Taxation Law
General Principles in Taxation
A. Definition and Concept of Taxation
Taxation
The power by which the sovereign raises revenue
to defray the expenses of the government.
B. Nature and Characteristics of Taxation
Nature of the Power of Taxation (Mamalateo)
The power to tax is inherent in the State,
being an attribute of sovereignty. As an incident of
sovereignty, the power to tax has been described
as unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is
to be found only in the responsibility of the
legislature which imposes the tax on the
constituency who are to pay it.
Being an inherent power, the legislature can
enact laws to raise revenues even without the grant
of said power in the Constitution. It must be noted
that Constitutional provisions relating to the power
of taxation do not operate as grants of power to the
Government, but instead merely constitute as
limitations upon a power which would otherwise be
practically without limit.
Nature or Characteristics or Attributes of the
Power of Taxation: (Lim)
1. For public purpose
2. Inherently legislative
3. Subject to international comity or treaty
4. Exaction payable in money
5. Territorial
6. Not absolute because is exercise is subject to
constitutional and inherent restrictions
7. Forced charge, imposition, contribution
(NOTE: FIPINTE Forced charge, imposition,
contribution, Inherently legislative, Public Purpose,
International Comity, Not absolute, Territorial,
Exaction payable in money)
CIR vs. Algue, Inc. (1988)
Facts: Algue Inc. received a letter of assessment
on delinquency income taxes in the amount of
P83,183.85 for the years 1958 and 1959. Algue
filed a letter of protest or request for
reconsideration to the CIR. Later on, a warrant of
distraint and levy was presented to Algue but such
letter was refused to be received on the ground of a
pending protest. In fact, it even presented a copy of
a photostate showing that there was indeed a
protest filed. Regardless of this however, the BIR
did not take any action on the protest. Hence, Algue
filed a petition for review with the CTA.
Alyssa Africa Page 1
It appears that P75,000 was disallowed by
the CIR as an ordinary reasonable or necessary
business expense of Algue. However, Algue claims
that such expense served as promotional fees paid
by it to certain individuals who helped them create
the Vegetable Oil Investment Corporation of the
Philippines and the purchase of properties of the
Philippine Sugar Estate Development Company.
It was able to establish that it was appointed
as an agent of Philippine Sugar Estate
Development Company to sell its properties and
that pursuant to such authority certain individuals
worked to form the Vegetable Oil Investment
Corporation who likewise purchased the PSEDC
properties. Algue received a P126,000 commission
from the sale, P75,000 of which, was paid as
promotional fees to the said individuals.
Issue: Whether or not the Collector of Internal
Revenue correctly disallowed the P75,000
deduction claimed by private respondent Algue as
legitimate business expenses.
Held: No, CIR was wrong for disallowing said
deduction as it was a valid business expense of the
company in favor of individuals which was duly
proven and established by competent evidence.
It is said that taxes are what we pay for
civilization society. Without taxes, the government
would be paralyzed for lack of the motive power to
activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who
is able to must contribute his share in the running of
the government. The government for its part, is
expected to respond in the form of tangible and
intangible benefits intended to improve the lives of
the people and enhance their moral and material
values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion
that it is an arbitrary method of exaction by those in
the seat of power.
But even as we concede the inevitability
and indispensability of taxation, it is a requirement
in all democratic regimes that it be exercised
reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right
to complain and the courts will then come to his
succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the
law has not been observed.
Taxation Law
Roxas vs. CTA (1968)
Facts: The Roxas brothers acquired agricultural
lands from their grandparents. In order to make use
of said lands, they formed a partnership called
Roxas y Compania. After the Second World War,
the tenants of their lands expressed their desire to
purchase the land they are actually occupying. The
government, in consonance with the constitutional
mandate to acquire big landed estates and
apportion them among the landless persuaded the
brothers to sell part of their land. They agreed to
sell it and were paid in installment over the said
properties. They reported 50% of the net gain from
it for income tax purposes as a sale of capital asset
held for more than one year provided for in Section
34 of the Tax Code. Upon assessment of the CIR
however, the latter argued that they must be taxed
as a real estate dealer liable to pay the
corresponding fixed tax.
Issue: Whether or not gain derived from the sale of
the Nasugbu farm lands an ordinary gain, and is
therefore, 100% taxable.
Held: No, it is not an ordinary gain. Roxas y Cia is
not a real estate dealer during the 10-year
amortization period as the sale was only pursuant
to the policy of the government to allocate lands to
the landless. Hence, pursuant to Section 34 of the
Tax Code, the lands sold to the farmers are capital
assets, and the gain derived from the sale is capital
tax subject to tax only to the extent of 50%.
The power of taxation is sometimes called
also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax
collector kill the "hen that lays the golden egg".
And, in order to maintain the general public's trust
and confidence in the Government this power must
be used justly and not treacherously. It does not
conform with our sense of justice in the instant case
for the Government to persuade the taxpayer to
lend it a helping hand and later on to penalize him
for duly answering the urgent call.
Sison, Jr. vs. Ancheta (1984)
Facts: Antero Sison was a regular taxpayer. He
filed a suit for declaratory relief or prohibition
proceeding questioning the validity of Section 1 of
Batas Pambansa Blg. 135 which amends Section
21 of the NIRC of 1977 resulting to a change in tax
rates on citizens or residents on their (a) taxable
compensation income, (b) taxable net income, (c)
Alyssa Africa Page 2
royalties, prizes, and other winnings, (d) interest
from bank deposits and yield or any other monetary
benefit from deposit substitutes and from trust fund
and similar arrangements, (e) dividends and share
of individual partner in the net profits of taxable
partnership, (f) adjusted gross income. He alleged
that the law is contrary to the equal protection, due
process clause and the uniformity in taxation. His
concern was that he was unduly discriminated
because he was imposed higher tax rates on his
professional income vis--vis those who have fixed
income or salaried individual taxpayers.
Issue:1. Whether or not the law is contrary to the
Constitution on the basis of equal protection, due
process, and uniformity in taxation.
2. Whether or not the imposition of tax rates based
on income classification is oppressive.
Held: 1. No, the law is not contrary to the
Constitution. The due process clause cannot be
invoked as the taxing statute was not shown to be
so arbitrary. Laws operate equally and uniformly on
all persons under similar circumstances or that all
persons must be treated in the same manner, the
conditions not being different, both in the privileges
conferred and the liabilities imposed. Equality and
uniformity in taxation means that all taxable articles
or kinds of property of the same class shall be
taxed at the same rate.
2. No, it is not oppressive. Taxpayers who are
recipients of compensation income are set apart as
a class. As there is practically no overhead
expense, these taxpayers are not entitled to make
deductions for income tax purposes because they
are in the same situation more or less. On the other
hand, in the case of professionals in the practice of
their calling and businessmen, there is no
uniformity in the costs or expenses necessary to
produce their income. It would not be just then to
disregard the disparities by giving all of them zero
deduction and indiscriminately impose on all alike
the same tax rates on the basis of gross income.
Tan Tiong Bio vs. CIR (1962)
Facts: Central Syndicate sent a letter to the CIR,
telling the latter that it had purchased with the
assumption of mortgage from Dee Hong Lue the
entire stock of surplus properties which he had
bought from Foreign Liquidation Commission. The
Syndicate remitted the sum of P43,750 in behalf of
Dee Hong Lue with the understanding that when
the consideration of the sale is exacted, it would
later be adjusted. The syndicate wrote another
Taxation Law
letter requesting a refund amounting to P1,103.28
for excess payment of sales tax due to the
adjustment and reduction of the purchase price.
However, upon investigation, it appears that the
Syndicate would still be liable for deficiency sales
tax amounting to P33,797 and a surcharge in
addition to the amount of P43,750 which the
Syndicate deposited in the name of Dee Hong Lue
as sales tax due since it appears that the Syndicate
is the true importer and original seller of the goods,
and must be the one liable to pay sales tax.
The case was elevated to the CTA but the claim
was denied. When the Collector filed a motion
requiring the syndicate to file a bond to guarantee
payment of the tax assessed, the CTA denied this
on the ground that the Syndicate is already a non-
existing entity due to the expiration of its corporate
existence.
Issue: Whether or not the sales tax in question can
be enforced against its successors-in-interest who
are the present petitioners
Held: Yes, it can be enforced against its
successors-in-interest or its stockholders.
Recognized are the following rules in
American jurisprudence: The dissolution of a
corporation does not extinguish the debts due or
owing to it. A creditor of a dissolve corporation may
follow its assets, as in the nature of a trust fund,
into the hands of its stockholders. An indebtedness
of a corporation to the federal government for
income and excess profit taxes is not extinguished
by the dissolution of the corporation. And it has
been stated, with reference to the effect of
dissolution upon taxes due from a corporation, "that
the hands of the government cannot, of course,
collect taxes from a defunct corporation, it loses
thereby none of its rights to assess taxes which had
been due from the corporation, and to collect them
from persons, who by reason of transactions with
the corporation, hold property against which the tax
can be enforced and that the legal death of the
corporation no more prevents such action than
would the physical death of an individual prevent
the government from assessing taxes against him
and collecting them from his administrator, who
holds the property which the decedent had formerly
possessed".
Considering that the Central Syndicate
realized from the sale of the surplus goods a net
profit of P229,073.83, and that the sale of said
goods was the only transaction undertaken by said
syndicate, there being no evidence to the contrary,
Alyssa Africa Page 3
the conclusion is that said net profit remained intact
and was distributed among the stockholders when
the corporation liquidated and distributed its assets
on August 15, 1948, immediately after the sale of
the said surplus goods. Petitioners are therefore
the beneficiaries of the defunct corporation and as
such should be held liable to pay the taxes in
question. However, there being no express
provision requiring the stockholders of the
corporation to be solidarily liable for its debts which
liability must be express and cannot be presumed,
petitioners should be held to be liable for the tax in
question only in proportion to their shares in the
distribution of the assets of the defunct corporation.
The decision of the trial court should be modified
accordingly.
C. Purpose of Taxation
1. To raise revenues
To defray the expenses of the government
2. Regulatory/special
To provide means for the rehabilitation and
stabilization of a threatened industry which is
affected with public interest as to be within the
police power of the state.
3. Others
a. Promotion of General Welfare to promote
the general welfare of the people
b. Reduction of social inequality progressive
system of taxation prevents the undue
concentration of wealth in the hands of a few
individuals
c. Encourage economic growth by granting
incentives and exemptions
d. Protectionism to protect local industries
from foreign competition
Philippine Airlines, Inc vs. Edu (1988)
Facts: Commissioner Romeo issued a regulation
requiring all tax exempt entities, among them PAL
to pay motor vehicle registration fees. PAL
protested and refused to register its motor vehicles
on the ground that based on a previous ruling,
registration fees are in reality taxes from the
payment of which PAL is exempt by virtue of
legislative franchise. The refund was denied based
on the ruling Republic vs. Philippine Rabbit Bus
Lines which explained that motor vehicle
registration fees are regulatory and not revenue
measures and therefore, do not come within the
exemption. PAL filed a case against the LTC
Commissioner but the trial court dismissed the
complaint.
Taxation Law
Issue: Whether or not the nature of motor vehicle
registration fees are that of taxes rather than
regulatory fees.
Held: Yes, fees for motor vehicle registration are
taxes rather than regulatory fees.
It is quite apparent that vehicle registration
fees were originally simple exceptional, intended
only for rigidly purposes in the exercise of the
State's police powers. Over the years, however, as
vehicular traffic exploded in number and motor
vehicles became absolute necessities without
which modem life as we know it would stand still,
Congress found the registration of vehicles a very
convenient way of raising much needed revenues.
Without changing the earlier deputy. of registration
payments as "fees," their nature has become that
of "taxes."
In view of the foregoing, we rule that motor
vehicle registration fees as at present exacted
pursuant to the Land Transportation and Traffic
Code are actually taxes intended for additional
revenues of government even if one fifth or less of
the amount collected is set aside for the operating
expenses of the agency administering the program.
