of
more than ten (10) years prior to the date of initial assessment. Such taxes
shall be computed on the basis of the applicable schedule of values in force
during the corresponding period.778

5) Notification of new or revised

assessment

When real property is assessed for the first time or when an existing
assessment is increased or decreased, the provincial, city or municipal
assessor shall within thirty (30) days give written notice of such new or
revised assessment to the person in whose name the property is declared.
The notice may be delivered personally or by registered mail or through the
assistance of the punong barangay to the last known address of the person
to be served.

h. Appraisal and assessment of machinery

(a) The fair market value of a brand-new machinery shall be the

acquisition cost.779

777 The reassessment of real property due to its partial or total destruction, or to a major
change in its actual use, or to any great and sudden inflation or deflation of real
property values, or to the gross illegality of the assessment when made or to any other
abnormal cause, shall be made within ninety (90) days from the date any such cause or
causes occurred, and shall take effect at the beginning of the quarter next following the
reassessment.
778 Sec. 222
779 In all other cases, the fair market value shall be determined by dividing the remaining

economic life of the machinery by its estimated economic life and multiplied by the
replacement or reproduction cost.

306
 (b) If the machinery is imported, the acquisition cost includes freight,
insurance, bank and other charges, brokerage, arrastre and handling, duties
and taxes, plus charges at the present site.780

5. Collection of real property tax

a. Date of accrual of real property tax

On the first day of January.781

b. Collection of tax

1) Collecting authority

The responsibility of the city or municipal treasurer concerned.

The city or municipal treasurer may deputize the barangay treasurer

to collect all taxes on real property located in the barangay: Provided, the
barangay treasurer is properly bonded for the purpose and the premium on
the bond shall be paid by the city or municipal government concerned.782

2) Duty of assessor to furnish local treasurer

with assessment rolls

780 The cost in foreign currency of imported machinery shall be converted to peso cost
on the basis of foreign currency exchange rates as fixed by the Central Bank.
781 From that date it shall constitute a lien on the property which shall be superior to any

other lien, mortgage, or encumbrance of any kind whatsoever, and shall be extinguished
only upon the payment of the delinquent tax (Sec. 246)
782 Sec. 247

307
 The provincial, city or municipal assessor shall prepare and submit to
the treasurer of the local government unit, on or before the thirty-first
(31st) day of December each year, an assessment roll containing a list of all
persons whose real properties have been newly assessed or reassessed and
the values of such properties.783

3) Notice of time for collection of tax

On or before the thirty-first (31st) day of January each year or any

other date to be prescribed by the sanggunian concerned/

Said notice shall likewise be published in a newspaper of general

circulation in the locality once a week for two (2) consecutive weeks.

c. Periods within which to collect real property tax

Within five (5) years from the date they become due.784

Within ten (10) years from discovery - in case there is fraud or intent
to evade payment of the tax.785
d. Special rules on payment

1) Payment of real property tax in

installments

The owner of the real property or the person having legal interest
therein may pay the basic real property tax and the additional tax for
Special Education Fund (SEF) due thereon without interest in four (4) equal
installments; the first installment to be due and payable on or before
March Thirty-first (31st); the second installment, on or before June Thirty
(30); the third installment, on or before September Thirty (30); and the last
installment on or before December Thirty-first (31st), except the special
levy the payment of which shall be governed by ordinance of the
sanggunian concerned.

783 Sec. 248

784 No action for the collection of the tax, whether administrative or judicial, shall be
instituted after the expiration of such period.
785 Sec. 270

308
 Payments of real property taxes shall first be applied to prior years
delinquencies, interests, and penalties, if any, and only after said
delinquencies are settled may tax payments be credited for the current
period.786

2) Interests on unpaid real property tax

Two percent (2%) per month, until the delinquent tax shall have been
fully paid.

In no case shall the total interest on the unpaid tax or portion thereof
exceed thirty-six (36) months.787

3) Condonation of real property tax

In case of a general failure of crops or substantial decrease in the

price of agricultural or agri-based products, or calamity in any province, city
or municipality, the sanggunian concerned, by ordinance passed prior to
the first (1st) day of January of any year and upon recommendation of the
Local Disaster Coordinating Council, may condone or reduce, wholly or
partially, the taxes and interest thereon for the succeeding year or years in
the city or municipality affected by the calamity.788

The President of the Philippines may, when public interest so

requires, condone or reduce the real property tax and interest for any year
in any province or city or a municipality within the Metropolitan Manila
Area.789

The period of prescription within which to collect shall be suspended for the time
during which:
1. The local treasurer is legally prevented from collecting the tax;
2. The owner of the property or the person having legal interest therein requests for
reinvestigation and executes a waiver in writing before the expiration of the period within
which to collect; and
3. The owner of the property or the person having legal interest therein is out of the
country or otherwise cannot be located
786 Sec. 250
787 Sec. 255
788 Sec. 276
789 Sec. 277

309
 e. Remedies of LGUs for collection of real property
tax

1) Issuance of notice of delinquency for real

property tax payment

To be posted at the main hall and in a publicly accessible and

conspicuous place in each barangay of the local government unit
concerned. The notice of delinquency shall also be published once a week
for two (2) consecutive weeks, in a newspaper of general circulation in the
province, city, or municipality.790

2) Local governments lien

The basic real property tax and any other tax levied constitutes a lien
on the property subject to tax, superior to all liens, charges or
encumbrances in favor of any person, irrespective of the owner or
possessor thereof, enforceable by administrative or judicial action, and may
only be extinguished upon payment of the tax and the related interests and
expenses.791

3) Remedies in general

The local government unit concerned may avail of the remedies by

administrative action thru levy on real property or by judicial action.792

790 Such notice shall specify the date upon which the tax became delinquent and shall
state that personal property may be distrained to effect payment. It shall likewise state
that any time before the distraint of personal property, payment of the tax with
surcharges, interests and penalties may be made, and unless the tax, surcharges and
penalties are paid before the expiration of the year for which the tax is due except when
the notice of assessment or special levy is contested administratively or judicially, the
delinquent real property will be sold at public auction, and the title to the property will
be vested in the purchaser, subject, however, to the right of the delinquent owner of the
property or any person having legal interest therein to redeem the property within one
(1) year from the date of sale (Sec. 254)
791 Sec. 257
792 Sec. 256

310
 4) Resale of real estate taken for taxes, fees
or charges

The sanggunian concerned may, by ordinance duly approved, and

upon notice of not less than twenty (20) days, sell and dispose of the real
property acquired at public auction. The proceeds of the sale shall accrue to
the general fund of the local government unit concerned.793

5) Further levy until full payment of amount

due

Levy may be repeated if necessary until the full amount due,

including all expenses, is collected.794

6. Refund or credit of real property tax

a. Payment under protest

(a) No protest shall be entertained unless the taxpayer first pays the
tax. There shall be annotated on the tax receipts the words "paid under
protest". The protest in writing must be filed within thirty (30) days from
payment of the tax to the provincial, city treasurer or municipal treasurer,
in the case of a municipality within Metropolitan Manila Area, who shall
decide the protest within sixty (60) days from receipt.

(b) The tax or a portion thereof paid under protest, shall be held in
trust by the treasurer concerned.

793 Sec. 264

794 Sec. 265

311
 (c) In the event that the protest is finally decided in favor of the
taxpayer, the amount or portion of the tax protested shall be refunded to
the protestant, or applied as tax credit against his existing or future tax
liability.

(d) In the event that the protest is denied or upon the lapse of the
sixty (60) day period prescribed in subparagraph (a), the taxpayer may
appeal.795

b. Repayment of excessive collections

When an assessment of basic real property tax or any other tax

levied is found to be illegal or erroneous and the tax is accordingly reduced
or adjusted, the taxpayer may file a written claim for refund or credit for
taxes and interests with the provincial or city treasurer within two (2) years
from the date the taxpayer is entitled to such reduction or adjustment.

The provincial or city treasurer shall decide the claim for tax refund
or credit within sixty (60) days from receipt thereof. In case the claim for
tax refund or credit is denied, the taxpayer may appeal.796

7. Taxpayers remedies

a. Contesting an assessment of value of real

property

795 Sec. 252

796 Sec. 253

312
 1) Appeal to the Local Board of
Assessment Appeals (LBAA)

Within sixty (60) days from the date of receipt of the written notice
of assessment, any owner or person having legal interest in the property
who is not satisfied with the action of the provincial, city or municipal
assessor in the assessment of his property may appeal to the Board of
Assessment Appeals of the provincial or city by filing a petition under oath
in the form prescribed for the purpose, together with copies of the tax
declarations and such affidavits or documents submitted in support of the
appeal.797

2) Appeal to the Central Board of

Assessment Appeals (CBAA)

Within thirty (30) days after receipt of the decision of said Board, the
owner of the property or the person having legal interest therein or the
assessor who is not satisfied with the decision of the Board, may appeal to
the Central Board of Assessment Appeals. The decision of the Central Board
shall be final and executory.798

3) Effect of payment of tax

Appeal on assessments of real property shall, in no case, suspend the

collection of the corresponding realty taxes on the property involved as
assessed by the provincial or city assessor, without prejudice to subsequent
adjustment depending upon the final outcome of the appeal.799

b. Payment of real property under protest

1) File protest with local treasurer800

2) Appeal to the Local Board of Assessment

Appeals801

797 Sec. 226

798 Sec. 229 (c), last par.
799 Sec. 231
800 See B. (6)(a), under Refund or credit of real property tax, supra

313
 3) Appeal to the Central Board of
Assessment Appeals802

4) Appeal to the CTA

By filing a petition for review803 with the CTA within thirty (30) days
from the receipt of the decision or ruling or in the case of inaction, from the
expiration of the period fixed by law to act thereon.804

5) Appeal to the SC

By filing with the said Court of Appeals a notice of appeal and with
the Supreme Court a petition for review, within thirty (30) days from the
date he receives notice of the ruling, order or decision. If, within the
aforesaid period, he fails to perfect his appeal, the said ruling, order or
decision shall become final and conclusive against him.

If no decision is rendered by the Court within thirty days from the

date a case is submitted for decision, the party adversely affected by said
ruling, order or decision may file with said Court a notice of his intention to
appeal to the Supreme Court, and if, within thirty (30) days from the filing
of said notice of intention to appeal, no decision has as yet been rendered
by the Court, the aggrieved party may file directly with the Supreme Court
an appeal from said ruling, order or decision, notwithstanding the foregoing
provisions of this section.

If any ruling, order or decision of the Court of Tax Appeals be adverse

to the Government, the Collector of Internal Revenue, the Commissioner of
Customs, or the provincial or city Board of Assessment Appeals concerned

801 See (a)(1), supra

802 See (a)(2), supra
803 under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of

Civil Procedure
804 Sec. 11, RA No. 1125

314
may likewise file an appeal therefrom to the Supreme Court in the manner
and within the same period as above prescribed for private parties.805

IV. Tariff and Customs Code of 1978, as amended (TCC)

A. Tariff and duties, defined

Custom duties Tariff

Duties which are one charged upon A book of rates, a table or catalogue
commodities on their being drawn usually in alphabetical order
imported into or exported out of a containing the names of several
country. kinds of merchandise with the duties
to be paid for the same as settled or
agreed upon between several states
that holds commerce together.

B. General rule: All imported articles are subject to duty.

Importation by the government taxable.

Any proceeding directly affecting any ruling, order or decision of the Court of Tax
805

Appeals shall have preference over all other civil proceedings except habeas corpus,
workmen's compensation and election cases.

315
 All articles when imported from a foreign country including those
previously exported from the Philippines are subject to duty unless
otherwise specifically provided for in the Tariff and Customs Code or other
laws.806

C. Purpose for imposition

For the protection of consumers and manufacturers, as well as Phil.

products from undue competition posed by foreign-made products.

D. Flexible tariff clause

A provision in the Tariff and Customs Code,807 which implements the

constitutionally delegated power to the Congress to further delegate to the
President of the Philippines, in the interest of national economy, general
welfare and/or national security upon recommendation of the NEDA (a) to
increase, reduce or remove existing protective rates of import duty,
provided the increase should not be higher than 100% ad valorem; (b) to
establish import quota or to ban imports of any commodity, and (c) to
impose additional duty on all imports not exceeding 10% ad valorem,
among others.

E. Requirements of importation

1. Beginning and ending of importation

806 Sec. 100

807 Sec. 401

316
 Importation begins when the carrying vessel or aircraft enters the
jurisdiction of the Philippines with the intention to unload808 therein.

Importation is deemed terminated upon payment of duties, taxes

and other charges due upon the articles or secured to be paid at a port of
entry and the legal permit for withdrawal shall gave been granted or in case
said articles are free of duties, taxes and other charges, until they have
legally left the jurisdiction of the customs.809

2. Obligations of importer

a. Cargo manifest

A cargo manifest shall in no case be changed or altered, except after

entry of the vessel, by means of an amendment by the master, consignee,
or agent thereof, under oath, and attached to the original manifest.810

b. Import entry

It is a declaration to the BOC showing particulars of the imported

article that will enable the customs authorities to determine the correct
duties. An importer is required to file an import entry. It must be
accomplished from disembarking of last cargo from vessel.

c. Declaration of correct weight or value

The declaration, ascertainment or verification of the correct weight

of the cargo at the port of loading is the duty or obligation of the master,
pilot, owner, officer or employee of the vessel.811 If he omits or disregards
this duty and a punishable discrepancy between the declared weight and
actual weight of the cargo exists, the inevitable conclusion is that he is

808 Even if not yet unloaded, and there is unmanifested cargo, forfeiture may take place
because importation has already begun.
809 Sec. 1202
810 Sec. 1228, 3rd par., Rev. Adm. Code
811 Sec. 2523

317
negligent or careless.812 Similarly, if in the exercise or performance of this
duty, he is negligent or careless resulting in the commission of excessive
discrepancy in the weight of the ship's cargo penalized under the law,
carelessness or incompetency is, nonetheless, imputable to him.

d. Liability for payment of duties

The liability for duties, taxes, fees and other charges attaching on
importation constitutes a personal debt due from the importer to the
government which can be discharged only by payment in full of all duties,
taxes, fees and other charges legally accruing. It also constitutes a lien upon
the articles imported which may be enforced while such articles are in
custody or subject to the control of the government.813

e. Liquidation of duties

If the Collector shall approve the returns of the appraiser and the
report of the weights, gauge or quantity, the liquidation shall be made on
the face of the entry showing the particulars thereof, initiated by the
liquidating clerk, approved by the chief liquidator, and recorded in the
record of liquidations.

A daily record of all entries liquidated shall be posted in the public

corridor of the customhouse, stating the name of the vessel or aircraft, the
port from which she arrived, the date of her arrival, the name of the
importer, and the serial number and date of the entry. A daily record must
also be kept by the Collector of all additional duties, taxes and other
charges found upon liquidation, and notice shall promptly be sent to the
interested parties.814

812 See Delgado Shipping Agencies, Inc. vs. Commissioner of Customs, C.T.A. Case No.
2685, Feb. 15, 1977; Macondray & Co., Inc. vs. Commissioner of Customs, C.T.A. Case No.
274 1, Feb. 3, 1977; Macondray & Co., Inc, vs. Commissioner of Customs, C.T.A. Case No.
2656, January 21, 1977 and cases cited therein.
813 Sec. 1204
814 Sec. 1601

318
 If to determine the exact amount due under the law, some future
action is required, the liquidation shall be deemed to be tentative as to the
item or items affected and shall to that extent be subject to future and final
readjustment and settlement. The entry in such case shall be stamped
"Tentative liquidation".815

When articles have been entered and passed free of duty or final
adjustment of duties made, with subsequent delivery, such entry and
passage free of duty or settlement of duties will, after the expiration of one
year, from the date of the final payment of duties, in the absence of fraud
or protest, be final and conclusive upon all parties, unless the liquidation of
the import entry was merely tentative.816

In determining the total amount of duties, taxes, surcharges,

wharfage and/or other charges to be paid on entries, a fraction of a peso
less than fifty centavos shall be disregarded, and a fraction of a peso
amounting to fifty centavos or more shall be considered as one peso. In
case of overpayment or underpayment of duties, taxes, surcharges,
wharfage and/or other charges paid on entries, where the amount involved
is less than five pesos, no refund or collection shall be made.817

f. Keeping of records

F. Importation in violation of TCC

1. Smuggling

a. An act of any person who shall:

1. Fraudulently import any article contrary to law, or

2. Assist in so doing, or

815 Sec. 1602

816 Sec. 1603
817 Sec. 1604

319
 3. Receive, conceal, buy, sell, facilitate, transport, conceal or
sell such article knowing its illegal importation.818
4. Export contrary to law.819

b. The Philippines is divided into various ports of entry entry other

than port of entry, will be smuggling.

2. Other fraudulent practices

Any person who makes or attempts to make any entry of imported or

exported article by means of any false or fraudulent invoice, declaration,
affidavit, letter, paper, or by means of any false statement, written or
verbal, or by means of any false or fraudulent practice whatsoever, or shall
be guilty of any willful act or omission by means of whereof the
Government might be deprived of the lawful duties, taxes and other
charges accruing from the article or any portion thereof, embraced or
referred to in such invoice, declaration, affidavit, letter, paper, or
statement, or affected by such act or omission, shall, for each offense, be
punished by a fine of not less than six hundred pesos nor more than five
thousand pesos and by imprisonment for not less than six months nor more
than two (2) years. If the offender is an alien, he shall be deported after
serving the sentence.820

G. Classification of goods

1. Taxable importation

All articles imported from any foreign country into the Philippines,
upon each importation, even though previously exported from the
Philippines, except as otherwise specifically provided.821

818 Sec. 3601

819 Sec. 3514
820 Sec. 3602
821 Sec. 101

320
 2. Prohibited importation

a. Dynamite, gunpowder, ammunitions and other explosives, firearm

and weapons of war, and detached parts thereof, except when authorized
by law.1awphil

b. Written or printed article in any form containing any matter

advocating or inciting treason, rebellion, insurrection or sedition against the
Government of the Philippines, of forcible resistance to any law of the
Philippines, or containing any threat to take the life of or inflict bodily harm
upon any person in the Philippines.

c. Written or printed articles, photographs, engravings, lithographs,

objects, paintings, drawings or other representation of an obscene or
immoral character.

d. Articles, instruments, drugs and substances designed, intended or

adapted for preventing human conception or producing unlawful abortion,
or any printed matter which advertises or describes or gives directly or
indirectly information where, how or by whom human conception is
prevented or unlawful abortion produced.

e. Roulette wheels, gambling outfits, loaded dice, marked cards,

machines, apparatus or mechanical devices used in gambling, or in the
distribution of money, cigars, cigarettes or other articles when such
distribution is dependent upon chance, including jackpot and pinball
machines or similar contrivances.

f. Lottery and sweepstakes tickets except those authorized by the

Philippine Government, advertisements thereof and lists of drawings
therein.

g. Any article manufactured in whole or in part of gold silver or other

precious metal, or alloys thereof, the stamps brands or marks of which do
not indicate the actual fineness or quality of said metals or alloys.

321
 h. Any adulterated or misbranded article of food or any adulterated
or misbranded drug in violation of the provisions of the "Food and Drugs
Act."

i. Marihuana, opium poppies, coca leaves, or any other narcotics or

synthetic drugs which are or may hereafter be declared habit forming by
the President of the Philippines, any compound, manufactured salt,
derivative, or preparation thereof, except when imported by the
Government of the Philippines or any person duly authorized by the
Collector of Internal Revenue, for medicinal purposes only.

j. Opium pipes and parts thereof, of whatever material.

k. All other articles the importation of which is prohibited by law.822

H. Classification of duties

1. Ordinary/Regular duties

Imposed on imported articles that enter the country of the

Philippines in avoidance with the schedules and classifications provided
under the Tariff and Customs Code.

a. Ad valorem; Methods of valuation

1) Transaction value

The price actually paid or payable for the goods when sold for export
to the Philippines, adjusted by adding:

a. The following to the extent that they are incurred by the buyer but
are not included in the price actually paid or payable for the imported
goods:

1. Commissions and brokerage fees;823

822 Sec. 102

322
 2. Cost of containers;

3. The cost of packing, whether for labour or materials;

4. The value, apportioned as appropriate, of the following

goods and services: materials, components, parts and similar items
incorporated in the imported goods; tools; dies; moulds and similar
items used in the production of imported goods; materials consumed
in the production of the imported goods; and engineering,
development, artwork, design work and plans and sketches
undertaken elsewhere than in the Philippines and necessary for the
production of imported goods, where such goods and services are
supplied directly or indirectly by the buyer free of charge or at a
reduced cost for use in connection with the production and sale for
export of the imported goods;

5. The amount of royalties and license fees related to the

goods being valued that the buyer must pay, either directly or
indirectly, as a condition of sale of the goods to the buyer;

b. The value of any part of the proceeds of any subsequent resale,

disposal or use of the imported goods that accrues directly or indirectly to
the seller;

c. The cost of transport of the imported goods from the port of

exportation to the port of entry in the Philippines;

d. Loading, unloading and handling charges associated with the

transport of the imported goods from the country of exportation to the
port of entry in the Philippines; and

e. The cost of insurance.824

2) Transaction value of identical goods

823 except buying commissions

824 Sec. 1 (A), R.A. 9135, amending Sec. 201 of TCC

323
 Where the dutiable value cannot be determined under method one,
the dutiable value shall be the transaction value of identical goods sold for
export to the Philippines and exported at or about the same time as the
goods being valued.

"Identical goods" shall mean goods which are the same in all
respects, including physical characteristics, quality and reputation. Minor
differences in appearances shall not preclude goods otherwise conforming
to the definition from being regarded as identical.825

3) Transaction value of similar goods

Where the dutiable value cannot be determined under the preceding

method, the dutiable value shall be the transaction value of similar goods
sold for export to the Philippines and exported at or about the same time
as the goods being valued.

"Similar goods" shall mean goods which, although not alike in all
respects, have like characteristics and like component materials which
enable them to perform the same functions and to be commercially
interchangeable. The quality of the goods, their reputation and the
existence of a trademark shall be among the factors to be considered in
determining whether goods are similar.826 xxx

4) Deductive value

Based on the unit price at which the imported goods or identical or

similar imported goods are sold in the Philippines, in the same condition as
when imported, in the greatest aggregate quantity, at or about the time of
the importation of the goods being valued, to persons not related to the
persons from whom they buy such goods, subject to deductions for the
following:

825 Sec. 1 (B), Id.

826 Sec. 1 (C), id.

324
 (1) Either the commissions usually paid or agreed to be paid or the
additions usually made for profit and general expenses in connection with
sales in such country of imported goods of the same class or kind;

(2) The usual costs of transport and insurance and associated costs
incurred within the Philippines; and

(3) Where appropriate, the costs and charges referred to in

subsection (A) (3), (4) and (5); and

(4) The customs duties and other national taxes payable in the
Philippines by reason of the importation or sale of the goods.827 xxx

5) Computed value

The sum of:

(1) The cost or the value of materials and fabrication or other

processing employed in producing the imported goods;

(2) The amount for profit and general expenses equal to that usually
reflected in the sale of goods of the same class or kind as the goods being
valued which are made by producers in the country of exportation for
export to the Philippines;

(3) The freight, insurance fees and other transportation expenses for
the importation of the goods;

(4) Any assist, if its value is not included under paragraph (1) hereof;
and

(5) The cost of containers and packing, if their values are not included
under paragraph (1) hereof.828 xxx

6) Fallback value

827 Sec. 1 (D), id.

828 Sec. 1 (E), id.

325
 If the dutiable value cannot be determined under the preceding
methods described above, it shall be determined by using other reasonable
means and on the basis of data available in the Philippines.

If the importer so requests, the importer shall be informed in writing

of the dutiable value determined under Method Six and the method used
to determine such value.

No dutiable value shall be determined under Method Six on the basis

of:

(1) The selling price in the Philippines of goods produced in the

Philippines;
(2) A system that provides for the acceptance for customs purposes
of the higher of two alternative values;
(3) The price of goods in the domestic market of the country of
exportation;
(4) The cost of production, other than computed values, that have
been determined for identical or similar goods in accordance with Method
Five hereof;
(5) The price of goods for export to a country other than the
Philippines;
(6) Minimum customs values; or
(7) Arbitrary or fictitious values.829
b. Specific

Duty based on the dutiable weight of goods number or

measurement.

2. Special duties

829 Sec. 1 (F), id.

326
 Imposed in addition to regular or ordinary duties principally in order
to protect local industries against unfair competition from foreign
manufacturers or procedures; consumer against possible deceptions; and
national interest.

a. Dumping duties

Imposed by the Secretary of Finance, upon the recommendation of

the Tariff Commission when:

a. The price of the imported article is deliberately or continually

fixed at less than the fair market value or cost of production;
and

b. Importation would cause or likely cause and injury to local

industries engaged in the manufacture or production of the
same or similar articles or prevent their establishment.