Osmena vs. Orbos (1993)
Facts: President Marcos issued PD 1956 creating
a Special Account in the General Fund designated
as the Oil Price Stabilization Fund (OPSF). The
OPSF was designed to reimburse oil companies for
cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustments
and from increases in the world market prices of
crude oil.
The OPSF was then reclassified as a trust
liability account in virtue of EO 1024 and ordered
its release from the National Treasury to the
Ministry of Energy. President Aquino amended PD
1956 by promulgating EO 137 expanding the
grounds for reimbursement to oil companies for
possible cost under recovery incurred as a result of
the reduction of domestic prices of petroleum
products, the amount of the under recovery being
left for the determination of the Ministry of Finance.
Senator Osmena assails the
constitutionality of a provision in PD 1956 on the
ground that it empowers the Energy Regulatory
Board to approve the increase of fuel prices or
impose additional amounts on petroleum products
the proceeds of which shall accrue to the OPSF
thus creating an undue and invalid delegation of
legislative power to tax.
Alyssa Africa Page 4
Issue: Whether or not there is undue delegation of
the legislative power of taxation.
Held: No, there is no undue delegation of
legislative power.
The Court finds that the provision conferring
the authority upon the ERB to impose additional
amounts on petroleum products provides a
sufficient standard by which the authority must be
exercised. In addition to the general policy of the
law to protect the local consumer by stabilizing and
subsidizing domestic pump rates, 8(c) of P.D.
1956 expressly authorizes the ERB to impose
additional amounts to augment the resources of the
Fund.
The Court is cited to this requirement by the
petitioner on the premise that what is involved here
is the power of taxation; but as already discussed,
this is not the case. What is here involved is not so
much the power of taxation as police power.
Although the provision authorizing the ERB to
impose additional amounts could be construed to
refer to the power of taxation, it cannot be
overlooked that the overriding consideration is to
enable the delegate to act with expediency in
carrying out the objectives of the law which are
embraced by the police power of the State.
The interplay and constant fluctuation of the various
factors involved in the determination of the price of
oil and petroleum products, and the frequently
shifting need to either augment or exhaust the
Fund, do not conveniently permit the setting of fixed
or rigid parameters in the law as proposed by the
petitioner. To do so would render the ERB unable to
respond effectively so as to mitigate or avoid the
undesirable consequences of such fluidity. As such,
the standard as it is expressed, suffices to guide
the delegate in the exercise of the delegated power,
taking account of the circumstances under which it
is to be exercised.
For a valid delegation of power, it is
essential that the law delegating the power must be
(1) complete in itself, that is it must set forth the
policy to be executed by the delegate and (2) it
must fix a standard limits of which
are sufficiently determinate or determinable to
which the delegate must conform.
The standard, as the Court has already
stated, may even be implied. In that light, there can
be no ground upon which to sustain the petition,
inasmuch as the challenged law sets forth a
determinable standard which guides the exercise of
the power granted to the ERB. By the same token,
the proper exercise of the delegated power may be
Taxation Law
tested with ease. It seems obvious that what the
law intended was to permit the additional imposts
for as long as there exists a need to protect the
general public and the petroleum industry from the
adverse consequences of pump rate fluctuations.
"Where the standards set up for the guidance of an
administrative officer and the action taken are in
fact recorded in the orders of such officer, so that
Congress, the courts and the public are assured
that the orders in the judgment of such officer
conform to the legislative standard, there is no
failure in the performance of the legislative
functions."
This Court thus finds no serious impediment
to sustaining the validity of the legislation; the
express purpose for which the imposts are
permitted and the general objectives and purposes
of the fund are readily discernible, and they
constitute a sufficient standard upon which the
delegation of power may be justified.
Caltex Phils., Inc. vs. COA (1992)
Facts: On February 2, 1989, the COA sent a letter
to Caltex Philippines, Inc. directing the latter to
remit to the OPSF its collection, excluding that
unremitted for the years 1986, and 1988, of the
additional tax on petroleum products authorized
under Section 8 of PD 1956. On March 9, 1989, the
COA sent another letter with a breakdown of
remittances to be made including the interest and
surcharges.
Caltex requested COA for an early release
of its reimbursement certificates from the OPSF
covering the claims with the Office of Energy Affairs
since June 1987 up to March 1989 invoking in
support thereof COA Circular No. 89-299 but the
COA denied the petitioners request. Caltex
submitted a proposal for the payment of the
collections and the recovery claims which COA
approved. However, COA prohibited Caltex from
offsetting remittances and reimbursements.
Issue: Whether or not the OPSF contributions are
can be offset with reimbursements.
Held: No, the OPSF contributions are still for public
purpose though they go to a special fund of the
government and thus cannot be offset.
Taxation is no longer envisioned as a
measure merely to raise revenue to support the
existence of the government; taxes may be levied
with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened
Alyssa Africa Page 5
industry which is affected with public interest as to
be within the police power of the state. There can
be no doubt that the oil industry is greatly imbued
with public interest as it vitally affects the general
welfare. Any unregulated increase in oil prices
could hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It
would have a chain reaction in terms of, among
others, demands for wage increases and upward
spiralling of the cost of basic commodities. The
stabilization then of oil prices is of prime concern
which the state, via its police power, may properly
address.
It is settled that a taxpayer may not offset
taxes due from the claims that he may have against
the government. Taxes cannot be the subject of
compensation because the government and
taxpayer are not mutually creditors and debtors of
each other and a claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be
set-off.
D. Principles of Sound Tax System
1. Fiscal Adequacy
The sources of revenue must be adequate to meet
government expenditure and their variation
regardless of business conditions.
2. Administrative Feasibility
Tax laws should be capable of convenient, just and
effective administration. They should be clear,
concise and capable of proper and economic
enforcement, convenient as to time and manner of
payment and not burdensome.
3. Theoretical Justice
Taxes levied must be based upon the ability of the
taxpayer to pay; it must not be unduly burdensome,
confiscatory or discouraging to business. It must be
equitable and uniform.
E. Theory and Basis of Taxation
1. Lifeblood Theory
The existence of government is a necessity; it
cannot exist nor endure without the means to pay
its expenses; and for those means, the government
has the right to compel all its citizens and property
within its limits to contribute in the form of taxes.
2. Necessity Theory
The existence of the government is a necessity and
it cannot continue without means to support itself.
Taxation Law
3. Benefits-Protection Theory
The government and the people have the reciprocal
and mutual duties of support and protection to one
another.
4. Jurisdiction over subject and objects
The power to tax can only be exercised within the
territorial jurisdiction of a taxing authority except
when there exists privity of relationship between the
taxing state and the object of tax.
Gomez vs. Palomar (1968)
Facts: To help raise funds for the Philippine
Tuberculosis Society, RA 1635 as amended by RA
2631 was enacted which directs the Director of
Posts to order a yearly printing and issuance of
semi-postal stamps of different denominations with
face value showing the regular postage charge plus
the additional amount of 5 cents for the said
purpose during the period of August 19 to
September 30. The proceeds for the sale will
constitute a special fund to be expended by the
Philippine Tuberculosis Society.
Benjamin Gomez questioned the
constitutionality of the statute on the ground that it
violates equal protection clause.
Issue: Whether or not the statute is violative of the
equal protection clause of the Constitution.
Held: No, it does not violate the equal protection
clause.
We are not one to invalidate legislation on
equal protection grounds except by the clearest
demonstration that it sanctions invidious
discrimination, which is all that the Constitution
forbids. The remedy for unwise legislation must be
sought in the legislature. Now, the classification of
mail users is not without any reason. It is based on
ability to pay, let alone the enjoyment of a privilege,
and on administrative convenience. In the
allocation of the tax burden, Congress must have
concluded that the contribution to the anti-TB fund
can be assured by those whose who can afford the
use of the mails.
The classification is likewise based on
considerations of administrative convenience. For it
is now a settled principle of law that "consideration
of practical administrative convenience and cost in
the administration of tax laws afford adequate
ground for imposing a tax on a well-recognized and
defined class." In the case of the anti-TB stamps,
undoubtedly, the single most important and
Alyssa Africa Page 6
influential consideration that led the legislature to
select mail users as subjects of the tax is the
relative ease and convenience of collecting the tax
through the post offices. The small amount of five
centavos does not justify the great expense and
inconvenience of collecting through the regular
means of collection. On the other hand, by placing
the duty of collection on postal authorities the tax
was made almost self-enforcing, with as little cost
and as little inconvenience as possible.
And then of course it is not accurate to say
that the statute constituted mail users into a class.
Mail users were already a class by themselves
even before the enactment of the statue and all that
the legislature did was merely to select their class.
Legislation is essentially empiric and Republic Act
1635, as amended, no more than reflects a
distinction that exists in fact. As Mr. Justice
Frankfurter said, "to recognize differences that exist
in fact is living law; to disregard them and
concentrate on some abstract identities is lifeless
logic."
Lorenzo vs. Posadas (1937)
Facts: During the probate of the will of Thomas
Henley, Moor was the trustee until February 29,
1932, when he resigned and Pablo Lorenzo was
appointed in his stead. However, while the case
was still pending with the court, the CIR assessed
the estate and ordered Lorenzo to pay delinquent
inheritance taxes. Lorenzo paid inheritance taxes
under protest and on October 4, 1932, brought an
action against Juan Posadas Jr, the Collector of
Internal Revenue to refund the inheritance taxes
paid.
Issue: Whether or not the payment of inheritance
taxes should have been suspended upon the
appointment of Lorenzo.
Held: No, it must not be suspended.
The highest considerations of public policy
also justify the conclusion we have reached. Were
we to hold that the payment of the tax could be
postponed or delayed by the creation of a trust of
the type at hand, the result would be plainly
disastrous. Testators may provide, as Thomas
Hanley has provided, that their estates be not
delivered to their beneficiaries until after the lapse
of a certain period of time. In the case at bar, the
period is ten years. In other cases, the trust may
last for fifty years, or for a longer period which does
not offend the rule against petuities. The collection
of the tax would then be left to the will of a private
Taxation Law
individual. The mere suggestion of this result is a of the people;
wider in
sufficient warning against the acceptance of the government application
of just
essential to the very existence of government. The and for public because it is
compensation
obligation to pay taxes rests not upon the privileges purpose the general
power to make
enjoyed by, or the protection afforded to, a citizen laws
by the government but upon the necessity of Revenue and
Promote
Property is
money for the support of the state. For this reason, Purpose support of the
welfare
taken for public
government use
no one is allowed to object to or resist the payment Community of Community of Operates on
Persons
of taxes solely because no personal benefit to him Affected
class of class of the owner of
individuals individuals the property
can be pointed out. While courts will not enlarge, by
Authority Government or
construction, the government's power of taxation that private
Government Government
they also will not place upon tax laws so loose a exercises individuals or
construction as to permit evasions on merely the power corporations
fanciful and insubstantial distinctions. When proper, There must be
There must be
Necessity No delegation due delegation
a tax statute should be construed to avoid the is necessary
due delegation
before local
of before local
possibilities of tax evasion. Construed this way, the Delegation
because it is
government
government or
inherent private party
statute, without resulting in injustice to the taxpayer, may exercise it
may exercise it
becomes fair to the government. There is no There is
That taxes must be collected promptly is a Effect or Money paid transfer of title, transfer of right
Transfer of as taxes at most there is to property
policy deeply entrenched in our tax system. Thus, Property becomes part restraint on the whether it be of
no court is allowed to grant injunction to restrain the Rights of public funds injurious use of ownership or
collection of any internal revenue tax property lesser right
The person
No direct and
Presumption affected
immediate
F. Aspects or Stages of Taxation Benefits
of receipt of
benefits
receives just
1. Levy or imposition benefits to compensation
received by the
every person for the property
It cannot be delegated; this usually includes the (1) person affected
taken from him
selection of coverage, object, nature, extent and The exercise
is Limited to
situs (CONES) in taxation, (2) its purpose and (3) constitutionall public interest
Limited to
prescribing the rules in taxation in general public purpose
Limitation y and and the
and just
inherently requirement of
compensation
limited or due process
2. Assessment and Collection restricted
Delegable via a valid statute; act of administration Sufficient to
No imposition,
and implementation of the tax law by executive Amount of the owner is
No limit cover cost of
Imposition paid the FMV of
through its administrative agencies regulation
his property
Most
Importanc
3. Payment of the Tax important of Most superior
e the three
Act of compliance by the taxpayer, including such Inferior to the
options, schemes or remedies as may be legally Non-
Superior and
impairment
available to him. clause of the
may override
Superior of the the non-
Constitution
Relationship Non- impairment
4. Refund to the
and cannot be
impairment clause because
exercised to
Recovery of any tax alleged to have been Constitution
impair the
clause of the the welfare of
Constitution the State is
erroneously or illegally assessed or collected or of Obligations
superior to any
any penalty claimed to have been collected without and
private contract
Contracts
authority, or of any sum alleged to have been clause
excessively or in any manner wrongfully collected.