Amount of special duty: extent of the underpricing.

b. Countervailing duties

Special duty imposed on imported articles which are granted any

kind or form of subsidy by the government in the country or origin or
exportation, the importation of which has caused or threatens to cause
material injury to a domestic industry or has materially relaided the growth
or, prevents the establishment of a domestic industry.830

c. Marking duties

830R.A. 8751
Requisites:
1. The levy of an excise tax or inland tax or local goods of the same or similar class as
the article imported or the grant of subsidy to the foreign exporter by his government;
and
2. The importation is likely to insure materially established local industries or prevent
their establishments.
Amount of special duty: Equal to the bounty or subsidy or subvention.

327
 Special duty of five percent (5%) ad valorem imposed or articles
properly marked, collected by the commissioner, except when such article
is exported or destroyed under the customs supervision and prior to final
liquidation of the corresponding entry.831

d. Retaliatory/Discriminatory duties

Imposed on imported goods whenever it is found as a fact that the

country of origin discriminates against the commerce of the Philippines in
such a manner as to place the commerce of the Philippines at a
disadvantage compared with the commerce of any foreign country.

e. Safeguard

Safeguard measures are emergency measures, including tariffs, to

protect domestic industries and producers from increased imports which
inflict or could inflict serious injury on them.832

The CTA is vested with jurisdiction to review decisions of the

Secretary of Trade and Industry imposing safeguard measures.833

The DTI Secretary cannot impose the safeguard measures if the Tariff
Commission does not favorably recommend its imposition.

I. Drawbacks

A drawback is a refund or tax credit granted on duties that had been

paid on products that are subsequently exported, such as on all fuel
imported into the Philippines used for propulsion of vessels engaged in
trade with foreign countries, or in the coastwise trade, or articles used as
raw materials for items subsequently exported.

831 Purpose: To prevent possible deception of the consumers.

832 Safeguard measures that may be imposed. Additional tariffs, import quotas or
banning of imports.
833 as provided under Rep. Act No. 8800, the Safeguard Measures Act (SMA) (Southern

Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R.

No. 158540, July 8, 2004)

328
 A drawback is a device resorted to for enabling a commodity affected
by taxes to be exported and sold in foreign markets upon the same terms
as if it had not been taxed at all. It refers to duties or taxes paid back or
remitted by the government on the exportation of that on which they were
levied under the Tariff and Customs Code. It refers to refund of duties on
imported fuel used for provision of vessels.

J. Remedies

1. Government

a. Administrative/Extrajudicial

1) Search, seizure, forfeiture, arrest

For the enforcement of the customs and tariff laws, the following
persons are authorized to effect searches, seizures and arrests conformably
with the provisions of said laws:

a. Officials of the Bureau of Customs, collectors, assistant collectors,

deputy collectors, surveyors, security and secret-service agents, inspectors,
port patrol officers and guards of the Bureau of Customs.

b. Officers of the Philippine Navy when authorized by the

Commissioner.

329
 c. Any person especially authorized in writing by the Commissioner.

d. Officers generally empowered by law to effect arrests and execute

processes of courts, when acting under direction of the Collector.

e. Any person especially authorized by a Collector, subject to

restrictions.

Persons exercising the powers hereinabove conferred shall, in the

exercise thereof, have the same authority, be entitled to the proper
protection, and shall be governed by the same law as other officers
exercising police authority in general.834

Persons acting under authority conferred pursuant to subsection (e)

may exercise their authority within the limits of the collection district only
and in or upon the particular vessel or aircraft, or in the particular place, or
in respect to the particular article specified in the appointment. All such
appointments shall be in writing, and the original shall be filed in the
customhouse of the district where made.

All other persons exercising the powers hereinabove conferred may

exercise the same at any place within the jurisdiction of the Bureau of
Customs.835

It shall be within the power of a customs official or person authorized

as aforesaid, and it shall be his duty, to make seizure of any vessel, aircraft,
cargo, articles, animal or other movable property when the same is subject
to forfeiture or liable for any fine imposed under customs and tariff laws,
and also to arrest any person subject to arrest for violation of any customs
and tariff laws.836

It shall be the duty of any person exercising authority as aforesaid,

upon being questioned at the time of the exercise thereof, to make known

834 Sec. 2203

835 Sec. 2204
836 Sec. 2205.

330
his official character as an officer or official of the Government, and if his
authority is derived from special authorization in writing to exhibit the
same for inspection, if demanded.837

Any person exercising police authority under the customs and tariff
laws may demand assistance of any police officer when such assistance
shall be necessary to effect any search, seizure or arrest which may be
lawfully made or attempted by him. It shall be the duty of any police officer
upon whom such requisition is made to give such lawful assistance in the
matter as may be required.838

For the more effective discharge of his official duties, any person
exercising the powers herein conferred, may at anytime enter, pass
through, or search any land or enclosure or any warehouse, store or other
building, not being a dwelling house.839

A warehouse, store or other building or enclosure used for the

keeping of storage of articles does not become a dwelling house within the
meaning hereof merely by reason of the fact that a person employed as
watchman lives in the place, nor will the fact that his family stays there with
him alter the case.

A dwelling house may be entered and searched only upon warrant

issued by a judge or justice of the peace, upon sworn application showing
probable case and particularly describing the place to be searched and
person or thing to be seized.840

It shall be lawful for any official or person exercising police authority

under these provisions to go aboard any vessel or aircraft within the limits
of any collection district, and to inspect, search and examine said vessel or
aircraft and any trunk, package, box or envelope on board, and to search
any person on board the said vessel or aircraft and to this end to hail and
stop such vessel or aircraft if under way, to use all necessary force to
compel compliance; and if it shall appear that any breach or violation of the

837 Sec. 2206

838 Sec. 2207.
839 Sec. 2208.
840 Sec. 2209

331
customs and tariff laws of the Philippines has been committed, whereby or
in consequence of which such vessels or aircrafts, or the article, or any part
thereof, on board of or imported by such vessel or aircraft, is liable to
forfeiture, to make seizure of the same or any part thereof.

The power of search shall extend to the removal of any false bottom,
partition, bulkhead or other obstruction, so far as may be necessary to
enable the officer to discover whether any dutiable or forfeitable articles
may be concealed therein.

No proceeding herein shall give rise to any claim for the damage
thereby caused to article or vessel or aircraft.841

It shall also be lawful for a person exercising authority as aforesaid to

open and examine any box, trunk, envelope or other container, wherever
found where he has reasonable cause to suspect the presence therein of
dutiable or prohibited article or articles introduced into the Philippines
contrary to law, and likewise to stop, search and examine any vehicle, beast
or person reasonably suspected of holding or conveying such article as
aforesaid.842

All persons coming into the Philippines from foreign countries shall
be liable to detention and search by the customs authorities under such
regulations as may be prescribed relative thereto.

Female inspectors may be employed for the examination and search

of persons of their own sex.843

Upon making any seizure, the Collector shall issue a warrant for the
detention of the property; and if the owner or importer desires to secure
the release of the property for legitimate use, the Collector may surrender
it upon the filing of a sufficient bond, in an amount to be fixed by him,
conditioned for the payment of the appraised value of the article and/or
any fine, expenses and costs which may be adjudged in the case. The

841 Sec. 2210

842 Sec. 2211
843 Sec. 2212

332
articles the importation of which is prohibited by law shall not be released
under bond.844

When a seizure is made for any cause, the Collector of the district
wherein the seizure is effected shall immediately make report thereof to
the Commissioner and to the Auditor General.845

The Collector shall give the owner or importer of the property or his
agent a written notice of the seizure and shall give him an opportunity to
be heard in reference to the delinquency which was the occasion of such
seizure.

For the purpose of giving such notice and of all other proceedings in
the matter of such seizure, the importer, consignee or person holding the
bill of lading shall be deemed to be the "owner" of the article included in
the bill.

For the same purpose, "agent" shall be deemed to include not only
any agent in fact of the owner of the seized property but also any person
having responsible possession of the property at the (missing) of the
seizure, if the owner or his agent in fact is unknown or cannot be
reached.846

Notice to an unknown owner shall be effected by posting a notice for

fifteen days in the public corridor of the customhouse of the district in
which the seizure was made, and, in the discretion of the Commissioner, by
publication in a newspaper or by such other means as he shall consider
desirable.847

The Collector shall also cause a list and particular description of the
property seized to be prepared and an appraisement or classification of the
same at its wholesale value in the local market in the usual wholesale
quantities to be made by at least two appraising officials, if there are such
officials at or near the place of seizure; in the absence of such officials, then

844 Sec. 2301

845 Sec. 2302
846 Sec. 2303
847 Sec. 2304

333
by two competent and disinterested citizens of the Philippines, to be
selected by him for that purpose, residing at or near the place of seizure,
which list and appraisement shall be properly attested to by such Collector
and the persons making the appraisal.848

If, within fifteen days after the notification prescribed in section

twenty-three hundred and four849 of this Code, no owner or agent can be
found or appears before the Collector, the latter shall declare the property
forfeited to the government to be sold at auction in accordance with law.850

If, in any seizure case, the owner or agent shall, while the case is yet
before the Collector of the district of seizure, pay to such Collector the fine
imposed by him or, in case of forfeiture, shall pay the appraised value of
the property, or, if after appeal of the case, he shall pay to the
Commissioner the amount of the fine as finally determined by him, or, in
case of forfeiture, shall pay the appraised value of the property, such
property shall be forthwith surrendered, and all liability which may or might
attach to the property by virtue of the offense which was the occasion of
the seizure and all liability which might have been incurred under any bond
given by the owner or agent in respect to such property shall thereupon be
deemed to be discharged.

Redemption of forfeited property shall not be allowed in any case

where the importation is absolutely prohibited or where the surrender of
the property to the person offering to redeem the same would be contrary
to law.851

b. Judicial

1) Rules on appeal including jurisdiction

The party aggrieved by a ruling of the Commissioner in any matter

brought before him upon protest or by his action or ruling in any case of
seizure may appeal to the Court of Tax Appeals.

848 Sec. 2305

849 supra
850 Sec. 2306.
851 Sec. 2307

334
 Unless an appeal is made to the Court of Tax Appeals, the action or
ruling of the Commissioner shall be final and conclusive.852

2) Taxpayer

a. Protest

When a ruling or decision of the Collector is made whereby liability

for duties, fees, or other money charge is determined, except the fixing of
fines in seizure cases, the party adversely affected may protest such ruling
or decision by presenting to the Collector at the time when payment of the
amount claimed to be due the Government is made, or within thirty (30)
days thereafter, a written protest setting forth his objections to the ruling
or decision in question, together with the reasons therefor. No protest shall
be considered unless payment of the amount due after final liquidation has
first been made.853

In all cases subject to protest, the interested party who desires to

have the action of the Collector reviewed, shall make a protest, otherwise,
the action of the Collector shall be final and conclusive against him, except
as to matters correctible for manifest error.854

Every protest shall point out the particular decision or ruling of the
Collector to which exception is taken or objection made, and shall indicate
with reasonable precision the particular ground or grounds upon which the
protesting party bases his claim for relief.

The scope of a protest shall be limited to the subject matter of a

single adjustment or other independent transaction; but any number of
issues may be raised in a protest with reference to the particular item or
items constituting the subject matter of the protest.

852 Sec. 2402

853 Sec. 2308
854 Sec. 2309

335
 "Single adjustment" refers to the entire content of one liquidation,
including all duties, fees, surcharges or fines incident thereto.855

If the nature of the articles permit, importers filing protests involving

questions of fact must, upon demand, supply the Collector with samples of
the articles which are the subject matter of the protests. Such samples shall
be verified by the custom official who made the classification against which
the protest are filed.856

When a protest in proper form is presented in a case where protest

in required, the Collector shall reexamine the matter thus presented, and if
the protest is sustained, in whole or in part, he shall enter the appropriate
order, the entry reliquidated if necessary.

In seizure cases, the Collector, after a hearing, shall in writing make a

declaration of forfeiture or fix the amount of the fine or take such other
action as may be proper.857

The person aggrieved by the decision or action of the Collector in any

matter presented upon protest or by his action in any case of seizure may,
within fifteen (15) days after notification in writing by the Collector of his
action or decision, give written notice to the Collector of his desire to have
the matter reviewed by the Commissioner. Thereupon the Collector shall
forthwith transmit all the records of the proceedings to the Commissioner,
who shall approve, modify or reverse the action or decision of the Collector
and take such steps and make such orders as may be necessary to give
effect to his decision.858

Notice of the decision of the Commissioner shall be given to the

party by whom the case was brought before him for review, and in seizure
cases such notice shall be effected by personal service if practicable.859

855 Sec. 2310.

856 Sec. 2311
857 Sec. 2312
858 Sec. 2313
859 Sec. 2314

336
 If in any case involving the assessment of duties the importer shall
fail to protest the ruling of the Collector, and the Commissioner shall be of
the opinion that the ruling was erroneous and unfavorable to the
Government, the latter may order a reliquidation; and if the ruling of the
Commissioner in any unprotested case should, in the opinion of the
department head, be erroneous and unfavorable to the Government, the
department head may require the Commissioner to order a reliquidation.860

b. Abandonment

Express - when it is made direct to the Collector by the interested

party in writing.
Implied when an intention to abandon can be clearly inferred from
the action or omission of the interested party.
The failure of any interested party to file the import entry within
fifteen days or any extension thereof from the discharge of the vessel or
aircraft shall be implied abandonment.

An implied abandonment shall not be effective until the article is

declared by the Collector to have been abandoned after notice thereof is
given to the interested party as in seizure cases.

Any person who abandons an imported article renounces all his

interests and property rights therein.861

The owner or importer of any articles may, within ten (10) days after
filing of the import entry, abandon to the Government all or a part of the
articles included in an invoice, and, thereupon, he shall be relieved from
the payment of duties, taxes and all other charges and expenses due
thereon.

The portion so abandoned is not less than ten per cent (10%) of the
total invoice and is not less than one package, except in cases of articles
imported for personal or family use. The article so abandoned shall be

860 Sec. 2315

861 Sec. 1801

337
delivered by the owner or importer at such place within the port of arrival
as the Collector shall designate, and upon his failure to so comply, the
owner or importer shall be liable for all expenses that may be incurred in
connection with the disposition of the articles.

Nothing shall be construed as relieving such owner or importer from

any criminal liability which may arise from any violation of law committed
in connection with the importation of the abandoned article.862

The owner or importer of an article impliedly abandoned may, at any

time before it is sold or otherwise disposed of, reclaim such article provided
all legal requirements regarding its importation are complied with and the
corresponding duties, taxes and other charges as well as all expenses
incurred as a consequence of the abandonment, are paid.863

c. Abatement and refund

No abatement of duties shall be made on account of damage

incurred or deterioration suffered during the voyage of importation; and
duties will be assessed on the actual quantity imported, as shown by the
return of weighers, gaugers, measures, examiners or appraisers, as the case
may be.864

When any package or packages appearing on the manifest or bill of

lading are missing, a remission or refund of the duty thereon shall be made
if it is shown by proof satisfactory to the Collector that the package or
packages in question have not been imported into the Philippines.865

If, upon opening any package, a deficiency or absence of any article,

or of part of the contents thereof, as called for by the invoice shall be found
to exist, such deficiency shall be certified to the Collector by the appraiser;
and upon the production of proof satisfactory to the Collector showing that

862 Sec. 1802

863 Sec. 1803
864 Sec. 1701
865 Sec. 1702

338
the shortage occurred before the arrival of the article in the Philippines, the
proper abatement or refund of the duty shall be made.866

A Collector may abate or refund the amount of duties accruing or

paid, and may likewise make a corresponding allowance or credit on the
entry bond, or other document, upon satisfactory proof of the injury,
destruction, or loss by theft, fire or other causes of any article as follows:

a. While within the limits of any port of entry prior to unlading under
customs supervision.
b. While remaining in customs custody after unlading.
c. While in transit under bond from the port of entry to any port in
the Philippines.
d. While released under bond to export, except in case of loss by
theft.867

Where it is satisfactorily shown to the Collector that an animal which

is the subject of importation dies or suffers injury before arrival, or while in
customs custody, the duty shall be correspondingly abated by him,
provided the carcass of any dead animal remaining on board or in customs
custody be removed in the manner required by the Collector and at the
expense of the importer.868

The Collector shall in all cases of allowances, abatements or refunds

of duties, cause an examination and report in writing to be made as to any
fact discovered during such examination which tends to account for the
discrepancy or difference and cause the corresponding adjustment to be
made on the import entry.869

Manifest clerical errors made in an invoice or entry, errors in return

of weight, measure and gauge, when duly certified to by the surveyor or

866 Sec. 1703

867 Sec. 1704
868 Sec. 1705
869 Sec. 1706

339
examining official870 and errors in the distribution of charges on invoices
not involving any question of law and certified to by the examining official,
may be corrected in the computation of duties, if such errors be discovered
before the payment of duties, or, if discovered within one year after the
final liquidation, upon written request and notice of error from the
importer, or upon statement of error certified by the Collector.

For the purpose of correcting the specified errors, the Collector is

authorized to reliquidate entries and collect additional charges, or to make
refunds on statement of error within the statutory time limit.871

All claims for refund of duties shall be made in writing, and

forwarded to the Collector to whom such duties are paid, who upon receipt
of such claim shall verify the same by the records of his office, and if found
to be correct and in accordance with law, shall certify the same to the
Commissioner with his recommendation together with all necessary papers
and documents. Upon receipt by the Commissioner of such certified claim
he shall cause the same to be paid if found correct.872

V. Judicial Remedies873

870 when there are such officials at the port

871 Sec. 1707
872 Sec. 1708
873 Republic Act 1125, as amended, and the Revised Rules of the Court of Tax Appeals

The Court of Tax Appeals (CTA) is a court of special appellate jurisdiction and a part
of our judicial system. The proceedings therein are judicial in nature although the Court is
not bound by the technical rules of evidence. (Purakan Plantation Co. vs. Domingo L-
18571, 29 Oct. 1966)

340
 A. Jurisdiction of the Court of Tax Appeals

1. Exclusive appellate jurisdiction over civil tax cases

a. Cases within the jurisdiction of the Court en

banc

(a) Decisions or resolutions on motions for reconsideration or new

trial of the Court in Divisions in the exercise of its exclusive appellate
jurisdiction over:

(1) Cases arising from administrative agencies Bureau of

Internal Revenue, Bureau of Customs, Department of Finance,
Department of Trade and Industry, Department of Agriculture;

(2) Local tax cases decided by the Regional Trial Courts in the
exercise of their original jurisdiction; and

(3) Tax collection cases decided by the Regional Trial Courts in

the exercise of their original jurisdiction involving final and executory
assessments for taxes, fees, charges and penalties, where the
principal amount of taxes and penalties claimed is less than one
million pesos;

(b) Decisions, resolutions or orders of the Regional Trial Courts in

local tax cases decided or resolved by them in the exercise of their
appellate jurisdiction;

It is a regular court vested with exclusive appellate jurisdiction over cases arising under
the:
1.National Internal Revenue Code
2.Tariff and Customs Code
3.Assessment law
The CTA is a highly specialized body specially created for the purpose of reviewing tax
cases, its findings will not be ordinarily be reviewed absent a showing of gross error or
abuse on its part. These findings are binding upon the Supreme Court and in the
absence of strong reasons for the court to delve on facts, only questions of law are open
for determination.

341
 (c) Decisions, resolutions or orders of the Regional Trial Courts in tax
collection cases decided or resolved by them in the exercise of their
appellate jurisdiction;

(d) Decisions, resolutions or orders on motions for reconsideration or

new trial of the Court in Division in the exercise of its exclusive original
jurisdiction over tax collection cases;

(e) Decisions of the Central Board of Assessment Appeals (CBAA) in

the exercise of its appellate jurisdiction over cases involving the assessment
and taxation of real property originally decided by the provincial or city
board of assessment appeals;

(f) Decisions, resolutions or orders on motions for reconsideration or

new trial of the Court in Division in the exercise of its exclusive original
jurisdiction over cases involving criminal offenses arising from violations of
the National Internal Revenue Code or the Tariff and Customs Code and
other laws administered by the Bureau of Internal Revenue or Bureau of
Customs;

(g) Decisions, resolutions or orders on motions for reconsideration or

new trial of the Court in Division in the exercise of its exclusive appellate
jurisdiction over criminal offenses mentioned in the preceding
subparagraph; and

(h) Decisions, resolutions or orders of the Regional trial Courts in the

exercise of their appellate jurisdiction over criminal offenses mentioned in
subparagraph (f).874

b. Cases within the jurisdiction of the Court in

divisions

(a) Exclusive original or appellate jurisdiction to review by appeal the

following:

874Rule 4, Sec. 2, Revised Rules of the Court Of Tax Appeals

342
 (1) Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases

involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where the National
Internal Revenue Code or other applicable law provides a specific
period for action.

In case of disputed assessments, the inaction of the

Commissioner of Internal Revenue within the one hundred eighty
day-period under Section 228875 of the National Internal revenue
Code shall be deemed a denial for purposes of allowing the taxpayer
to appeal his case to the Court and does not necessarily constitute a
formal decision of the Commissioner of Internal Revenue on the tax
case.

Should the taxpayer opt to await the final decision of the

Commissioner of Internal Revenue on the disputed assessments
beyond the one hundred eighty day-period abovementioned, the
taxpayer may appeal such final decision to the Court under Section
3(a), Rule 8876 of these Rules.

875supra
876A party adversely affected by a decision, ruling or the inaction of the Commissioner of
Internal Revenue on disputed assessments or claims for refund of internal revenue taxes,
or by a decision or ruling of the Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional Trial Court in
the exercise of its original jurisdiction may appeal to the Court by petition for review filed
within thirty (30) days after receipt of a copy of such decision or ruling, or expiration of
the period fixed by law for the Commissioner of Internal Revenue to act on the disputed
assessments. In case of inaction of the Commissioner of Internal revenue on claims for
refund of internal revenue taxes erroneously or illegally collected, the taxpayer must file a
petition for review within the two-year period prescribed by law from payment or
collection of the taxes.

343
 In the case of claims for refund of taxes erroneously or illegally
collected, the taxpayer must file a petition for review with the Court
prior to the expiration of the two-year period under Section 229877 of
the National Internal Revenue Code;

(3) Decisions, resolutions or orders of the Regional Trial Courts

in local tax cases decided or resolved by them in the exercise of their
original jurisdiction;

(4) Decisions of the Commissioner of Customs in cases

involving liability for customs duties, fees or other money charges,
seizure, detention or release of property affected, fines, forfeitures
of other penalties in relation thereto, or other matters arising under
the Customs Law or other laws administered by the Bureau of
Customs;

(5) Decisions of the Secretary of Finance on customs cases

elevated to him automatically for review from decisions of the
Commissioner of Customs adverse to the Government under Section
2315878 of the Tariff and Customs Code; and

(6) Decisions of the Secretary of Trade and Industry, in the case

of nonagricultural product, commodity or article, and the Secretary
of Agriculture, in the case of agricultural product, commodity or
article, involving dumping and countervailing duties under Section
301 and 302,879 respectively, of the Tariff and Customs Code, and
safeguard measures under Republic Act No. 8800, where either party
may appeal the decision to impose or not to impose said duties;

877 supra
878 Supervisory Authority of Commissioner And of Department Head in Certain Cases. If
in any case involving the assessment of duties the importer shall fail to protest the ruling
of the Collector, and the Commissioner shall be of the opinion that the ruling was
erroneous and unfavorable to the Government, the latter may order a reliquidation; and
if the ruling of the Commissioner in any unprotested case should, in the opinion of the
department head, be erroneous and unfavorable to the Government, the department
head may require the Commissioner to order a reliquidation.
879 supra

344
 (b) Exclusive jurisdiction over cases involving criminal offenses, to
wit:

(1) Original jurisdiction over all criminal offenses arising from

violations of the National internal Revenue Code or Tariff and
Customs Code and other laws administered by the Bureau of Internal
Revenue of the Bureau of Customs, where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is one
million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments,

resolutions or orders of the Regional Trial Courts in their original
jurisdiction in criminal offenses arising from violations of the National
Internal Revenue Code or Tariff and Customs Code and other laws
administered by the Bureau of Internal Revenue or Bureau of
Customs, where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than one million pesos or
where there is no specified amount claimed;

(c) Exclusive jurisdiction over tax collections cases, to wit:

(1) Original jurisdiction in tax collection cases involving final

and executory assessments for taxes, fees, charges and penalties,
where the principal amount of taxes and fees, exclusive of charges
and penalties, claimed is one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments,

resolutions or orders of the Regional Trial Courts in tax collection
cases originally decided by them within their respective territorial
jurisdiction.880

2. Criminal cases

a. Exclusive original jurisdiction

880 Rule 4, Sec. 3, Revised Rules of the Court Of Tax Appeals

345
 Over all criminal cases arising from violations of the NIRC or Tariff
and Customs Code and other laws administered by the BIR or the Bureau of
Customs

Where the principal amount of taxes and fees, exclusive of charges

and penalties claimed is less than one million pesos (P1,000, 000. 00) or
where there is no specified amount claimed - the offenses or penalties shall
be tried by the regular courts and the jurisdiction of the CTA shall be
appellate.