2. Toll Fee
G. Tax compared to the following: A consideration which is paid for the use of a
1. Police Power and Eminent Domain property which is of a public nature
Power of
Power of
Police Power Eminent
Taxation
Domain i. Sec. 155 of the Local Government Code
Definition Power to take Power to enact Power to take Section 155. Toll Fees or Charges The
property for laws to private property sanggunian concerned may prescribe the terms
the support of promote the for public use
the general welfare upon payment and conditions and fix the rates for the
Alyssa Africa Page 7
Taxation Law
imposition of toll fees or charges for the use of
any public road, pier, or wharf, waterway, bridge,
ferry or telecommunication unit concerned:
Provided, That no such toll fees or charges shall
be collected from officers and enlisted men of
the Armed Forces of the Philippines and
members of the Philippine National Police on
mission, post office personnel delivering mail,
physically-handicapped, and disabled citizens
who are 65 years or older.
When public safety and welfare so requires,
the sanggunian concerned may discontinue the
collection of the tolls, and thereafter the said
facility shall be free and open for public use.
Persons exempted from payment of toll fees:
1. Officers and enlisted men of the Armed Forces of
the Philippines;
2. Members of the Philippine National Police on
mission;
3. Post office personnel delivering mail;
4. Physically-handicapped; and
5. Disabled citizens who are 65 years or older
facilities, therefore, they are not government
exactions that can be properly treated as a tax.
Taxes may be imposed only by the government
under its sovereign authority, toll fees may be
demanded by either the government or private
individuals or entities, as an attribute of ownership.
Parenthetically, VAT on tollway operations
cannot be deemed a tax on tax due to the nature of
VAT as an indirect tax. In indirect taxation, a
distinction is made between the liability for the tax
and burden of the tax. The seller who is liable for
the VAT may shift or pass on the amount of VAT it
paid on goods, properties or services to the buyer.
In such a case, what is transferred is not the
sellers liability but merely the burden of the VAT.
Thus, the seller remains directly and legally
liable for payment of the VAT, but the buyer bears
its burden since the amount of VAT paid by the
former is added to the selling price. Once shifted,
the VAT ceases to be a tax and simply becomes
part of the cost that the buyer must pay in order to
purchase the good, property or service.

Tax Toll 3. License Fees or Charges

Imposed in the exercise of police power for
Demand of
Demand of sovereignty purposes of regulation
proprietorship
Compensation for the
Support for the Tax License
use of somebody elses
government Purpose Revenue purpose
Purposes of
property regulation
Maybe imposed by the Source of Taxing power of Police power of
Imposed only by the
government or by power the government the government
government
private individuals Has limit based on
Determined by the cost the necessity to
Base on governmental Amount No limit
carry out the
of property or
needs regulation
improvement thereon
Person, Required for the
Diaz vs. Secretary of Finance (2011) properties, commencement of
Subject or
business, rights, a business or
Facts: object of
interests, profession or
Issue: Whether or not the imposition of VAT on imposition
privileges, acts exercise of a
tollway operators a) amounts to a tax on tax and and transactions right/privilege
not a tax on services; Nature of
Revocability Always revocable
permanence
Held: In sum, fees paid by the public to tollway Power to tax
Does not include
operators for use of the tollways, are not taxes in Scope includes the
the power to tax
any sense. A tax is imposed under the taxing power power to license
of the government principally for the purpose of When Post-activity Pre-activity
raising revenues to fund public expenditures. 27 Toll imposed imposition imposition
fees, on the other hand, are collected by private Preceding years
quarters data, if
tollway operators as reimbursement for the costs Basis of
Current data new or business,
and expenses incurred in the construction, computation
based on
maintenance and operation of the tollways, as well capitalization
as to assure them a reasonable margin of income. Nature Self-assessing Not self-assessing
Although toll fees are charged for the use of public Limitation Subject to Subject to the 3
Alyssa Africa Page 8
Taxation Law
limitations
because it is an
constitutional, exercise of police
inherent and power to guard
contractual and safeguard the
limitations interest and
welfare of the
public
Exemption from
tax does not Exemption from
Exemption include regulatory fees is
exemption from not allowed
regulatory fees
Test in Determining Whether the Imposition is a
Tax or a Fee
If the generation of revenue is the primary purpose
and regulation is merely incidental, the imposition is
a tax, but if regulation is the primary purpose, the
fact that incidental revenue is also obtained does
not make the imposition a tax.
Importance of Distinction of Tax from Fee
1. The government instrumentality that imposes the
exaction may have no authority to collect the tax
but is authorized to collect the fees;
2. The person, who is required to pay the exaction,
may be exempt from tax but not from the payment
of fees or vice versa;
3. For income tax purposes, the tax not fees, may
be claimed as income tax deduction
Philippine Airlines, Inc vs. Edu (1988)
Facts: Commissioner Romeo issued a regulation
requiring all tax exempt entities, among them PAL
to pay motor vehicle registration fees. PAL
pretested and refused to register its motor vehicles
on the ground that based on a previous ruling,
registration fees are in reality taxes from the
payment of which PAL is exempt by virtue of
legislative franchise. The refund was denied based
on the ruling Republic vs. Philippine Rabbit Bus
Lines which explained that motor vehicle
registration fees are regulatory and not revenue
measures and therefore, do not come within the
exemption. PAL filed a case against the LTC
Commissioner but the trial court dismissed the
complaint.
Issue: Whether or not the nature of motor vehicle
registration fees are that of taxes rather than
regulatory fees.
Held: Yes, fees for motor vehicle registration are
taxes rather than regulatory fees.
Alyssa Africa Page 9
It is quite apparent that vehicle registration
fees were originally simple exceptional. intended
only for rigidly purposes in the exercise of the
State's police powers. Over the years, however, as
vehicular traffic exploded in number and motor
vehicles became absolute necessities without
which modem life as we know it would stand still,
Congress found the registration of vehicles a very
convenient way of raising much needed revenues.
Without changing the earlier deputy. of registration
payments as "fees," their nature has become that
of "taxes."
In view of the foregoing, we rule that motor vehicle
registration fees as at present exacted pursuant to
the Land Transportation and Traffic Code are
actually taxes intended for additional revenues. of
government even if one fifth or less of the amount
collected is set aside for the operating expenses of
the agency administering the program.
Angeles University Foundation vs. City of
Angeles (2012)
Facts: Petitioner plans to build a Medical Center but
refuses to pay for its building permit on the ground
that it is exempted from payment of tax.
Issue: Whether or not the petitioner is exempt from
the payment of building permit and related fees
imposed under the National Building Code.
Held: A building permit fee is a regulatory imposition
is highlighted by the fact that in processing an
application for a building permit, the Building Official
shall see to it that the applicant satisfies and
conforms with approved standard requirements on
zoning and land use, lines and grades, structural
design, sanitary and sewerage, environmental health,
electrical and mechanical safety as well as with other
rules and regulations implementing the National
Building Code.[24] Thus, ancillary permits such as
electrical permit, sanitary permit and zoning
clearance must also be secured and the
corresponding fees paid before a building permit may
be issued. And as can be gleaned from the
implementing rules and regulations of the National
Building Code, clearances from various government
authorities exercising and enforcing regulatory
functions affecting buildings/structures, like local
government units, may be further required before a
building permit may be issued.
Since building permit fees are not charges
on property, they are not impositions from which
petitioner is exempt.
Taxation Law
City of Iloilo vs. Villanueva (1959)
Facts: An ordinance was imposed by the city which
sought to collect from the spouses an annual
license tax fee for the operation of their apartments.
The spouses refused to pay the same on the
ground that it is violative of the constitutional
provisions requiring uniformity of taxation
contending that it is oppressive, unreasonable and
discriminatory.
Issue: Whether or not the city, in imposing the
licensee is an exercise of its taxing power.
Held: It can therefore be said that in order that a
license fee may be considered merely as a
regulatory measure, it must be only "of a sufficient
amount to include the expenses of issuing the
license and the cost of the necessary inspection or
police surveillance, taking into account not only the
expense of direct regulation but also incidental
consequences.?' On the other hand, if the fee
charged is a revenue measure, the power to exact
such fee "must be expressly granted by charter or
statute and is not to be implied from the conferred
power to license and regulate merely."
A cursory reading of the ordinance in
question would at once reveal that the license fees
charged therein are not merely for regulation but for
revenue, because the fee of P24 per annum
charged therein for every apartment far exceeds
"the expense of issuing the license", plus "the cost
of inspection or police surveillance", and other
incidental expenses. Thus, for the first house which
consists of 11 apartments, the defendants would
have to pay a license fee of P264 annually; for the
second house which consists of 14 apartments, the
fee would be P308 annually; for the third house
which consists of 14 apartments, the fee would be
P308 annually; for the third house which consists of
7 apartments, and the fourth which consists of 2
apartments, the fee would be P2156 annually. All in
all, defendants would have to pay a license tax fee
amounting to P888 per annum. This, in addition to
the fees that may be exacted from many other
residents similarly situated, would constitute a
sizeable sum of revenue which would engross the
coffers of the City. These fees cannot therefore be
considered as merely for regulation purposes as
contended.
It is however claimed that even if the fees
exacted in the ordinance be considered as taxes for
purposes of revenue still their exaction may be
justified because the same comes within the power
granted to the city by its Charter. And in that
Alyssa Africa Page 10
advocacy the city invokes section 21, paragraph j,
of the Charter, which gives the city the power "To
tax, fix the license fee for, and regulate hotels,
restaurants, refreshment parlors, cafes, lodging
houses, boarding houses, livery garages, public
warehouses, pawnshops, theaters,
cinematographs." The city claims that a tenement
house can be considered as one belonging to the
group of hotels, lodging houses, or boarding
houses therein enumerated.
We disagree. It is well-settled that a
municipal corporation, unlike a sovereign state, is
clothed with no inherent power of taxation. "The
charter or statute must plainly show an intent to
confer that power or the municipality cannot
assume it. And the power when granted is to be
construed strictissimi juris. Any doubt or ambiguity
arising out of the term used in granting that power
must be resolved against the municipality.
Inferences, implications, deductions all these
have no place in the interpretation of the taxing
power of a municipal corporation." (Icard vs. City of
Baguio, 83 Phil., 870; 46 Off. Gaz. 11 Sup., 320;
Medina vs. City of Baguio, 91 Phil., 854; 48 Off.
Gaz., [11] 4769; Yu vs. City of Lipa, 99 Phil., 975;
54 Off . Gaz., [13] 4055. And it not appearing that
the power to tax owners of tenement houses is one
among those clearly and expressly granted to the
City of Iloilo by its Charter, the exercise of such
power cannot be assumed and hence the
ordinance in question is ultra vires insofar as its
taxes a tenement house such as those belonging to
defendants.
4. Special Assessment
A kind of property tax confined to local imposition
upon improvements in its immediate vicinity and
levied with reference to special benefits to the
property assessed.
i. Sec. 240 of the Local Government Code
Section 240. Special Levy by Local Government
Units A province, city or municipality may
impose a special levy on the lands comprised
within its territorial jurisdiction specially benefited
by public works projects or improvements funded
by the local government unit concerned:
Provided, however, That the special levy shall
not exceed 60% of the actual cost of such
projects and improvements, including the costs
of acquiring land and such other real property in
connection therewith: Provided, further, That the
special levy shall not apply to lands exempt from
basic real property tax and the remainder of the
Taxation Law
land portions of which have been donated to the recovery of cost and/or
local government unit concerned for the maintenance of
construction of such projects or improvements. improvement

Limitations: Republic vs. Bacolod Murcia Milling Co. Inc.

1. Applicable only to lands within its territorial (1999) (Digest from Berne Guerrero)
jurisdiction; Facts: RA 632 created the Philippine Sugar
2. Land must be specially benefited by public Institute, a semi-public corporation. In 1951, the
works projects or improvements funded by the Institute Taxation Law I, 2004 ( 13 ) Digests (Berne
LGU concerned; and Guerrero) acquired the Insular Sugar Refinery for
3. Special Levy must not exceed 60% of the P3.07 million payable in installments from the
actual cost of the project or improvement; proceeds of the sugar tax to be collected under RA
632. The operation of the refinery for 1954 to 1957
Exemptions: was disastrous as the Institute suffered tremendous
1. Lands exempt from basic real property tax; losses. Contending that the purchase of the refinery
and with money from the Institutes fund was not
2. Remainder of the land portions of which have authorized under RA 632, and that the continued
been donated to the local government unit operation of the refinery is inimical to their interest,
concerned for the construction of such projects Bacolod-Murcia Milling Co., Ma-ao Sugar Central,
or improvements. Talisay-Silay Milling Co. and the Central Azucarera
del Danao refused to continue with their
Tax Special Assessment contribution to said fund. The trial court found them
Levied on business, liable under RA 632.
interests, transactions,
Levied on Land
rights, persons, Issue: Whether the taxpayers may refuse to pay the
properties or privileges special assessment, allegedly distinct from an
Cannot be made the ordinary tax which no one can refuse to pay.
personal liability of the
May be made a
person assessed, Held: The nature of a special assessment similar
personal liability of the
because it is the land to the case has been discussed and explained in
person assessed
that answers for the Lutz vs. Araneta. The special assessment or levy
liability for the Philippine Sugar Institute (Philsugin) Fund is
Based on necessity with not so much an exercise of the power of taxation,
no hope of direct or Based wholly on nor the imposition of a special assessment, but the
immediate benefit to the benefits received exercise of police power for the general welfare of
taxpayer the entire country. It is, therefore, an exercise of a
Power to tax carried sovereign power which no private citizen may
with it the power to levy lawfully resist. Section 2a of the Charter authorizing
special assessment Philsugin to conduct research work for the sugar
Exemption from taxes industry in all its phases, either agricultural or
does not include industrial, for the purpose of introducing into the
Exemption is qualified sugar industry such practices or processes that will
exemption from special
assessment reduce the cost of production and achieve greater
An imposition of a efficiency in the industry, justifies the acquisition of
charge on all property, the refinery in question. The financial loss resulting
real and personal in a from the operation thereof is no means an index
prescribed area is a tax May be imposed by the that the industry did not profit therefrom, as other
and not an assessment, national or local gains of a different nature (such as experience)
although the purpose is government may have been realized.
to make a local
improvement on a street 5. Toll Fees ( see no. 2; repeated in the
or highway Syllabus)
Of general application Exceptional in
application for the 6. Customs Duties

Alyssa Africa Page 11

Taxation Law
Imposed on goods that are imported into or Non-payment covers
exported from our country; used interchangeably imprisonment except
No imprisonment for
with tariff. poll tax as it is
non-payment
sanctioned under the
Tariff duties payable on goods imported or law
exported Generally, not subject to
Subject to set-off
set-off
Notable Distinction: Tax is broader than Draws interest when
Tariff/Customs Duties. Does not earn interest
stipulated or when in
except when delinquent
default
Garcia vs. The Executive Secretary (1992) Generally payable in May be paid in cash or
Facts: money in kind
Issue: Prescriptive periods are
Held: Customs duties which are assessed at the Prescriptive periods are
those provided under
prescribed tariff rates are very much like taxes those provided under
the Civil Code or Rules
which are frequently imposed for both revenue- the NIRC
of Court
raising and for regulatory purposes. Thus, it has
been held that "customs duties" is "the name given When is tax considered a debt?
to taxes on the importation and exportation of a. when the tax is secured by a bond
commodities, the tariff or tax assessed upon b.. when its collection is being enforced by court
merchandise imported from, or exported to, a action
foreign country." The levying of customs duties on c. when the tax is the subject of a compromise
imported goods may have in some measure the agreement validly entered into between the
effect of protecting local industries where such government and the taxpayer
local industries actually exist and are producing d. interest on tax delinquency is considered as
comparable goods. Simultaneously, however, the interest on indebtedness
very same customs duties inevitably have the effect
of producing governmental revenues. Customs Consequence if a tax is a debt?
duties like internal revenue taxes are rarely, if ever, a. When taxes are considered debts, the
designed to achieve one policy objective only. Most prescriptive periods for their collection are
commonly, customs duties, which constitute taxes governed by those provided in the general laws
in the sense of exactions the proceeds of which (Civil Law and Rules of Court) and NOT those
become public funds have either or both the provided under the Tax Code.
generation of revenue and the regulation of b. In case of an appeal, it is the Court of Appeals
economic or social activity as their moving that has jurisdiction and not the Court of Tax
purposes and frequently, it is very difficult to say Appeals
which, in a particular instance, is the dominant or
principal objective. In the instant case, since the i. Rule on Compensation under the Civil
Philippines in fact produces ten (10) to fifteen Code (Art. 1279)
percent (15%) of the crude oil consumed here, the Article 1279. In order that compensation may be
imposition of increased tariff rates and a special proper, it is necessary:
duty on imported crude oil and imported oil 1. That each one of the obligors be bound
products may be seen to have some "protective" principally, and that he be at the same time a
impact upon indigenous oil production. For the principal creditor of the other;
effective, price of imported crude oil and oil 2. That both debts consist in a sum of money, or
products is increased. At the same time, it cannot if the things due or consumable, they be of the
be gainsaid that substantial revenues for the same kind, and also of the same quality if the
government are raised by the imposition of such latter has been stated;
increased tariff rates or special duty. 3. That the two debts be due;
4. That they be liquidated and demandable;
7. Debt 5. That over neither of them there be any
Tax Debt retention or controversy, commenced by third
Based on law Based on contract persons and communicated in due time to the
Not assignable Assignable debtor.

Alyssa Africa Page 12

Taxation Law
ii. Are Taxes Subject to Set-Off?
In taxation, the concept of set-off arises where a
taxpayer is liable to pay tax but the government
for one reason or another, is indebted to the said
taxpayer.
General Rule: No set-off is admissible against
the demands for taxes levied for general or local
governmental purposes
Reason: Taxes and debts are of different nature
and character. The taxes assessed are the
obligations of the taxpayer arising from law,
while the money judgment against the
government is an obligation arising from
contract, whether express or implied
Exception: When the set off took place because
both the claim of the Government for inheritance
taxes and the claim of the estate for services
rendered have already become overdue and
demandable and fully liquidated. Further, an
amount for the claim of the estate had already
been appropriated by the government by virtue
of a law.
Francia vs. IAC (1988)
Facts: Petitioner contends that his property must
not have been auctioned due to non-payment of
real estate taxes on the ground that the
government owed him money arising from the
expropriation of his land. He contends that the
claims should have been set-off by operation of
law.
Issue: Whether or not there can be off-setting of
taxes against his outstanding claim from the
government.
Held: We have consistently ruled that there can be
no off-setting of taxes against the claims that the
taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to
or greater than the tax being collected. The
collection of a tax cannot await the results of a
lawsuit against the government.
Francia contends that his tax delinquency of
P2,400.00 has been extinguished by legal
compensation. He claims that the government
owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax
Alyssa Africa Page 13
obligation had been set-off by operation of law as of
October 15, 1977.
There is no legal basis for the contention.
By legal compensation, obligations of persons, who
in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278,
Civil Code). The circumstances of the case do not
satisfy the requirements provided by Article 1279,
to wit:
(1) that each one of the obligors be bound
principally and that he be at the same time a
principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no
merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the
taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to
or greater than the tax being collected. The
collection of a tax cannot await the results of a
lawsuit against the government.
In the case of Republic v. Mambulao
Lumber Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the subject of
set-off or compensation. We stated that:
A claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are
construed uniformly, in the light of public policy, to
exclude the remedy in an action or any
indebtedness of the state or municipality to one
who is liable to the state or municipality for taxes.
Neither are they a proper subject of recoupment
since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S., 7374). "The
general rule based on grounds of public policy is
well-settled that no set-off admissible against
demands for taxes levied for general or local
governmental purposes. The reason on which the
general rule is based, is that taxes are not in the
nature of contracts between the party and party but
grow out of duty to, and are the positive acts of the
government to the making and enforcing of which,
the personal consent of individual taxpayers is not
required. ..."
We stated that a taxpayer cannot refuse to pay his
tax when called upon by the collector because he
has a claim against the governmental body not
included in the tax levy.
Philex Mining vs. CIR (1988)
Taxation Law
Facts: Philex protested the demand for payment of
the tax liabilities stating that it has pending claims
for VAT input credit/refund for the taxes it paid for
the years 1989 to 1991 in the amount of
P119,977,037.02 plus interest. Therefore these
claims for tax credit/refund should be applied
against the tax liabilities.
Issue: Whether or not the tax credit may be applied
against tax liabilities.
Held: We fail to see the logic of Philex's claim for
this is an outright disregard of the basic principle in
tax law that taxes are the lifeblood of the
government and so should be collected without
unnecessary hindrance. 24 Evidently, to
countenance Philex's whimsical reason would
render ineffective our tax collection system. Too
simplistic, it finds no support in law or in
jurisprudence.
To be sure, we cannot allow Philex to refuse
the payment of its tax liabilities on the ground that it
has a pending tax claim for refund or credit against
the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax
is that it is compulsory rather than a matter of
bargain. 25 Hence, a tax does not depend upon the
consent of the taxpayer. 26 If any taxpayer can defer
the payment of taxes by raising the defense that it
still has a pending claim for refund or credit, this
would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim
against the government or that the collection of the
tax is contingent on the result of the lawsuit it filed
against the government. 27 Moreover, Philex's
theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give
rise to confusion and abuse, depriving the
government of authority over the manner by which
taxpayers credit and offset their tax liabilities.
Domingo vs. Garlitos (1963) (Digest from Berne
Guerrero)
Facts: In Domingo vs. Moscoso (106 PHIL 1138),
the Supreme Court declared as final and executory
the order of the Court of First Instance of Leyte for
the payment of estate and inheritance taxes,
charges and penalties amounting to P40,058.55 by
the Estate of the late Walter Scott Price. The
petition for execution filed by the fiscal, however,
was denied by the lower court. The Court held that
the execution is unjustified as the Government itself
is indebted to the Estate for 262,200; and ordered
Alyssa Africa Page 14
the amount of inheritance taxes be deducted from
the Governments indebtedness to the Estate.
Issue: Whether a tax and a debt may be
compensated.
Held: The court having jurisdiction of the Estate had
found that the claim of the Estate against the
Government has been recognized and an amount
of P262,200 has already been appropriated by a
corresponding law (RA 2700). Under the
circumstances, both the claim of the Government
for inheritance taxes and the claim of the intestate
for services rendered have already become
overdue and demandable as well as fully liquidated.
Compensation, therefore, takes place by operation
of law, in accordance with Article 1279 and 1290 of
the Civil Code, and both debts are extinguished to
the concurrent amount.