The criminal action and the corresponding civil action for the
recovery of civil liability for taxes and penalties shall, at all times, be
simultaneously instituted with, and jointly determined in the same
proceeding by the CTA, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no right to reserve
the filing of such civil action separately from the criminal action will be
recognized.

b. Exclusive appellate jurisdiction in criminal cases

Over appeals from the judgments, resolutions or orders of the RTC in

tax cases originally decided by them, in their respective territorial
jurisdiction.

Over petitions for review of the judgments, resolutions, or orders of

the RTC in the exercise of their appellate jurisdiction over tax cases
originally decided by the Metropolitan Trial Courts, Municipal Trial Courts,
and Municipal Circuit Trial Courts in their respective jurisdiction.

B. Judicial Procedures

1. Judicial action for collection of taxes

a. Internal revenue taxes

Upon the issuance of any ruling, order or decision by the CTA

favorable to the national government, the CTA shall issue an order

346
authorizing the Bureau of Internal Revenue, through the Commissioner to
seize and distraint any goods, chattels, or effects, and the personal
property, including stocks and other securities, debts, credits, bank
accounts, and interests in and rights to personal property and/or levy the
real property of such persons in sufficient quantity to satisfy the tax or
charge together with any increment thereto incident to delinquency. This
remedy shall not be exclusive and shall not preclude the Court from availing
of other means under the Rules of Court.881

b. Local taxes

1) Prescriptive period

Five (5) years from date of assessment.

2. Civil cases

a. Who may appeal, mode of appeal, effect of

appeal

Any party adversely affected by a decision, ruling or inaction of the

Commissioner of Internal Revenue, the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and Industry or the Secretary
of Agriculture or the Central Board of Assessment Appeals or the Regional
Trial Courts may file an appeal with the CTA within thirty (30) days after the
receipt of such decision or ruling or after the expiration of the period fixed
by law for action as referred to in Section 7(a)(2) herein.

Appeal shall be made by filing a petition for review under a

procedure analogous to that provided for under Rule 42882 of the 1997
Rules of Civil Procedure with the CTA within thirty (30) days from the
receipt of the decision or ruling or in the case of inaction as herein
provided, from the expiration of the period fixed by law to act thereon. A
Division of the CTA shall hear the appeal: With respect to decisions or
rulings of the Central Board of Assessment Appeals and the Regional Trial
Court in the exercise of its appellate jurisdiction appeal shall be made by
881 Sec. 13, R.A. No. 1125, as amended by Sec. 9 of RA No. 9282
882 See Reference

347
filing a petition for review under a procedure analogous to that provided
for under Rule 43883 of the 1997 Rules of Civil Procedure with the CTA,
which shall hear the case en banc.

All other cases involving rulings, orders or decisions filed with the
CTA as provided for in Section 7 shall be raffled to its Divisions. A party
adversely affected by a ruling, order or decision of a Division of the CTA
may file a motion for reconsideration of new trial before the same Division
of the CTA within fifteens (15) days from notice thereof: Provide, however,
That in criminal cases, the general rule applicable in regular Courts on
matters of prosecution and appeal shall likewise apply.

No appeal taken to the CTA from the decision of the Commissioner of

Internal Revenue or the Commissioner of Customs or the Regional Trial
Court, provincial, city or municipal treasurer or the Secretary of Finance,
the Secretary of Trade and Industry and Secretary of Agriculture, as the
case may be shall suspend the payment, levy, distraint, and/or sale of any
property of the taxpayer for the satisfaction of his tax liability as provided
by existing law. When in the opinion of the Court the collection by the
aforementioned government agencies may jeopardize the interest of the
Government and/or the taxpayer the Court any stage of the proceeding
may suspend the said collection and require the taxpayer either to deposit
the amount claimed or to file a surety bond for not more than double the
amount with the Court.

In criminal and collection cases covered respectively by Section 7(b)

and (c) of this Act, the Government may directly file the said cases with the
CTA covering amounts within its exclusive and original jurisdiction.884

1) Suspension of collection of tax

a) Injunction not available to restrain

collection

883 Ibid.
884 Sec. 11 of R.A. No. 1125, id.

348
 Sec. 11 of RA No. 1125885 grants CTA power to suspend collection of
tax if such collection works to serious prejudice of either taxpayer or
government.

However, Sec. 218 of the Tax Code provides that no court may grant
injunction to restrain collection of any tax, fee or charge imposed by Tax
Code. 886

Appeal to the CTA does not automatically suspend collection unless

CTA issues suspension order at any stage of proceedings.

2) Taking of evidence

The Court may direct that a case, or any issue thereof, be assigned to
one of its members for the taking of evidence, when the determination of a
question of fact arises upon motion or otherwise in any stage of the
proceedings, or when the taking of an account is necessary, or when the
determination of an issue of fact requires the examination of a long
account. The hearing before such member shall proceed in all respects as
though the same had been made before the Court.

Upon the recommendation of such hearing of such member, he shall

promptly submit to the Court his report in writing, stating his findings and
conclusions; and thereafter, the Court shall render its decisions on the case,
adopting, modifying, or rejecting the report or the Court may recommit it
with instructions, or receive further evidence.887

3) Motion for reconsideration or New trial

A party adversely affected by a decision or resolution of a Division of

the Court on a motion for reconsideration or new trial may appeal to the

885 as amended by Sec. 9 of RA No. 9282

886 The provision in the Tax Code refers to courts other than the CTA (Blaquera vs.
Rodriguez, GR No. L-11295, March 29, 1958)
887 Sec. 12, R.A. 1125

349
Court by filing before it a petition for review within fifteen days from
receipt of a copy of the questioned decision or resolution. Upon proper
motion and the payment of the full amount of the docket and other lawful
fees and deposit for costs before the expiration of the reglementary period
herein fixed, the Court may grant an additional period not exceeding fifteen
days from the expiration of the original period within which to file the
petition for review.888

An appeal from a decision or resolution of the Court in Division on a

motion for reconsideration or new trial shall be taken to the Court by
petition for review.889 The Court en banc shall act on the appeal.890

b. Appeal to the CTA, en banc

No civil proceeding involving matter arising under the National

Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, until and unless an appeal has been
previously filed with the CTA and disposed of.891

"A party adversely affected by a resolution of a Division of the CTA on

a motion for reconsideration or new trial, may file a petition for review with
the CTA en banc.

c. Petition for review on certiorari to the Supreme

Court

A party adversely affected by a decision or ruling of the CTA en banc

may file with the Supreme Court a verified petition for review on
certiorari.892
3. Criminal cases

a. Institution and prosecution of criminal actions

888 Sec. 3 (b), Revised Rules of the CTA

889 as provided in Rule 43 of the Rules of Court
890 Sec. 4 (b), Revised Rules of the CTA
891 Sec. 18, id.
892 pursuant to Rule 45 of the 1997 Rules of Civil Procedure (Sec. 19. Id.)

350
 1) Institution on civil action in criminal
action

In cases within the jurisdiction of the Court, the criminal action and
the corresponding civil action for the recovery of civil liability for taxes and
penalties shall be deemed jointly instituted in the same proceeding. The
filing of the criminal action shall necessarily carry with it the filing of the
civil action. No right to reserve the filing of such civil action separately from
the criminal action shall be allowed or recognized.893

b. Appeal and period to appeal

1) Solicitor General as counsel for the

People and government officials sued in
their official capacity

The Solicitor General shall represent the People of the Philippines

and government officials sued in their official capacity in all cases brought
to the Court in the exercise of its appellate jurisdiction. He may deputized
the legal officers of the Bureau of Internal Revenue in cases brought under
the National Internal Revenue Code or other laws enforced by the Bureau
of Internal Revenue, or the legal officers of the Bureau of Customs in cases
brought under the Tariff and Customs Code of the Philippines or other laws
enforced by the Bureau of Customs, to appear in behalf of the officials of
said agencies sued in their official capacity. Such duly deputized legal
officers shall remain at all times under the direct control and supervision of
the Solicitor General.894

c. Petition for review on certiorari to the Supreme

Court

A party adversely affected by a decision or ruling of the Court en

banc may appeal therefrom by filing with the Supreme Court a verified
petition for review on certiorari within fifteen (15) days from receipt of a

893 Rule 9, Sec. 11, id.;, Rule 111, sec. 1[a], par. 1a; Rules of Court
894 Sec. 10, id.

351
copy of the decision or resolution.895 If such party has filed a motion for
reconsideration or for new trial, the period herein fixed shall run from the
partys receipt of a copy of the resolution denying the motion for
reconsideration or for new trial.896

C. Taxpayers suit impugning the validity of tax measures or

acts of taxing authorities

a. Taxpayers suit, defined

A case where the act complained of directly involves the illegal

disbursement of public funds derived from taxation.897

b. Distinguished from citizens suit

The plaintiff in a taxpayers suit is in a different category from the

plaintiff in a citizens suit. In the former, the plaintiff is affected by the
expenditure of public funds, while in the latter, he is but the mere
instrument of the public concern.898

c. Requisites for challenging the constitutionality

of a tax measure or act of taxing authority

895 as provided in Rule 45 of the Rules of Court

896 Rule 16, Sec. 1, id.
897 Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110

Requisites for a taxpayers petition:

1. That money is being extracted and spent in violation of specific constitutional
protections against abuses of legislative power
2. That public money is being deflected to any improper purpose
3. That the petitioner seeks to restrain respondents from wasting public funds through
the enforcement of an invalid or unconstitutional law.
The Supreme Court has discretion whether or not to entertain taxpayers suit and could
brush aside lack of locus standi (Kilos Bayan vs. Guingona)
898 Beauchamp v. Silk

352
 1) Concept of locus standi as applied in
taxation

It is a partys personal and substantial interest in the case, such that

the party has sustained or will sustain direct injury as a result of the
government act being challenged. It calls for more than just a generalized
grievance.899

A party need not be a party to the contract to challenge its validity.900

2) Doctrine of transcendental importance

The Court has adopted a rule that even where the petitioners have
failed to show direct injury, they have been allowed to sue under the
principle of "transcendental importance."901

The doctrine applies when paramount public interest is involved.

3) Ripeness for judicial determination

In our jurisdiction, the issue of ripeness is generally treated in terms

of actual injury to the plaintiff. Hence, a question is ripe for adjudication
when the act being challenged has had a direct adverse effect on the

As held by the New York Supreme Court in People ex rel Case v. Collins: "In matters of
mere public right, howeverthe people are the real partiesIt is at least the right, if not
the duty, of every citizen to interfere and see that a public offence be properly pursued
and punished, and that a public grievance be remedied." With respect to taxpayers
suits, Terr v. Jordan held that "the right of a citizen and a taxpayer to maintain an action
in courts to restrain the unlawful use of public funds to his injury cannot be denied."
899 Abaya v. Ebdane, G. R. No. 167919, February 14, 2007
900 Ibid.
901 David v. Arroyo, G.R. No. 171396 (2006)

An issue is of transcendental importance because of the following:

1. the character of the funds or other assets involved in the case;
2. the presence of a clear disregard of a constitutional or statutory prohibition by an
instrumentality of the government; and
3. the lack of any other party with a more direct and specific interest in raising
the question. (Francisco vs. House of Representatives, 415 SCRA 44; Senate v. Ermita
G.R. No. 169777 (2006))

353
individual challenging it.902 An alternative road to review similarly taken
would be to determine whether an action has already been accomplished
or performed by a branch of government before the courts may step in.903
To be ripe for judicial adjudication, the petitioner must show a
personal stake in the outcome of the case or an injury to himself that can
be redressed by a favorable decision of the Court.904

Reference

National Internal Revenue Code of the Phils.905

902 Guingona, Jr. v. Court of Appeals, 354 Phil. 415, 427-428 (1998).
903 Francisco, Jr. v. House of Representatives, 460 Phil. 830, 901-902 (2003).
904 ABAKADA Guro Party List, etc., v. Purisima, etc., citing Cruz v. Secretary of
Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion
905 R.A. 8424, as amended

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Sec. 6. Power of the Commissioner to Make assessments and Prescribe
additional Requirements for Tax Administration and Enforcement.

xxx

(F) Authority of the Commissioner to inquire into Bank Deposit

Accounts. - Notwithstanding any contrary provision of Republic Act No.
1405 and other general or special laws, the Commissioner is hereby
authorized to inquire into the bank deposits of:

(1) a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax
liability under Sec. 204 (A) (2) of this Code by reason of financial incapacity
to pay his tax liability.

In case a taxpayer files an application to compromise the payment of

his tax liabilities on his claim that his financial position demonstrates a clear
inability to pay the tax assessed, his application shall not be considered
unless and until he waives in writing his privilege under Republic Act No.
1405 or under other general or special laws, and such waiver shall
constitute the authority of the Commissioner to inquire into the bank
deposits of the taxpayer.