Air Canada vs. CIR (2016)
Facts:
Issue:
Held: Hence, the Court of Tax Appeals properly
denied petitioner's claim for refund of allegedly
erroneously paid tax on its Gross Philippine
Billings, on the ground that it was liable instead for
the regular 32% tax on its taxable income received
from sources within the Philippines. Its
determination of petitioner's liability for the 32%
regular income tax was made merely for the
purpose of ascertaining petitioner's entitlement to a
tax refund and not for imposing any deficiency tax.
In sum, the rulings in those cases were to
the effect that the taxpayer cannot simply refuse to
pay tax on the ground that the tax liabilities were
off-set against any alleged claim the taxpayer may
have against the government. Such would merely
be in keeping with the basic policy on prompt
collection of taxes as the lifeblood of the
government.
Here, what is involved is a denial of a
taxpayer's refund claim on account of the Court of
Tax Appeals' finding of its liability for another tax in
lieu of the Gross Philippine Billings tax that was
allegedly erroneously paid.
H. Other Principles and Doctrines
1. Double Taxation
The same property must be taxed twice when it
should be taxed but once; both taxes must be
imposed on the same or subject matter, for the
same purpose, by the same State, Government or
taxing authority, within the same jurisdiction or
Taxation Law
taxing district, during the same taxing period, and
they must be the same kind or character of tax.
i. Kinds
a. Direct duplicate taxation happens when the
same subject/object of taxation is taxed TWICE
when it should only be taxed once; prohibited
and violative of the constitutional provision on
uniformity and equity
b. Indirect duplicate taxation No constitutional
violation; taxing the same property by 2 different
taxing authorities
ii. Modes of Eliminating Double Taxation
Methods used in Tax Treaties
1. Setting 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.
2. Whenever the state of source is given a full or
limited right to tax together with the state of
residence. The treaties make it incumbent upon
the state of residence to allow relief in order to
avoid double taxation.
Methods of Relief
1. Exemption Method
Income or capital which is taxable in the state of
source or situs is exempted in the state of
residence, although in some instances it may be
taken into account in determining the rate of tax
applicable to the taxpayers remaining income or
capital.
2. 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.
Remedies Against Double or Multiplicity of
Taxation:
a. Provision for tax exemption
b. Allowance of tax credit for foreign taxes paid
c. Allowance of deduction for foreign taxes paid
d. Application of Principle of Reciprocity
e. Enter into treaties and/or agreement with
foreign government;
f. Allowance and/or application for tax incentives,
and
Alyssa Africa Page 15
g. Reduction of Philippine Tax Rate
1. RMO No. 72-2010 dated August 25, 2010
Provides methods of reliefs from double taxation
on interest income, dividend income, capital
gains, royalties and business profits through the
processing of Tax Treaty Relief Applications.
CIR vs. Solidbank (2003)
Facts:
Issue: Whether or not the 20% final withholding tax
on a banks interest income forms part of the
taxable gross receipts in computing the 5% gross
receipts tax.
Held: Double taxation means taxing the same
property twice when it should be taxed only once;
that is, "x x x taxing the same person twice by the
same jurisdiction for the same thing."117 It is
obnoxious when the taxpayer is taxed twice, when
it should be but once.118 Otherwise described as
"direct duplicate taxation,"119 the two taxes must be
imposed on the same subject matter, for the same
purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period;
and they must be of the same kind or character.120
First, the taxes herein are imposed on two
different subject matters. The subject matter of the
FWT is the passive income generated in the form of
interest on deposits and yield on deposit
substitutes, while the subject matter of the GRT is
the privilege of engaging in the business of
banking.
A tax based on receipts is a tax on business
rather than on the property; hence, it is an
excise121 rather than a property tax.122 It is not an
income tax, unlike the FWT. In fact, we have
already held that one can be taxed for engaging in
business and further taxed differently for the
income derived therefrom.123 Akin to our ruling in
Velilla v. Posadas,124 these two taxes are entirely
distinct and are assessed under different
provisions.
Second, although both taxes are national in
scope because they are imposed by the same
taxing authority -- the national government under
the Tax Code -- and operate within the same
Philippine jurisdiction for the same purpose of
raising revenues, the taxing periods they affect are
different. The FWT is deducted and withheld as
soon as the income is earned, and is paid after
every calendar quarter in which it is earned. On the
other hand, the GRT is neither deducted nor
Taxation Law
withheld, but is paid only after every taxable quarter
in which it is earned.
Third, these two taxes are of different kinds
or characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not
subject to withholding.
Nursery Care Corporation vs. Acevedo (2014)
Facts: The City of Manila assessed and collected
taxes from the individual petitioners pursuant to
Section 15 (Tax on Wholesalers, Distributors, or
Dealers) and Section 17 (Tax on Retailers) of the
Revenue Code of Manila.3 At the same time, the
City of Manila imposed additional taxes upon the
petitioners pursuant to Section 21 ofthe Revenue
Code of Manila,4 as amended, as a condition for
the renewal of their respective business licenses for
the year 1999. Section 21 of the Revenue Code of
Manila stated:
Section 21. Tax on Business Subject to the Excise,
Value-Added or Percentage Taxes under the NIRC
- On any of the following businesses and articles of
commerce subject to the excise, value-added or
percentage taxes under the National Internal
Revenue Code, hereinafter referred to as NIRC, as
amended, a tax of FIFTY PERCENT (50%) OF
ONE PERCENT (1%) per annum on the gross
sales or receipts of the preceding calendar year is
hereby imposed:
A) On person who sells goods and services in the
course of trade or businesses; x x x PROVIDED,
that all registered businesses in the City of Manila
already paying the aforementioned tax shall be
exempted from payment thereof.
Issue: Whether or not there was double taxation.
Held: Double taxation means taxingthe same
property twice when it should be taxed only once;
that is, "taxing the same person twice by the same
jurisdictionfor the same thing." It is obnoxious when
the taxpayer is taxed twice, when it should be but
once. Otherwise described as "direct duplicate
taxation," the two taxes must be imposed on the
same subject matter, for the same purpose, by the
same taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes must
be of the same kind or character.
Using the aforementioned test, the Court finds that
there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and
Alyssa Africa Page 16
21 of Tax Ordinance No. 7794, since these are
being imposed: (1) on the same subject matter
the privilege of doing business in the City of Manila;
(2) for the same purpose to make persons
conducting business within the City of Manila
contribute tocity revenues; (3) by the same taxing
authority petitioner Cityof Manila; (4) within the
same taxing jurisdiction within the territorial
jurisdiction of the City of Manila; (5) for the same
taxing periods per calendar year; and (6) of the
same kind or character a local business tax
imposed on gross sales or receipts of the business.
The distinction petitioners attempt to make between
the taxes under Sections 14 and 21 of Tax
Ordinance No. 7794 is specious. The Court revisits
Section 143 of the LGC, the very source of the
power of municipalities and cities to impose a local
business tax, and to which any local business tax
imposed by petitioner City of Manila must conform.
It is apparent from a perusal thereof that when a
municipality or city has already imposed a business
tax on manufacturers, etc.of liquors, distilled spirits,
wines, and any other article of commerce, pursuant
to Section 143(a) of the LGC, said municipality or
city may no longer subject the same manufacturers,
etc.to a business tax under Section 143(h) of the
same Code. Section 143(h) may be imposed only
on businesses that are subject to excise tax, VAT,
or percentagetax under the NIRC, and that are "not
otherwise specified in preceding paragraphs." In
the same way, businesses such as respondents,
already subject to a local business tax under
Section 14 of Tax Ordinance No. 7794 [which is
based on Section 143(a) of the LGC], can no longer
be made liable for local business tax under Section
21 of the same Tax Ordinance [which is based on
Section 143(h) of the LGC].
CIR vs. SC Johnson and Sons, Inc. (1999)
Facts:
Issue:
Held: As stated earlier, the ultimate reason for
avoiding double taxation is to encourage foreign
investors to invest in the Philippines a crucial
economic goal for developing countries. 23 The goal
of double taxation conventions would be thwarted if
such treaties did not provide for effective measures
to minimize, if not completely eliminate, the tax
Taxation Law
burden laid upon the income or capital of the
investor. Thus, if the rates of tax are lowered by the
state of source, in this case, by the Philippines,
there should be a concomitant commitment on the
part of the state of residence to grant some form of
tax relief, whether this be in the form of a tax credit
or exemption. 24 Otherwise, the tax which could
have been collected by the Philippine government
will simply be collected by another state, defeating
the object of the tax treaty since the tax burden
imposed upon the investor would remain
unrelieved. If the state of residence does not grant
some form of tax relief to the investor, no benefit
would redound to the Philippines, i.e., increased
investment resulting from a favorable tax regime,
should it impose a lower tax rate on the royalty
earnings of the investor, and it would be better to
impose the regular rate rather than lose much-
needed revenues to another country.
At the same time, the intention behind the adoption
of the provision on "relief from double taxation" in
the two tax treaties in question should be
considered in light of the purpose behind the most
favored nation clause.
The purpose of a most favored nation clause is to
grant to the contracting party treatment not less
favorable than that which has been or may be
granted to the "most favored" among other
countries. 25 The most favored nation clause is
intended to establish the principle of equality of
international treatment by providing that the citizens
or subjects of the contracting nations may enjoy the
privileges accorded by either party to those of the
most favored nation. 26 The essence of the principle
is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to
which the country of residence of such taxpayer is
also a party provided that the subject matter of
taxation, in this case royalty income, is the same as
that in the tax treaty under which the taxpayer is
liable. Both Article 13 of the RP-US Tax Treaty and
Article 12 (2) (b) of the RP-West Germany Tax
Treaty, above-quoted, speaks of tax on royalties for
the use of trademark, patent, and technology. The
entitlement of the 10% rate by U.S. firms despite
the absence of a matching credit (20% for royalties)
would derogate from the design behind the most
grant equality of international treatment since the
tax burden laid upon the income of the investor is
not the same in the two countries. The similarity in
the circumstances of payment of taxes is a
condition for the enjoyment of most favored nation
treatment precisely to underscore the need for
equality of treatment.
Alyssa Africa Page 17
Deutsche Bank vs. AG Manila Branch (2013)
Facts:
Issue:
Held: Our Constitution provides for adherence to
the general principles of international law as part of
the law of the land.15 The time-honored
international principle of pacta sunt servanda
demands the performance in good faith of treaty
obligations on the part of the states that enter into
the agreement. Every treaty in force is binding upon
the parties, and obligations under the treaty must
be performed by them in good faith.16 More
importantly, treaties have the force and effect of law
in this jurisdiction.17
Tax treaties are entered into "to reconcile
the national fiscal legislations of the contracting
parties and, in turn, help the taxpayer avoid
simultaneous taxations in two different
jurisdictions."18 CIR v. S.C. Johnson and Son, Inc.
further clarifies that "tax conventions are drafted
with a view towards the elimination of international
juridical double taxation, which is defined as the
imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same
subject matter and for identical periods. The
apparent rationale for doing away with double
taxation is to encourage the free flow of goods and
services and the movement of capital, technology
and persons between countries, conditions deemed
vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly
predictable and reasonable international investment
climate and the protection against double taxation
is crucial in creating such a climate."
Simply put, tax treaties are entered into to
minimize, if not eliminate the harshness of
international juridical double taxation, which is why
they are also known as double tax treaty or double
tax agreements.
"A state that has contracted valid
international obligations is bound to make in its
legislations those modifications that may be
necessary to ensure the fulfillment of the
obligations undertaken."20 Thus, laws and
issuances must ensure that the reliefs granted
under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose
additional requirements that would negate the
availment of the reliefs provided for under
international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-
requisite for the availment of the benefits under
said agreement.
Taxation Law
Likewise, it must be stressed that there is
nothing in RMO No. 1-2000 which would indicate a
deprivation of entitlement to a tax treaty relief for
failure to comply with the 15-day period. We
recognize the clear intention of the BIR in
implementing RMO No. 1-2000, but the CTAs
outright denial of a tax treaty relief for failure to
strictly comply with the prescribed period is not in
harmony with the objectives of the contracting state
to ensure that the benefits granted under tax
treaties are enjoyed by duly entitled persons or
corporations.
Bearing in mind the rationale of tax treaties,
the period of application for the availment of tax
treaty relief as required by RMO No. 1-2000 should
not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial
of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period
under the administrative issuance would impair the
value of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely operate
to confirm the entitlement of the taxpayer to the
relief.
2. Taxpayers suit
A class suit brought by one or more taxpayers on
behalf of themselves and as representation of a
class of taxpayers situated within a taxing district
and for the purpose of seeking relief from illegal or
unauthorized acts of the government or its tax
officials which acts are injurious to their common
interest as taxpayers.
Mamba vs. Lara (2009)
Facts:
Issue:
Held: A taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed, or
that the public money is being deflected to any
improper purpose, or that there is wastage of public
funds through the enforcement of an invalid or
unconstitutional law. A person suing as a taxpayer,
however, must show that the act complained of
directly involves the illegal disbursement of public
funds derived from taxation. He must also prove
that he has sufficient interest in preventing the
illegal expenditure of money raised by taxation and
that he will sustain a direct injury because of the
enforcement of the questioned statute or
contract. In other words, for a taxpayers suit to
prosper, two requisites must be met: (1) public
Alyssa Africa Page 18
funds derived from taxation are disbursed by a
political subdivision or instrumentality and in doing
so, a law is violated or some irregularity is
committed and (2) the petitioner is directly affected
by the alleged act.
In light of the foregoing, it is apparent that
contrary to the view of the RTC, a taxpayer need
not be a party to the contract to challenge its
validity. As long as taxes are involved, people have
a right to question contracts entered into by the
government.
3. Kinds of Taxes
Classification or Kinds of Taxes:
a. As to subject matter:
i. Personal, poll or capitation tax of a fixed
amount imposed upon persons residing within a
specified territory, whether citizens or not without
regard to their property, occupation or business in
which they may be engaged
ii. Property tax imposed on property, whether real
or personal, in proportion either to its value or some
other reasonable rule of apportionment
iii. Excise or privilege charge imposed upon the
performance of an act, the enjoyment of a privilege
or engaging in an occupation, profession or
business.
b. As to who bears the burden and incidence:
i. Direct taxes which are exacted from the very
person who, it is intended or desired, should pay
them. The liability for the payment of tax as well as
the impact of the tax falls on the same person.
ii. Indirect tax wherein the incidence or liability for
the payment falls on one person but the burden
may be shifted or passed on to another not as a tax
but as part of the purchase price
c. As to purpose:
i. General, fiscal or revenue tax imposed for the
general or ordinary purposes of the Government, to
raise revenue for governmental needs;
ii. Special regulatory or sumptuary tax imposed
for a special purpose, to achieve some social or
economic ends irrespective of whether revenue is
actually raised or not
d. As to how amount is determined
i. Specific tax of a fixed amount imposed by the
head or number or by some standard of weight or
measurement; it requires no valuation other than a
listing or classification of the objects to be taxed
Taxation Law
ii. Ad Valorem tax of a fixed portion of the value of
the property with respect to which the tax is
assessed; it requires the intervention of assessors
or appraisers to estimate the value of such property
before the amount due from each taxpayer can be
determined
iii. Mixed tax having both the characteristics of
specific tax and ad valorem tax
e. As to taxing authority
i. National levied by the National Government
through Congress, and administered by the BIR or
the BOC
ii. Local or Municipal levied by the LGUs through
their respective Sanggunians, and administered by
the local executive government through the local
treasurer
f. As to rate
i. Progressive or graduated the tax rate increases
as the tax base or bracket increases
ii. Regressive the tax rate decreases as the tax
base increases
iii. Proportionate tax rate is based on a fixed
percentage of the amount of the property receipts
or other bases to be taxed
4. Construction and Applicability of Tax Laws
Nature of Tax Laws
1. Not political in character effective even under
belligerent occupation
2. Civil in nature and not penal in character not
subject to ex post facto law prohibitions
Construction of Tax Laws:
1. Prospective in operation
2. Legislative intention must be considered
Tax statues are to receive a reasonable
construction with a view to carrying out their
purpose and intent
3. Where there is doubt in every case of doubt,
in tax statutes imposing payment of tax, laws are
construed strictly against the government and
liberally in favor of the taxpayer.
4. Where the language is plain Rule of strict
construction against the government does not apply
where the language of the tax law is plain and there
is no doubt as to the legislative intent. The words
employed are to be given their ordinary meaning
5. Public purpose is always presumed
6. Provisions of the taxing act are not to be
extended by implication
Alyssa Africa Page 19
Hornbook Doctrine
The interpretation of tax laws that a statute will not
be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously. A tax
cannot be imposed without clear and express
words for that purpose.
7. Tax laws are special and prevail over general
laws
CIR vs. Filipinas Compania De Seguros (1960)
Facts:
Issue:
Held: Petitioner, however, contends that the above-
quoted provision refers only to fixed taxes on
occupation and does not cover fixed taxes on
business, such as the real estate dealer's fixed tax
herein involved. This is technically correct, but we
note from the deliberations in the Senate, where
the proviso in question was introduced as an
amendment, that said House Bill No. 5919 which
became Republic Act No. 1856 was considered,
amended, and enacted into law, in order precisely
that the "iniquitous effects" which were then being
felt by taxpayers. in general, on account of the
approval of Republic Act No. 1612, Which was
being given retroactive effect by the Bureau of
Internal Revenue by collecting these taxes
retroactively from January 1, 1956, be eliminated
and complaints against such action be finally
settled. (See Senate Congressional Record, May 4,
1957, pp. 10321033.)
It is also to be observed that said House Bill
No. 5819 as originally presented, was expressly
intended to amend certain provisions of the
National Internal Revenue Code dealing on fixed
taxes on business. The provisions in respect of
fixed tax on occupation were merely subsequently
added. This would seem to indicate that the proviso
in question was intended to cover not only fixed
taxes on occupation, but also fixed taxes on
business. (Senate Congressional Record, March 7,
1957, p. 444.)The fact that said proviso was placed
only at the end of paragraph "(B) On occupation" is
not, therefore, view of the circumstances, decisive
and unmistakable indication that Congress limited
the proviso to occupation taxes.
Even though the primary purpose of the
proviso is to limit restrain the general language of a
statute, the legislature, unfotunately, does not
always use it with technical correctness;
consequently, where its use creates an ambiguity, it
is the duty of the court to ascertain the legislative
intention, through resort to usual rules of
construction applicable to statutes, generally an
Taxation Law
give it effect even though the statute is thereby
enlarged, or the proviso made to assume the force
of an independent enactment and although a
proviso as such has no existence apart from
provision which it is designed to limit or to qualify.
(Statutory Construction by E. T. Crawford, pp. 604-
605.)
. . . When construing a statute, the reason for its
enactment should be kept in mind, and the statute
should be construe with reference to its intended
scope and purpose. (Id. at p. 249.)
On the general principle of prospectivity of statute
on the language of Republic Act 1612 itself,
especially Section 21 thereof, and on the basis of
its intended scope and purpose as disclosed in the
Congressional Record we find ourselves in
agreement with the Court of Tax Appeals.
CIR vs. CA (1997)
Facts:
Issue: Whether or not the private respondent falls
under the purview of independent contractor
pursuant to Section 205 of the Tax Code.
Held: We disagree. Petitioner Commissioner of
Internal Revenue erred in applying the principles of
tax exemption without first applying the well-settled
doctrine of strict interpretation in the imposition of
taxes. It is obviously both illogical and impractical to
determine who are exempted without first
determining who are covered by the aforesaid
provision. The Commissioner should have
determined first if private respondent was covered
by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other
burdens on the populace, before asking Ateneo to
prove its exemption therefrom. The Court takes this
occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that "(a) statute will not be
construed as imposing a tax unless it does
so clearly, expressly, and unambiguously . . . (A)
tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general
rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness
to tax laws and the provisions of a taxing act
are not to be extended by
8
implication." Parenthetically, in answering the
question of who is subject to tax statutes, it is basic
that "in case of doubt, such statutes are to be
construed most strongly against the government
and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be
Alyssa Africa Page 20
imposed beyond what statutes expressly and
clearly import." 9
To fall under its coverage, Section 205 of the
National Internal Revenue Code requires that the
independent contractor be engaged in the business
of selling its services. Hence, to impose the three
percent contractor's tax on Ateneo's Institute of
Philippine Culture, it should be sufficiently proven
that the private respondent is indeed selling its
services for a fee in pursuit of an independent
business. And it is only after private respondent has
been found clearly to be subject to the provisions of
Sec. 205 that the question of exemption therefrom
would arise. Only after such coverage is shown
does the rule of construction that tax exemptions
are to be strictly construed against the taxpayer
come into play, contrary to petitioner's position. This
is the main line of reasoning of the Court of Tax
Appeals in its decision, 10 which was affirmed by the
CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of
Philippine Culture
After reviewing the records of this case, we find no
evidence that Ateneo's Institute of Philippine
Culture ever sold its services for a fee to anyone or
was ever engaged in a business apart from and
independently of the academic purposes of the
university.
Manila International Airport Authority vs. CA
(2006)
Facts:
Issue:
Held: Under Section 2(10) and (13) of the
Introductory Provisions of the Administrative Code,
which governs the legal relation and status of
government units, agencies and offices within the
entire government machinery, MIAA is a
government instrumentality and not a government-
owned or controlled corporation. Under Section
133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person
because it is not subject to "[t]axes, fees or charges
of any kind" by local governments. The only
exception is when MIAA leases its real property to a
"taxable person" as provided in Section 234(a) of
the Local Government Code, in which case the
specific real property leased becomes subject to
real estate tax. Thus, only portions of the Airport
Lands and Buildings leased to taxable persons like
private parties are subject to real estate tax by the
City of Paraaque.
Taxation Law
5. Tax Amnesty
It is a general pardon or intentional overlooking by ii. Old Amnesty Laws RA No. 9480 dated
the state of its authority to impose penalties on May 24, 2007 and RA No. 9399 dated March
persons otherwise guilty of tax evasion or violation 20, 2007 (Concept Only)
of a tax law. RA 9480 grants tax amnesties to those who will
Tax Exemption Tax Amnesty avail for tax delinquencies in 2005 and prior
Connotes condonation years.
Immunity from tax from payment of existing RA 9399 grants tax amnesties to business
tax liabilities enterprises operating in the special economic
Grantee does not need zones or freeport zones.
Grantee pays a portion
to pay anything
Can be availed of by 1. Administrative Amnesty Last Priority in
Not always available Tax Audit
any qualified taxpayer
Prospective in Retroactive in
application application I. Inherent Limitations
Tax liability does not 1. Public Purpose
Tax liability attaches to a Public use is no longer confined to the traditional
attach to one enjoying a
taxpayer who wants to notion of use by the public but held synonymous
privilege of tax
avail of tax amnesty with public interest, public benefit, public welfare,
exemption
Immunity from criminal, and public convenience.
Immunity from civil
civil, and administrative
liability only Levy is for public purpose if:
liability
Tax amnesty requires 1. it is for the welfare of the nation or greater
Tax exemption requires the payment of certain portion of the population
no payment of tax percentage of unpaid 2. it affects the area as a community rather than as
taxes individuals
Prospective in Retroactive in 3. designed to support the services of the
application application government for some of the recognized objects of
the country
i. Nature and Benefits
Rules on Amnesty: Test to Determine Public Purpose
a. Like tax exemption, it is never favored nor 1. Duty test whether the thing to be furthered by
presumed and construed strictly against the the appropriation of public revenue is something
taxpayer which is the duty of the State as a government to
b. The government is not estopped from provide; and
questioning the tax liability even if amnesty tax 2. Promotion of General Welfare Test - whether the
payments were already received proceeds of the tax will directly promote the welfare
Reason: Erroneous application and enforcement of the community in equal measure.
of the law by public officers do not block
subsequent correct application of the statute. Pascual vs. Secretary of Public Works (1960)
The government is never estopped by mistakes Facts:
or errors of its agents. Issue:
c. Defense of tax amnesty, like insanity, is a Held: The validity of a statute depends upon the
personal defense. powers of Congress at the time of its passage or
Reason: Relates to the circumstances of a approval, not upon events occurring, or acts
particular accused and not the character of the performed, subsequently thereto, unless the latter
acts charged in the information. consists of an amendment of the organic law,
removing, with retrospective operation, the
To avail of a tax amnesty granted by the constitutional limitation infringed by said statute.