Sec. 24

Sec. 32 (B)(6)(a)

Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan maintained
by the employer: Provided, That the retiring official or employee has been
in the service of the same employer for at least ten (10) years and is not
less than fifty (50) years of age at the time of his retirement: Provided,
further, That the benefits granted under this subparagraph shall be availed

355
of by an official or employee only once. For purposes of this Subsection, the
term 'reasonable private benefit plan' means a pension, gratuity, stock
bonus or profit-sharing plan maintained by an employer for the benefit of
some or all of his officials or employees, wherein contributions are made by
such employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of
the fund thus accumulated, and wherein its is provided in said plan that at
no time shall any part of the corpus or income of the fund be used for, or
be diverted to, any purpose other than for the exclusive benefit of the said
officials and employees.

SEC. 33. Special Treatment of Fringe Benefit.-

(A) Imposition of Tax.- A final tax of thirty-four percent (34%)

effective January 1, 1998; thirty-three percent (33%) effective January 1,
1999; and thirty-two percent (32%) effective January 1, 2000 and
thereafter, is hereby imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee (except rank and file
employees as defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature of, or
necessary to the trade, business or profession of the employer, or when the
fringe benefit is for the convenience or advantage of the employer). The tax
herein imposed is payable by the employer which tax shall be paid in the
same manner as provided for under Section 57 (A) of this Code. The
grossed-up monetary value of the fringe benefit shall be determined by
dividing the actual monetary value of the fringe benefit by sixty-six percent
(66%) effective January 1, 1998; sixty-seven percent (67%) effective January
1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and
thereafter: Provided, however, That fringe benefit furnished to employees
and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be
taxed at the applicable rates imposed thereat: Provided, further, That the
grossed -Up value of the fringe benefit shall be determined by dividing the
actual monetary value of the fringe benefit by the difference between one
hundred percent (100%) and the applicable rates of income tax under
Subsections (B), (C), (D), and (E) of Section 25.

(B) Fringe Benefit defined.- For purposes of this Section, the term
"fringe benefit" means any good, service or other benefit furnished or
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granted in cash or in kind by an employer to an individual employee (except
rank and file employees as defined herein) such as, but not limited to, the
following:

(1) Housing;
(2) Expenseaccount;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or other
similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not
taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax
under special laws;
(2) Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of
the Commissioner.

SEC. 58. Returns and Payment of Taxes Withheld at Source. -

(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes

deducted and withheld under Section 57 by withholding agents shall be
covered by a return and paid to, except in cases where the Commissioner
otherwise permits, an authorized Treasurer of the city or municipality
where the withholding agent has his legal residence or principal place of

357
business, or where the withholding agent is a corporation, where the
principal office is located.

The taxes deducted and withheld by the withholding agent shall be

held as a special fund in trust for the government until paid to the
collecting officers.

The return for final withholding tax shall be filed and the payment
made within twenty-five (25) days from the close of each calendar quarter,
while the return for creditable withholding taxes shall be filed and the
payment made not later than the last day of the month following the close
of the quarter during which withholding was made: Provided, That the
Commissioner, with the approval of the Secretary of Finance, may require
these withholding agents to pay or deposit the taxes deducted or withheld
at more frequent intervals when necessary to protect the interest of the
government.

(B) Statement of Income Payments Made and Taxes Withheld. -

Every withholding agent required to deduct and withhold taxes under
Section 57 shall furnish each recipient, in respect to his or its receipts
during the calendar quarter or year, a written statement showing the
income or other payments made by the withholding agent during such
quarter or year, and the amount of the tax deducted and withheld
therefrom, simultaneously upon payment at the request of the payee, but
not late than the twentieth (20th) day following the close of the quarter in
the case of corporate payee, or not later than March 1 of the following year
in the case of individual payee for creditable withholding taxes. For final
withholding taxes, the statement should be given to the payee on or before
January 31 of the succeeding year.

(C) Annual Information Return. - Every withholding agent required to

deduct and withhold taxes under Section 57 shall submit to the
Commissioner an annual information return containing the list of payees
and income payments, amount of taxes withheld from each payee and such
other pertinent information as may be required by the Commissioner. In
the case of final withholding taxes, the return shall be filed on or before
January 31 of the succeeding year, and for creditable withholding taxes, not
later than March 1 of the year following the year for which the annual

358
report is being submitted. This return, if made and filed in accordance with
the rules and regulations approved by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance with
the requirements of Section 68 of this Title in respect to the income
payments.

The Commissioner may, by rules and regulations, grant to any

withholding agent a reasonable extension of time to furnish and submit the
return required in this Subsection.

(D) Income of Recipient. - Income upon which any creditable tax is

required to be withheld at source under Section 57 shall be included in the
return of its recipient but the excess of the amount of tax so withheld over
the tax due on his return shall be refunded to him subject to the provisions
of Section 204; if the income tax collected at source is less than the tax due
on his return, the difference shall be paid in accordance with the provisions
of Section 56.

All taxes withheld pursuant to the provisions of this Code and its
implementing rules and regulations are hereby considered trust funds and
shall be maintained in a separate account and not commingled with any
other funds of the withholding agent.

(E) Registration with Register of Deeds. - No registration of any

document transferring real property shall be effected by the Register of
Deeds unless the Commissioner or his duly authorized representative has
certified that such transfer has been reported, and the capital gains or
creditable withholding tax, if any, has been paid: Provided, however, That
the information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, shall be annotated by the Register of Deeds in the Transfer
Certificate of Title or Condominium Certificate of Title: Provided, further,
That in cases of transfer of property to a corporation, pursuant to a merger,
consolidation or reorganization, and where the law allows deferred
recognition of income in accordance with Section 40, the information as
may be required by rules and regulations to be prescribed by the Secretary
of Finance, upon recommendation of the Commissioner, shall be annotated
by the Register of Deeds at the back of the Transfer Certificate of Title or

359
Condominium Certificate of Title of the real property involved: Provided,
finally, That any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code.

Sec.. 75.

Declaration of Quarterly Corporate Income Tax. - Every corporation

shall file in duplicate a quarterly summary declaration of its gross income
and deductions on a cumulative basis for the preceding quarter or quarters
upon which the income tax, as provided in Title II of this Code, shall be
levied, collected and paid. The tax so computed shall be decreased by the
amount of tax previously paid or assessed during the preceding quarters
and shall be paid not later than sixty (60) days from the close of each of the
first three (3) quarters of the taxable year, whether calendar or fiscal year.

Sec. 106

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may be
agreed upon which may influence or determine the transfer of ownership
of the goods so exported and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) Sale of raw materials or packaging materials to a nonresident

buyer for delivery to a resident local export-oriented enterprise to be used
in manufacturing, processing, packing or repacking in the Philippines of the
said buyer's goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

(3) Sale of raw materials or packaging materials to export-oriented

enterprise whose export sales exceed seventy percent (70%) of total annual
production;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

360
 (5) Those considered export sales under Executive Order NO. 226,
otherwise known as the Omnibus Investment Code of 1987, and other
special laws.

(b) Foreign Currency Denominated Sale. - The phrase "foreign

currency denominated sale" means sale to a nonresident of goods, except
those mentioned in Sections 149 and 150, assembled or manufactured in
the Philippines for delivery to a resident in the Philippines, paid for in
acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP).

(c) Sales to persons or entities whose exemption under special laws

or international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate.

Sec. 108

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services
performed in the Philippines by VAT- registered persons shall be subject to
zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons

doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under

special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero percent
(0%) rate; `

361
 (4) Services rendered to vessels engaged exclusively in international
shipping; and

(5) Services performed by subcontractors and/or contractors in

processing, converting, of manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of total annual production.

SEC. 111. Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to

value-added tax or any person who elects to be a VAT-registered person
shall, subject to the filing of an inventory according to rules and regulations
prescribed by the Secretary of finance, upon recommendation of the
Commissioner, be allowed input tax on his beginning inventory of goods,
materials and supplies equivalent for eight percent (8%) of the value of
such inventory or the actual value-added tax paid on such goods, materials
and supplies, whichever is higher, which shall be creditable against the
output tax.

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines,

mackerel and milk, and in manufacturing refined sugar and cooking oil,
shall be allowed a presumptive input tax, creditable against the output tax,
equivalent to one and one-half percent (1 1/2%) of the gross value in
money of their purchases of primary agricultural products which are used
as inputs to their production.

As used in this Subsection, the term "processing" shall mean

pasteurization, canning and activities which through physical or chemical
process alter the exterior texture or form or inner substance of a product in
such manner as to prepare it for special use to which it could not have been
put in its original form or condition.

362
 (2) Public works contractors shall be allowed a presumptive input
tax equivalent to one and one-half percent (1 1/2%) of the contract price
with respect to government contracts only in lieu of actual input taxes
therefrom.

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-Rated or Effectively Zero-Rated Sales. - any VAT-registered

person, whose sales are zero-rated or effectively zero-rated may, within
two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied
against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in taxable or
exempt sale of goods of properties or services, and the amount of
creditable input tax due or paid cannot be directly and entirely attributed
to any one of the transactions, it shall be allocated proportionately on the
basis of the volume of sales.

(B) Capital Goods. - A VAT-registered person may apply for the

issuance of a tax credit certificate or refund of input taxes paid on capital
goods imported or locally purchased, to the extent that such input taxes
have not been applied against output taxes. The application may be made
only within two (2) years after the close of the taxable quarter when the
importation or purchase was made.

(C) Cancellation of VAT Registration. - A person whose registration

has been cancelled due to retirement from or cessation of business, or due
to changes in or cessation of status under Section 106(C) of this Code may,
within two (2) years from the date of cancellation, apply for the issuance of
a tax credit certificate for any unused input tax which may be used in
payment of his other internal revenue taxes.

363
(D) Period Within Which Refund or Tax Credit of Input Taxes Shall be
Made. - In proper cases, the Commissioner shall grant a refund or issue the
tax credit certificate for creditable input taxes within one hundred twenty
(120) days from the date of submission of compete documents in support
of the application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within
the period prescribed above, the taxpayer affected may, within thirty (30)
days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals.-

(E) Manner of Giving Refund. - Refunds shall be made upon warrants

drawn by the Commissioner or by his duly authorized representative
without the necessity of being countersigned by the Chairman, Commission
on audit, the provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, That refunds under this paragraph shall be
subject to post audit by the Commission on Audit.

SEC. 113.

Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-registered person shall, for

every sale, issue an invoice or receipt. In addition to the information
required under Section 237, the following information shall be indicated in
the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed

by his taxpayer's identification number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay
to the seller with the indication that such amount includes the value-
added tax.

364
 (B) Accounting Requirements. - Notwithstanding the provisions of
Section 233, all persons subject to the value-added tax under Sections 106
and 108 shall, in addition to the regular accounting records required,
maintain a subsidiary sales journal and subsidiary purchase journal on
which the daily sales and purchases are recorded. The subsidiary journals
shall contain such information as may be required by the Secretary of
Finance.

Sec. 143. Tax on Business. - The municipality may impose taxes on the
following businesses:

(a) On manufacturers, assemblers, repackers, processors, brewers,

distillers, rectifiers, and compounders of liquors, distilled spirits, and
wines or manufacturers of any article of commerce of whatever kind
or nature, in accordance with the following schedule:

With gross sales or receipts for

Amount of Tax Per
the preceding calendar year in
Annum
the amount of:
Less than 10,000.00 165.00
P 10,000.00 or more but less 220.00
than 15,000.00
15,000.00 or more but less 202.00
than 20,000.00
20,000.00 or more but less 440.00
than 30,000.00
30,000.00 or more but less 660.00
than 40,000.00
40,000.00 or more but less 825.00
than 50,000.00
50,000.00 or more but less 1,320.00
than 75,000.00
75,000.00 or more but less 1,650.00
than 100,000.00

365
 100,000.00 or more but less 2,200.00
than 150,000.00
150,000.00 or more but less 2,750.00
than 200,000.00
200,000.00 or more but less 3,850.00
than 300,000.00
300,000.00 or more but less 5,500.00
than 500,000.00
500,000.00 or more but less 8,000.00
than 750,000.00
750,000.00 or more but less 10,000.00
than 1,000,000.00
1,000,000.00 or more but less 13,750.00
than 2,000,000.00
2,000,000.00 or more but less 16,500.00
than 3,000,000.00
3,000,000.00 or more but less 19,000.00
than 4,000,000.00
4,000,000.00 or more but less 23,100.00
than 5,000,000.00
5,000,000.00 or more but less 24,375.00
than 6,500,000.00
6,000,000.00 or more at a rate not exceeding thirty-
seven and a half percent (37%) of one percent (1%)

(b) On wholesalers, distributors, or dealers in any article of

commerce of whatever kind or nature in accordance with the
following schedule:

With gross sales or receipts for Amount of Tax

the preceding calendar year in the Per Annum
amount of:

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Less than 1,000.00 18.00
P 1,000.00 or more but less than 33.00
2,000.00
2,000.00 or more but less than 50.00
3,000.00
3,000.00 or more but less than 72.00
4,000.00
4,000.00 or more but less than 100.00
5,000.00
5,000.00 or more but less than 121.00
6,000.00
6,000.00 or more but less than 143.00
7,000.00
7,000.00 or more but less than 165.00
8,000.00
8,000.00 or more but less than 187.00
10,000.00
10,000.00 or more but less than 220.00
15,000.00
15,000.00 or more but less than 275.00
20,000.00
20,000.00 or more but less than 330.00
30,000.00
30,000.00 or more but less than 440.00
40,000.00
40,000.00 or more but less than 660.00
50,000.00
50,000.00 or more but less than 990.00
75,000.00
75,000.00 or more but less than 1,320.00

367
 100,000.00
100,000.00 or more but less than 1,870.00
150,000.00
150,000.00 or more but less than 2,420.00
200,000.00
200,000.00 or more but less than 3,300.00
300,000.00
300,000.00 or more but less than 4,400.00
500,000.00
500,000.00 or more but less than 6,600.00
750,000.00
750,000.00 or more but less than 8,800.00
1,000,000.00
1,000,000.00 or more but less 10,000.00
than 2,000,000.00
2,000,000.00 or more at a rate not exceeding fifty
percent (50%) of one percent (1%).