Government, and to be immune from suit on its Referring to the P85,000.00 appropriation for the
delinquencies, the taxpayer must have projected feeder roads in question, the legality
voluntarily disclosed his previously untaxed thereof depended upon whether said roads were
income and must have paid the corresponding public or private property when the bill, which, latter
tax on such previously untaxed income. on, became Republic Act 920, was passed by

Alyssa Africa Page 21

Taxation Law
Congress, or, when said bill was approved by the
President and the disbursement of said sum
became effective, or on June 20, 1953 (see section
13 of said Act). Inasmuch as the land on which the
projected feeder roads were to be constructed
belonged then to respondent Zulueta, the result is
that said appropriation sought a private purpose,
and hence, was null and void. 4 The donation to the
Government, over five (5) months after the
approval and effectivity of said Act, made,
according to the petition, for the purpose of giving a
"semblance of legality", or legalizing, the
appropriation in question, did not cure its
aforementioned basic defect. Consequently, a
judicial nullification of said donation need not
precede the declaration of unconstitutionality of
said appropriation.
2. Legislative in Nature
Delegata potestas non potest delegari (A delegated
power cannot be further delegated)
Since the power of taxation is a power that is
exercised by Congress as delegates of the people,
then as a general rule, Congress could not re-
delegate this delegated power
Basis: Delegated power constitutes not only a debt
but a duty to be performed by the delegate through
the instrumentality of his own judgment and not
through the intervening mind of another.
i. Delegation to Local Government Units
The Constitution grants each LGU the power to
create its own sources of revenue and levy,,
taxes, fees and charges which shall accrue
exclusively to the LGU (Const. Art. X Sec. 5)
ii. Delegation to the President
1. Sec. 28(2) Article VI of the Constitution
Section 28 (2), Article VI 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.
2. Flexible Tariff Clause Sec. 401 of the
Tariff and Customs Code
Section 401. Flexible Clause
a. In the interest of national economy, general
welfare and/or national security, and subject to
the limitations herein prescribed, the President,
Alyssa Africa Page 22
upon recommendation of the National Economic
and Development Authority is hereby
empowered: (1) to increase, reduce or remove
existing protective rates of import duty (including
any necessary change in classification). The
existing rates may be increased or decreased to
any level, in one or several stages but in no case
shall the increased rate of import duty be higher
than a maximum of 100% ad valorem; (2) to
establish import quota or to ban imports of any
commodity, as may be necessary; and (3) to
impose an additional duty on all imports not
exceeding 10% ad valorem whenever
necessary; Provided, That upon periodic
investigations by the Tariff Commission and
recommendation of the NEDA, the President
may cause a gradual reduction of protection
levels granted in Section 140 of this Code,
including those subsequently granted pursuant
to this section.
---( to be continued hehe)
iii. Delegation to Administrative Agencies
Also known as the power of subordinate
legislation subject to the following tests:
a. Completeness test the law must be
complete in all its essential terms and conditions
when it leaves the legislature so that there will
be nothing left for the delegate to do when it
reaches him except to enforce it.
b. Sufficient standard test 0 the law must offer a
sufficient standard to specify the limits of the
delegates authority, announce legislative policy,
and specify conditions under which it is to be
implemented.
Pepsi Cola Bottling Co. of the Phils vs.
Municpality of Tanauan (1976)
Facts:
Issue:
Held:: Undoubtedly, the taxing authority conferred
on local governments under Section 2, Republic Act
No. 2264, is broad enough as to extend to almost
"everything, accepting those which are mentioned
therein." As long as the text levied under the
authority of a city or municipal ordinance is not
within the exceptions and limitations in the law, the
same comes within the ambit of the general rule,
pursuant to the rules of exclucion
attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the
prohibition against municipalities and municipal
districts to impose "any percentage tax or other
taxes in any form based thereon nor impose taxes
Taxation Law
on articles subject to specific tax except gasoline,
under the provisions of the National Internal
Revenue Code." For purposes of this particular
limitation, a municipal ordinance which prescribes a
set ratio between the amount of the tax and the
volume of sale of the taxpayer imposes a sales tax
and is null and void for being outside the power of
the municipality to enact. 20But, the imposition of "a
tax of one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity" on all soft drinks
produced or manufactured under Ordinance No. 27
does not partake of the nature of a percentage tax
on sales, or other taxes in any form based thereon.
The tax is levied on the produce (whether sold or
not) and not on the sales. The volume capacity of
the taxpayer's production of soft drinks is
considered solely for purposes of determining the
tax rate on the products, but there is not set ratio
between the volume of sales and the amount of the
tax. 21
Nor can the tax levied be treated as a specific tax.
Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented
liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils
and other fuels, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine,
opium and other habit-forming drugs. 22 Soft drink is
not one of those specified.
AbakadaGuro Party List vs. Executive Secretary
(2005)
Facts:
Issue:
Held: Congress simply granted the Secretary of
Finance the authority to ascertain the existence of a
fact, namely, whether by December 31, 2005, the
value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (24/5%) or
the national government deficit as a percentage of
GDP of the previous year exceeds one and one-
half percent (1%). If either of these two instances
has occurred, the Secretary of Finance, by
legislative mandate, must submit such information
to the President. Then the 12% VAT rate must be
imposed by the President effective January 1,
2006. There is no undue delegation of
legislative power but only of the discretion as to
the execution of a law. This is constitutionally
permissible.57 Congress does not abdicate its
functions or unduly delegate power when it
describes what job must be done, who must do it,
and what is the scope of his authority; in our
Alyssa Africa Page 23
complex economy that is frequently the only way in
which the legislative process can go forward.
Garcia vs. The Executive Secretary (1992)
Facts:
Issue:
Held: Turning first to the question of
constitutionality, under Section 24, Article VI of the
Constitution, the enactment of appropriation,
revenue and tariff bills, like all other bills is, of
course, within the province of the Legislative rather
than the Executive Department. It does not follow,
however, that therefore Executive Orders Nos. 475
and 478, assuming they may be characterized as
revenue measures, are prohibited to the President,
that they must be enacted instead by the Congress
of the Philippines. There is thus explicit
constitutional permission 1 to Congress to authorize
the President "subject to such limitations and
restrictions is [Congress] may impose" to fix "within
specific limits" "tariff rates . . . and other duties or
imposts . . ."
CIR vs. CA (1996)
Facts:
Issue:
Held:
3. Territorial
Situs of Taxation
Place of taxation; it is the place or authority that has
the right to impose and collect taxes.
Factors that Determine Situs
1. Kind of tax being levied;
2. Situs of the Property;
3. Residence of the Taxpayer;
4. Source of Income;
5. Citizenship of the taxpayer; and
6. Situs of the Excise, privilege, business or
occupation being taxed
i. Rule on situs of taxation of different kinds
of taxes
Situs of Subjects of Tax:
1. Persons poll, capitation or community taxes
are based upon the residence of the taxpayer
regardless of the source of income or location of
the property of the taxpayer
2. Property
a. Real property where the property is located
b.. Tangible personal property where the
property is physically located although the owner
resides in another jurisdiction
Taxation Law
c. Intangible personal property domicile of the
owner
exceptions: a. when the property has acquired a
business situs in another jurisdiction; b when the
law provides for the situs of the subject of tax
d. income factors that determine the situs of
income tax:
i. nationality or citizenship of the taxpayer;
ii. residence or domicile;
iii. source of income
e. excise or privilege depends upon the place
where the act is performed or occupation is
engaged in
f. gratuitous transfer transmission of property
from a donor to a donee or from a decedent to
his heirs may be subject to taxation in the state
where the transferor is a citizen or a resident or
where the property is located in case of a non-
resident
4. International Comity
Comity is the respect accorded by nations to each
other because they are equals
i. Sec. 2 Art. II of the Constitution
Section 2. The Philippines renounces war as an
instrument of national policy, adopts the
generally accepted principles of international law
as part of the law of the land and adheres to the
policy of peace, equality, justice, freedom,
cooperation, and amity with all nations.
ii. Sec. 32(b)(7)(a) of the NIRC
Section 32. Income derived by foreign
government Income derived from investments
in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits
in banks in the Philippines by (i) foreign
governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign
governments, and (iii)international or regional
financing institutions established by foreign
governments.
iii. Sec. 159 of the Local Government Code
Section 159. Exemptions The following are
exempt from the community tax:
1. Diplomatic and consular representatives; and
2. Transient visitors when their stay in the
Philippines does not exceed 3 months.
5. Exemption of Government entities, agencies
and instrumentalities
Inherent Limitation of Exemption of
Government from Taxation covers:
Alyssa Africa Page 24
1. Government entities;
2. Government agencies; and
3. Government instrumentalities
i. Sec. 27(C) of the NIRC
Section 27. The provisions of existing special or
general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities
owned or controlled by the Government, except
the GSIS, SSS, the Philippine Health Insurance
Corporation, the local water districts, and the
Philippine Charity Sweepstakes Office shall pay
suchr ate of tax upon their taxable income as are
imposed by this Section upon corporations or
associations engaged in similar business
industry or activity.
ii. Sec. 133(o) of the Local Government Code
Section 133. Common Limitations on the Taxing
Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the
following:
(o) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government units.
Manila International Airport Authority vs. CA
(2006)
Facts:
Issue:
Held:
(NOTE: PITEL Public Purpose, International
Comity, Territorial, Exemption of Govt Entities,
and Legislative in Nature)
J. Constitutional Limitations
1. Due Process and Equal Protection
Tan vs. Del Rosario (1994)
Facts:
Issue:
Held:
PAGCOR vs. The BIR (2011)
Facts:
Issue:
Held:
2. Prohibition against imprisonment for non-
payment of poll tax
i. Sec. 20 Art. III of the Constitution
Article 3. Bill of Rights
Taxation Law
Section 20. No person shall be imprisoned for
debt or non-payment of a poll tax
ii. Community Tax under the Local
Government Code
Article VI. Community Tax
Section 156. Community Tax Cities or
municipalities may levy a community tax in
accordance with the provisions of this Article.
Section 157. Individuals Liable to Community
Tax. Every inhabitant of the Philippines 18
years of age or over who has been regularly
employed on a wage or salary basis for at least
30 consecutive working days during any
calendar year, or who is engaged in business or
occupation, or who owns real property with an
aggregate assessed value of P1,000.00 or more,
or who is required by law to file an income tax
return shall pay an annual community tax of
P5.00 and an annual additional tax of P1.00 for
every P1,000.00 of income regardless of
whether from business, exercise of profession or
from property which in no case shall exceed
P5,000.00.
In the case of husband and wife, the
additional tax herein imposed shall be based
upon the total property owned by them and the
total gross receipts or earnings derived by them.
Section 158. Juridical Persons Liable to
Community Tax. Every corporation no matter
how created or organized, whether domestic or
resident foreign, engaged in or doing business in
the Philippines shall pay an annual community
tax of P500.00 and an annual additional tax,
which, in no case, shall exceed P10,000.00 in
accordance with the following schedule:
(1) For every P5,000.00 worth of real property
in the Philippines owned by it during the
preceding year based on the valuation used for
the payment of real property tax under existing
laws, found in the assessment rolls of the city
or municipality where the real property is
situated P2.00; and
(2) For every P5,000.00 of gross receipts or
earnings derived by it from its business in the
Philippines during the preceding year P2.00
The dividends received by a corporation from
another corporation however, shall for the
purpose of the additional tax, be considered as
part of the gross receipts or earnings of said
corporation.