(c) On exporters, and on manufacturers , millers, producers,

wholesalers, distributors, dealers or retailers of essential commodities
enumerated hereunder at a rate not exceeding one-half () of the rates
prescribed under subsection (a), (b) and (d) of this Section:

(1) Rice and corn;

(2) Wheat or cassava flour, meat, dairy products, locally

manufactured, processed or preserved food, sugar, salt and
other agricultural, marine, and fresh water products, whether
in their original state or not;

(3) Cooking oil and cooking gas;

(4) Laundry soap, detergents, and medicine;

368
 (5) Agricultural implements. equipment and post-harvest
facilities, fertilizers, pesticides, insecticides, herbicides and
other farm inputs;

(6) Poultry feeds and other animal feeds;

(7) School supplies; and

(8) Cement.

(d) On retailers.

With gross sales or receipts for the Rate of Tax

preceding calendar year in the Per Annum
amount of:
P400,000.00 or less 2%
more than P400,000.00 1%

Provided, however, That barangays shall have the exclusive power to

levy taxes, as provided under Section 152 hereof, on gross sales or
receipts of the preceding calendar year of Fifty thousand pesos
(P50,000.00) or less, in the case of cities, and Thirty thousand pesos
(P30,000.00) or less, in the case of municipalities.

(e) On contractors and other independent contractors, in accordance

with the following schedule:

With gross sales or receipts for

Amount of Tax
the preceding calendar year in the
Per Annum
amount of:
Less than 5,000.00 27.50
P 5,000.00 or more but less than P 61.60
10,000.00
10,000.00 or more but less than 104.50
15,000.00

369
15,000.00 or more but less than 165.00
20,000.00
20,000.00 or more but less than 275.00
30,000.00
30,000.00 or more but less than 385.00
40,000.00
40,000.00 or more but less than 550.00
50,000.00
50,000.00 or more but less than 880.00
75,000.00
75,000.00 or more but less than 1,320.00
100,000.00
100,000.00 or more but less than 1,980.00
150,000.00
150,000.00 or more but less than 2,640.00
200,000.00
200,000.00 or more but less than 3,630.00
250,000.00
250,000.00 or more but less than 4,620.00
300,000.00
300,000.00 or more but less than 6,160.00
400,000.00
400,000.00 or more but less than 8,250.00
500,000.00
500,000.00 or more but less than 9,250.00
750,000.00
750,000.00 or more but less than 10,250.00
1,000,000.00
1,000,000.00 or more but less 11,500.00
than 2,000,000.00

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 2,000,000.00 or more at a rate not exceeding fifty
percent (50%) of one percent (1%)

(f) On banks and other financial institutions, at a rate not exceeding

fifty percent (50%) of one percent (1%) on the gross receipts of the
preceding calendar year derived from interest, commissions and
discounts from lending activities, income from financial leasing,
dividends, rentals on property and profit from exchange or sale of
property, insurance premium.

(g) On peddlers engaged in the sale of any merchandise or article of

commerce, at a rate not exceeding Fifty pesos (P50.00) per peddler
annually.

(h) On any business, not otherwise specified in the preceding

paragraphs, which the sanggunian concerned may deem proper to
tax: Provided, That on any business subject to the excise, value-
added or percentage tax under the National Internal Revenue Code,
as amended, the rate of tax shall not exceed two percent (2%) of
gross sales or receipts of the preceding calendar year.

The sanggunian concerned may prescribe a schedule of graduated tax rates

but in no case to exceed the rates prescribed herein.

SEC. 236. Registration Requirements. -

(A) Requirements. - Every person subject to any internal revenue tax shall
register once with the appropriate Revenue District Officer:

(1) Within ten (10) days from date of employment, or

(2) On or before the commencement of business,or

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 (3) Before payment of any tax due, or

(4) Upon filing of a return, statement or declaration as required in this

Code.

The registration shall contain the taxpayer's name, style, place of residence,
business and such other information as may be required by the
Commissioner in the form prescribed therefor.

A person maintaining a head office, branch or facility shall register with the
Revenue District Officer having jurisdiction over the head office, brand or
facility. For purposes of this Section, the term "facility" may include but not
be limited to sales outlets, places of production, warehouses or storage
places.

(B) Annual Registration Fee. - An annual registration fee in the amount of

Five hundred pesos (P500) for every separate or distinct establishment or
place of business, including facility types where sales transactions occur,
shall be paid upon registration and every year thereafter on or before the
last day of January: Provided, however, That cooperatives, individuals
earning purely compensation income, whether locally or abroad, and
overseas workers are not liable to the registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located

within the revenue district, or to the Revenue Collection Officer, or duly
authorized Treasurer of the city of municipality where each place of
business or branch is registered.

(C) Registration of Each Type of Internal Revenue Tax. - Every person who is
required to register with the Bureau of Internal Revenue under Subsection
(A) hereof, shall register each type of internal revenue tax for which he is
obligated, shall file a return and shall pay such taxes, and shall updates such
registration of any changes in accordance with Subsection (E) hereof.

(D) Transfer of Registration. - In case a registered person decides to transfer

his place of business or his head office or branches, it shall be his duty to

372
update his registration status by filing an application for registration
information update in the form prescribed therefor.

(E) Other Updates. - Any person registered in accordance with this Section
shall, whenever applicable, update his registration information with the
Revenue District Office where he is registered, specifying therein any
change in type and other taxpayer details.

(F) Cancellation of Registration. - The registration of any person who ceases

to be liable to a tax type shall be cancelled upon filing with the Revenue
District Office where he is registered an application for registration
information update in a form prescribed therefor.

(G) Persons Commencing Business. - Any person, who expects to realize

gross sales or receipts subject to value-added tax in excess of the amount
prescribed under Section 109(z) of this Code for the next 12-month period
from the commencement of the business, shall register with the Revenue
District Office which has jurisdiction over the head office or branch and
shall pay the annual registration fee prescribed in Subsection (B) hereof.

(H) Persons Becoming Liable to the Value-added Tax. - Any person, whose
gross sales or receipts in any 12-month period exceeds the amount
prescribed under Subsection 109(z) of this Code for exemption from the
value-added tax shall register in accordance with Subsection (A) hereof, and
shall pay the annual registration fee prescribed within ten (10) days after
the end of the last month of that period, and shall be liable to the value-
added tax commencing from the first day of the month following his
registration.

(I) Optional Registration of Exempt Person. - Any person whose transactions

are exempt from value-added tax under Section 109(z) of this Code; or any
person whose transactions are exempt from the value-added tax under
Section 109(a), (b), (c), and (d) of this Code, who opts to register as a VAT
taxpayer with respect to his export sales only, may update his registration
information in accordance with Subsection (E) hereof, not later than ten
(10) days before the beginning of the taxable quarter and shall pay the
annual registration fee prescribed in Subsection (B) hereof.

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In any case, the Commissioner may, for administrative reasons, deny any
application for registration including updates prescribed under Subsection
(E) hereof.

For purposes of Title IV of this Code, any person who has registered value-
added tax as a tax type in accordance with the provisions of Subsection (C)
hereof shall be referred to as VAT-registered person who shall be assigned
only one Taxpayer Identification Number.

(J) Supplying of Taxpayer Identification Number (TIN). - Any person required

under the authority of this Code to make, render or file a return, statement
or other document shall be supplied with or assigned a Taxpayer
Identification Number (TIN) which he shall indicate in such return,
statement or document filed with the Bureau of Internal Revenue for his
proper identification for tax purposes, and which he shall indicate in certain
documents, such as, but not limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments;

(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds of Assessor's
Office;
(4) Registration certificate of transportation equipment by land, sea or
air;
(5) Documents to be registered with the Securities and Exchange
Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other
financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of Trade &
Industry; and
(10) Such other documents which may hereafter be required under rules
and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

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 In cases where a registered taxpayer dies, the administrator or
executor shall register the estate of the decedent in accordance with
Subsection (A) hereof and a new Taxpayer Identification Number (TIN) shall
be supplied in accordance with the provisions of this Section.

In the case of a nonresident decedent, the executor or administrator

of the estate shall register the estate with the Revenue District Office
where he is registered: Provided, however, That in case such executor or
administrator is not registered, registration of the estate shall be made
with the Taxpayer Identification Number (TIN) supplied by the Revenue
District Office having jurisdiction over his legal residence.

Only one Taxpayer identification Number (TIN) shall be assigned to a

taxpayer. Any person who shall secure more than one Taxpayer
Identification Number shall be criminally liable under the provision of
Section 275 on 'Violation of Other Provisions of this Code or Regulations in
General'.

Sec. 237.

Issuance of Receipts or Sales or Commercial Invoices. All persons

subject to an internal revenue tax shall, for each sale or transfer of
merchandise or for services rendered valued at Twenty-five pesos (P25.00)
or more, issue duly registered receipts or sales or commercial invoices,
prepared at least in duplicate, showing the date of transaction, quantity,
unit cost and description of merchandise or nature of service: Provided,
however, That in the case of sales, receipts or transfers in the amount of
One hundred pesos (P100.00) or more, or regardless of the amount, where
the sale or transfer is made by a person liable to value-added tax to
another person also liable to value-added tax; or where the receipt is
issued to cover payment made as rentals, commissions, compensations or
fees, receipts or invoices shall be issued which shall show the name,

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business style, if any, and address of the purchaser, customer or client:
Provided, further, That where the purchaser is a VAT-registered person, in
addition to the information herein required, the invoice or receipt shall
further show the Taxpayer Identification Number (TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the

purchaser, customer or client at the time the transaction is effected, who, if
engaged in business or in the exercise of profession, shall keep and
preserve the same in his place of business for a period of three (3) years
from the close of the taxable year in which such invoice or receipt was
issued, while the duplicate shall be kept and preserved by the issuer, also in
his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person

subject to internal revenue tax from compliance with the provisions of this
Section.

SEC. 248. Civil Penalties.

xxx

(B) In case of willful neglect to file the return within the period
prescribed by this Code or by rules and regulations, or in case a false or
fraudulent return is willfully made, the penalty to be imposed shall be fifty
percent (50%) of the tax or of the deficiency tax, in case, any payment has
been made on the basis of such return before the discovery of the falsity or
fraud: Provided, That a substantial underdeclaration of taxable sales,
receipts or income, or a substantial overstatement of deductions, as
determined by the Commissioner pursuant to the rules and regulations to
be promulgated by the Secretary of Finance, shall constitute prima facie
evidence of a false or fraudulent return: Provided, further, That failure to
report sales, receipts or income in an amount exceeding thirty percent
(30%) of that declared per return, and a claim of deductions in an amount
exceeding (30%) of actual deductions, shall render the taxpayer liable for
substantial underdeclaration of sales, receipts or income or for
overstatement of deductions, as mentioned herein.

SEC. 282.
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Informer's Reward to Persons Instrumental in the Discovery of Violations of
the National Internal Revenue Code and in the Discovery and Seizure of
Smuggled Goods. -

(A) For Violations of the National Internal Revenue Code. - Any

person, except an internal revenue official or employee, or other public
official or employee, or his relative within the sixth degree of consanguinity,
who voluntarily gives definite and sworn information, not yet in the
possession of the Bureau of Internal Revenue, leading to the discovery of
frauds upon the internal revenue laws or violations of any of the provisions
thereof, thereby resulting in the recovery of revenues, surcharges and fees
and/or the conviction of the guilty party and/or the imposition of any of the
fine or penalty, shall be rewarded in a sum equivalent to ten percent (10%)
of the revenues, surcharges or fees recovered and/or fine or penalty
imposed and collected or One Million Pesos (P1,000,000) per case,
whichever is lower. The same amount of reward shall also be given to an
informer where the offender has offered to compromise the violation of
law committed by him and his offer has been accepted by the
Commissioner and collected from the offender: Provided, That should no
revenue, surcharges or fees be actually recovered or collected, such person
shall not be entitled to a reward: Provided, further, That the information
mentioned herein shall not refer to a case already pending or previously
investigated or examined by the Commissioner or any of his deputies,
agents or examiners, or the Secretary of Finance or any of his deputies or
agents: Provided, finally, That the reward provided herein shall be paid
under rules and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner.

(B) For Discovery and Seizure of Smuggled Goods. - To encourage the

public to extend full cooperation in eradicating smuggling, a cash reward
equivalent to ten percent (10%) of the fair market value of the smuggled
and confiscated goods or One Million Pesos (P1,000,000) per case,
whichever is lower, shall be given to persons instrumental in the discovery
and seizure of such smuggled goods.

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 The cash rewards of informers shall be subject to income tax,
collected as a final withholding tax, at a rate of ten percent (10%).
The provisions of the foregoing Subsections notwithstanding, all public
officials, whether incumbent or retired, who acquired the information in
the course of the performance of their duties during their incumbency, are
prohibited from claiming informer's reward.

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RULES OF COURT

RULE 42

Petition for Review From the Regional Trial Courts to the Court of
Appeals

Section 1. How appeal taken; time for filing. A party desiring to

appeal from a decision of the Regional Trial Court rendered in the exercise
of its appellate jurisdiction may file a verified petition for review with the
Court of Appeals, paying at the same time to the clerk of said court the
corresponding docket and other lawful fees, depositing the amount of
P500.00 for costs, and furnishing the Regional Trial Court and the adverse
party with a copy of the petition. The petition shall be filed and served
within fifteen (15) days from notice of the decision sought to be reviewed
or of the denial of petitioner's motion for new trial or reconsideration filed
in due time after judgment. Upon proper motion and the payment of the
full amount of the docket and other lawful fees and the deposit for costs
before the expiration of the reglementary period, the Court of Appeals may
grant an additional period of fifteen (15) days only within which to file the
petition for review. No further extension shall be granted except for the
most compelling reason and in no case to exceed fifteen (15) days. (n)

Section 2. Form and contents. The petition shall be filed in seven

(7) legible copies, with the original copy intended for the court being
indicated as such by the petitioner, and shall (a) state the full names of the
parties to the case, without impleading the lower courts or judges thereof

378
either as petitioners or respondents; (b) indicate the specific material dates
showing that it was filed on time; (c) set forth concisely a statement of the
matters involved, the issues raised, the specification of errors of fact or law,
or both, allegedly committed by the Regional Trial Court, and the reasons
or arguments relied upon for the allowance of the appeal; (d) be
accompanied by clearly legible duplicate originals or true copies of the
judgments or final orders of both lower courts, certified correct by the clerk
of court of the Regional Trial Court, the requisite number of plain copies
thereof and of the pleadings and other material portions of the record as
would support the allegations of the petition.

The petitioner shall also submit together with the petition a

certification under oath that he has not theretofore commenced any other
action involving the same issues in the Supreme Court, the Court of Appeals
or different divisions thereof, or any other tribunal or agency; if there is
such other action or proceeding, he must state the status of the same; and
if he should thereafter learn that a similar action or proceeding has been
filed or is pending before the Supreme Court, the Court of Appeals, or
different divisions thereof, or any other tribunal or agency, he undertakes
to promptly inform the aforesaid courts and other tribunal or agency
thereof within five (5) days therefrom. (n)

Section 3. Effect of failure to comply with requirements. The

failure of the petitioner to comply with any of the foregoing requirements
regarding the payment of the docket and other lawful fees, the deposit for
costs, proof of service of the petition, and the contents of and the
documents which should accompany the petition shall be sufficient ground
for the dismissal thereof. (n)

Section 4. Action on the petition. The Court of Appeals may

require the respondent to file a comment on the petition, not a motion to
dismiss, within ten (10) days from notice, or dismiss the petition if it finds
the same to be patently without merit, prosecuted manifestly for delay, or
that the questions raised therein are too insubstantial to require
consideration. (n)

Section 5. Contents of comment. The comment of the respondent

shall be filed in seven (7) legible copies, accompanied by certified true

379
copies of such material portions of the record referred to therein together
with other supporting papers and shall (a) state whether or not he accepts
the statement of matters involved in the petition; (b) point out such
insufficiencies or inaccuracies as he believes exist in petitioner's statement
of matters involved but without repetition; and (c) state the reasons why
the petition should not be given due course. A copy thereof shall be served
on the petitioner. (a)

Section 6. Due course. If upon the filing of the comment or such

other pleadings as the court may allow or require, or after the expiration of
the period for the filing thereof without such comment or pleading having
been submitted, the Court of Appeals finds prima facie that the lower court
has committed an error of fact or law that will warrant a reversal or
modification of the appealed decision, it may accordingly give due course
to the petition. (n)

Section 7. Elevation of record. Whenever the Court of Appeals

deems it necessary, it may order the clerk of court of the Regional Trial
Court to elevate the original record of the case including the oral and
documentary evidence within fifteen (15) days from notice. (n)

Section 8. Perfection of appeal; effect thereof. (a) Upon the timely

filing of a petition for review and the payment of the corresponding docket
and other lawful fees, the appeal is deemed perfected as to the petitioner.

The Regional Trial Court loses jurisdiction over the case upon the perfection
of the appeals filed in due time and the expiration of the time to appeal of
the other parties.

However, before the Court of Appeals gives due course to the petition, the
Regional Trial Court may issue orders for the protection and preservation of
the rights of the parties which do not involve any matter litigated by the
appeal, approve compromises, permit appeals of indigent litigants, order
execution pending appeal in accordance with section 2 of Rule 39, and
allow withdrawal of the appeal. (9a, R41)

(b) Except in civil cases decided under the Rule on Summary Procedure, the
appeal shall stay the judgment or final order unless the Court of Appeals,
the law, or these Rules shall provide otherwise. (a)
380
 Section 9. Submission for decision. If the petition is given due
course, the Court of Appeals may set the case for oral argument or require
the parties to submit memoranda within a period of fifteen (15) days from
notice. The case shall be deemed submitted for decision upon the filing of
the last pleading or memorandum required by these Rules or by the court
itself. (n)

RULE 43

Appeals From the Court of Tax Appeals and Quasi-Judicial Agencies to the
Court of Appeals

Section 1. Scope. This Rule shall apply to appeals from judgments

or final orders of the Court of Tax Appeals and from awards, judgments,
final orders or resolutions of or authorized by any quasi-judicial agency in
the exercise of its quasi-judicial functions. Among these agencies are the
Civil Service Commission, Central Board of Assessment Appeals, Securities
and Exchange Commission, Office of the President, Land Registration
Authority, Social Security Commission, Civil Aeronautics Board, Bureau of
Patents, Trademarks and Technology Transfer, National Electrification
Administration, Energy Regulatory Board, National Telecommunications
Commission, Department of Agrarian Reform under Republic Act No. 6657,
Government Service Insurance System, Employees Compensation
Commission, Agricultural Invention Board, Insurance Commission,
Philippine Atomic Energy Commission, Board of Investments, Construction
Industry Arbitration Commission, and voluntary arbitrators authorized by
law. (n)

Section 2. Cases not covered. This Rule shall not apply to

judgments or final orders issued under the Labor Code of the Philippines.
(n)

Section 3. Where to appeal. An appeal under this Rule may be

taken to the Court of Appeals within the period and in the manner herein
provided, whether the appeal involves questions of fact, of law, or mixed
questions of fact and law. (n)

381
 Section 4. Period of appeal. The appeal shall be taken within
fifteen (15) days from notice of the award, judgment, final order or
resolution, or from the date of its last publication, if publication is required
by law for its effectivity, or of the denial of petitioner's motion for new trial
or reconsideration duly filed in accordance with the governing law of the
court or agency a quo. Only one (1) motion for reconsideration shall be
allowed. Upon proper motion and the payment of the full amount of the
docket fee before the expiration of the reglementary period, the Court of
Appeals may grant an additional period of fifteen (15) days only within
which to file the petition for review. No further extension shall be granted
except for the most compelling reason and in no case to exceed fifteen (15)
days. (n)

Section 5. How appeal taken. Appeal shall be taken by filing a

verified petition for review in seven (7) legible copies with the Court of
Appeals, with proof of service of a copy thereof on the adverse party and
on the court or agency a quo. The original copy of the petition intended for
the Court of Appeals shall be indicated as such by the petitioner.

Upon the filing of the petition, the petitioner shall pay to the clerk of court
of the Court of Appeals the docketing and other lawful fees and deposit the
sum of P500.00 for costs. Exemption from payment of docketing and other
lawful fees and the deposit for costs may be granted by the Court of
Appeals upon a verified motion setting forth valid grounds therefor. If the
Court of Appeals denies the motion, the petitioner shall pay the docketing
and other lawful fees and deposit for costs within fifteen (15) days from
notice of the denial. (n)

Section 6. Contents of the petition. The petition for review shall (a)
state the full names of the parties to the case, without impleading the court
or agencies either as petitioners or respondents; (b) contain a concise
statement of the facts and issues involved and the grounds relied upon for
the review; (c) be accompanied by a clearly legible duplicate original or a
certified true copy of the award, judgment, final order or resolution
appealed from, together with certified true copies of such material portions
of the record referred to therein and other supporting papers; and (d)
contain a sworn certification against forum shopping as provided in the last

382
paragraph of section 2, Rule 42. The petition shall state the specific
material dates showing that it was filed within the period fixed herein. (2a)

Section 7. Effect of failure to comply with requirements. The

failure of the petitioner to comply with any of the foregoing requirements
regarding the payment of the docket and other lawful fees, the deposit for
costs, proof of service of the petition, and the contents of and the
documents which should accompany the petition shall be sufficient ground
for the dismissal thereof. (n)

Section 8. Action on the petition. The Court of Appeals may

require the respondent to file a comment on the petition not a motion to
dismiss, within ten (10) days from notice, or dismiss the petition if it finds
the same to be patently without merit, prosecuted manifestly for delay, or
that the questions raised therein are too unsubstantial to require
consideration. (6a)

Section 9. Contents of comment. The comment shall be filed

within ten (10) days from notice in seven (7) legible copies and
accompanied by clearly legible certified true copies of such material
portions of the record referred to therein together with other supporting
papers. The comment shall (a) point out insufficiencies or inaccuracies in
petitioner's statement of facts and issues; and (b) state the reasons why the
petition should be denied or dismissed. A copy thereof shall be served on
the petitioner, and proof of such service shall be filed with the Court of
Appeals. (9a)

Section 10. Due course. If upon the filing of the comment or such
other pleadings or documents as may be required or allowed by the Court
of Appeals or upon the expiration of the period for the filing thereof, and
on the records the Court of Appeals finds prima facie that the court or
agency concerned has committed errors of fact or law that would warrant
reversal or modification of the award, judgment, final order or resolution
sought to be reviewed, it may give due course to the petition; otherwise, it
shall dismiss the same. The findings of fact of the court or agency
concerned, when supported by substantial evidence, shall be binding on
the Court of Appeals. (n)

383
 Section 11. Transmittal of record. Within fifteen (15) days from
notice that the petition has been given due course, the Court of Appeals
may require the court or agency concerned to transmit the original or a
legible certified true copy of the entire record of the proceeding under
review. The record to be transmitted may be abridged by agreement of all
parties to the proceeding. The Court of Appeals may require or permit
subsequent correction of or addition to the record. (8a)

Section 12. Effect of appeal. The appeal shall not stay the award,
judgment, final order or resolution sought to be reviewed unless the Court
of Appeals shall direct otherwise upon such .terms as it may deem just.
(10a)

Section 13. Submission for decision. If the petition is given due

course, the Court of Appeals may set the case for oral argument or require
the parties to submit memoranda within a period of fifteen (15) days from
notice. The case shall be deemed submitted for decision upon the filing of
the last pleading or memorandum required by these Rules or by the court
of Appeals. (n)

384