Alyssa Africa Page 25
Section 159. Exemptions. The following are
exempt from the community tax:
(1) Diplomatic and consular representatives; and
(2) Transient visitors when their stay in the
Philippines does not exceed 3 months.
3. Uniformity and Equality of Taxation
i. Sec. 28(1) Art. VI of the Constitution
Section 28. The rule of taxation shall be uniform
and equitable. The Congress shall evolve a
progressive system of taxation
Tolentino vs. Secretary of Finance (1995)
Facts:
Issue:
Held:
AbakadaGuro Party List vs. Executive Secretary
(2005)
Facts:
Issue:
Held:
Tan vs. Del Rosario (1994)
Facts:
Issue:
Held:
4. Authority of the President to impose tariff
rates
5. Non-impairment of obligation of contracts
/Grant of Franchise
i. Sec. 10 Art. III of the Constitution
Section 10. No law impairing the obligation of
contracts shall be passed.
ii. Sec. 11 Art. XII of the Constitution
Article XII. National Economy and Patrimony
Section 11. No franchise, certificate, or any other
form of authorization for the operation of a public
utility shall be granted except to citizens of the
Philippines or to corporations or associations
organized under the laws of the Philippines at
least 60% of whose capital is owned by such
citizens, nor shall such franchise, certificate or
authorization be exclusive in character or for a
longer period than 50 years. Neither shall any
such franchise or right be granted except under
the condition that it shall be subject to
amendment, alteration, or repeal by the
Congress when the common good so requires.
The state shall encourage equity participation in
public utilities by the general public. The
Taxation Law
participation of foreign investors in the governing
body of any public utility enterprise shall be
limited to their proportionate share in its capital,
and all the executive and managing officers of
such corporation or association must be citizens
of the Philippines.
Meralco vs. Province of Laguna (1999)
Facts:
Issue:
Held:
Smart Communications, Inc. vs. City of Davao
(2008)
Facts:
Issue:
Held:
6. Infringement of Religious Freedom
i. Sec. 5 Art. III of the Constitution
Section 5. No law shall be made respecting an
establishment of religion, or prohibiting the free
exercise thereof. The free exercise and
enjoyment o religious profession and worship,
without discrimination or preference, shall
forever be allowed. No religious test shall be
required for the exercise of civil or political rights.
American Bible Society vs. City of Manila (1957)
Facts:
Issue:
Held:
Tolentino vs. Secretary of Finance (1995)
Facts:
Issue:
Held:
7. Infringement of Press Freedom
i. Sec. 4 Art. III of the Constitution
Section 4. No law shall be passed abridging the
freedom of speech, of expression, or the press,
o the right to the people peaceably to assemble
and petition the government for redress of
grievances.
Tolentino vs. Secretary of Finance (1995)
Facts:
Issue:
Held:
8. Exemption of Religious, Charitable and
Educational Institutions from Tax
i. Sec. 28(3) Art. VI of the Constitution
Alyssa Africa Page 26
Article VI. Legislative Department
Section 28(3) Charitable institutions, churches
and parsonages or convents appurtenant
thereto, mosques, non profit cemeteries and all
lands, buildings and improvements, actually
directly, and exclusively used for religious
charitable or educational purposes shall be
exempt from tax.
ii. Sec. 4(3) and (4) Art. XIV of the
Constitution
Article XIV. Education, Science and Technology,
Arts, Culture, and Sports
Section 4.
(3) 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. Upon the dissolution or cessation of the
corporate existence of such institutions, their
assets shall be disposed of in the manner
provided by law.
Proprietary educational institutions, including
those cooperatively, owned may likewise be
entitled to such exemptions subject to the
limitations provided by law including restrictions
on dividends and provisions for reinvestment.
(4) Subject to conditions prescribed by law, all
grants, endowments, donations, or contributions
used, actually, directly and exclusively for
educational purposes shall be exempt from tax.
iii. Secs. 27(B) and 30 of the NIRC
Section 27. Rates of Income Tax on Domestic
Corporations.
(B) Proprietary Educational Institutions and
Hospitals. Proprietary educational institutions
and hospitals which are nonprofit shall pay a tax
of 10% on their taxable income except those
covered by Subsection (D)[Passive Income]
hereof: Provided, That if the gross income from
unrelated trade, business or other activity
exceeds 50% of the total gross income derived
by such educational institutions or hospitals from
all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable
income. For purposes of this Subsection, 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. A proprietary educational institution is
any private school maintained and administered
Taxation Law
by private individuals or groups with an issued
permit to operate from the Department of Culture
and Sports, or the Commission on Higher
Education, or the Technical Education and Skills
Development Authority, as the case may be, in
accordance with existing laws and regulations.
Section 30. Exemptions from Tax on
Corporations. The following organizations shall
not be taxed under this Title 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 a mutual
aid association or a non0stock corporation
organized by employees providing for the
payment of life, sickness, accident, or there
benefits exclusively to the members of such
society, order, or association, or nonstock
corporation or their dependents;
(D)Cemetery company owned and operated
exclusively for the benefit of its members;
(E) Nonstock corporation or association
organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no
part of its net income or asset shall belong to or
inure to the benefit of any member, organizer,
officer of 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 insures to the
benefit of any private stockholder or individual;
(G) Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare;
(H) A nonstock and nonprofit educational
institution;
(I) Government educational institution;
(J) Farmers or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consist solely of
assessments, dues and fees collected from
members for the sole purpose of meeting its
expenses; and
Alyssa Africa Page 27
(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.
CIR vs. CA (1998)
Facts:
Issue:
Held:
Lung Center of the Philippines vs. Quezon City
(2004)
Facts:
Issue:
Held:
9. Prohibition on the use of tax levied for
special purpose
i. Sec. 29 Art. VI of the Constitution
Article VI. Legislative Department
Section 29. (1) No money shall be paid out of the
Treasury except in pursuance of an
appropriation made by law.
(2) No public money or property shall be
appropriated, applied, paid or employed, directly
or indirectly, for the use, benefit, or support of
any sect, church, denomination, sectarian
institution, or system of religion, or of any priest,
preacher, minister, 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.
(3) All money collected on 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.
Osmena vs. Orbos (1993)
Facts:
Taxation Law
Issue:
Held:
10. Origin of Appropriation, Revenue and Tariff
Bills
i. Sec. 24 Art. VI of the Constitution
Article VI. Legislative Department
Section 24. All appropriation, revenue or tariff
bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall
originate exclusively in the House of
Representatives, but the Senate may propose or
concur with amendments.
Tolentino vs. Secretary of Finance (1995)
Facts:
Issue:
Held:
11. Grant of Tax Exemption
i. Sec. 28(4) Art. VI of the Constitution
Article VI Legislative Department
Section 28. (4) No law granting any tax
exemption shall be passed without the
concurrence of a majority of all the Members of
the Congress.
12. Non-impairment of the Supreme Courts
Jurisdiction
i. Secs. 2 and 5 Art. VIII of the Constitution
Article VIII. Judicial Department
Section 2. 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 Section 5 hereof.
No law shall be passed reorganizing the
Judiciary when it undermines the security of
tenure of its Members.
Section 5. 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
the 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,
Alyssa Africa Page 28
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 6
months without the consent of the judge
concerned.
(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.
Taxation Law
II. Income Taxation
A. Income Tax System
1. Global
The total allowable deductions as well as personal
and additional exemptions, in case of individuals, or
the total allowable deductions, in case of
corporations, are deducted from the gross income
to arrive at the net taxable income subject to the
graduated income tax rates ranging from 3% to
70%, in case of individuals, or to the two-tiered
income tax rates of 25% and 35%, in the case of
corporations.
2. Schedular
There are different types of incomes that are
subject to different sets of graduated or flat income
tax rates. The applicable tax rate will depend on the
classification of the taxable income and the basis
could be gross income or net income. Separate
income tax return or capital gains tax return,
whichever is applicable, is filed by the recipient of
income for the particular types of income received,
but no income tax return is filed by the recipient of
passive income subject to final withholding tax
because the withholding agent is primarily
responsible for the filing of the withholding tax
return and the payment of final tax to the BIR on
such income.
3. Semi-schedular or Semi-Global
All compensation income, business or professional
income, capital gain, passive income, and other
income not subject to final tax 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, and other income not subject to final tax, in
the case of corporation, as well as personal and
additional exemptions, in the case of individual
taxpayer, the taxable income is subjected to one
set of graduated tax rates, if an individual, or
normal corporate income tax rate, if a corporation.
B. Characteristics and Features of the
Philippine Income Tax System
1. Direct Tax tax burden is borne by the income
recipient upon whom the tax is imposed
Alyssa Africa Page 29
2. Progressive Tax - tax base increases as the tax
rate increases founded on the ability to pay
principle and is consistent with the Constitutional
provision that Congress shall evolve a progressive
system of taxation
3. Adopted the most comprehensive system of
imposing income tax by adopting the citizenship
principle, the residence principle and the source
principle.
4. Follows the semi-schedular or semi-global
system of income taxation, although certain passive
investment incomes, capital gains on sale of shares
of stock of domestic corporations and real property
located in the Philippines, and other income are
subject to final taxes at preferential tax rates.
5. Of American Origin the authoritative decisions
of the US courts and officials charged with
enforcing the US Internal Revenue Code have
peculiar force and persuasive effect for the
Philippines
C. Definition of Income
Income Tax - a tax on all yearly profits arising from
property, professions, trades or offices, or as a tax
on persons income, emoluments, profits and the
like.
Fisher vs. Trinidad
Facts: Frederick C. Fisher was a stockholder of the
Philippine American Drug Company. When the
corporation declared stock dividends, the appellant
was issued his proportionate share of P24,800
stock dividend. The appellant paid his income tax of
P889.91 under protest on the ground that the stock
dividend is a capital and not income.
Issue: Whether or not stock dividends are income
taxable under the provisions of Section 25, Act no.
2833.
Held: No, a stock dividend is not income, but capital
of the corporation. The appellee argues that there
is nothing in Section 25 of Act no. 2833 which
contravenes the provisions of the Jones Law. That
Taxation Law
may be admitted. He further argues that the Act of
Congress expressly authorized the Philippine
Legislatures to provide for an income tax. That fact
may also be admitted. But a careful reading of that
Act will show that, while it permitted a tax upon
income, the same provided that income shall
include gains, profits, and income derived from
salaries, wages, or compensation for personal
services, as well as from interest, rent, dividends,
securities, etc. The appellee emphasizes the
income from dividends. Of course, income received
as dividends is taxable as an income but an income
from dividends is a very different thing from receipt
of a stock dividend. One is an actual receipt of
profits; the other is a receipt of a representation of
the increased value of the assets of corporation.
1. When is Income Taxable?
Income, gain, or profit is subject to income tax
when the following conditions are present:
a. income, gain or profit;
b. income, gain or profit is received or realized
during the taxable year; and
c. income, gain or profit is not exempt from income
tax
Notes:
As a general rule, a mere increase in the value of
property is not income but merely an unrealized
increase in capital. For the same reason, a
decrease in the value of the property is not
normally allowable as a deductible loss. No income
is derived nor a loss incurred by the owner until
after the actual sale or other disposition of the
property in excess of its cost.
i. Realization Test
1. Section 38 of RR No. 2-40 dated February 10,
1940
Section 38. Bases of Computation Approved
standard methods of accounting will be ordinarily
regarded as clearly reflecting income. A method of
accounting will not, however, be regarded as clearly
reflecting income unless all items of gross income
and all deductions are treated with reasonable
consistency. All items of gross income shall be
included in the gross income for the taxable year in
which they are received by the taxpayer and
Alyssa Africa Page 30
deductions taken accordingly, unless in order to
reflect income such amounts are to be properly
accounted for as of a different period. For instance,
in any case in which it is necessary to use an
inventory, no accounting in regard to purchases
and sales will correctly reflect income except an
accrual method. A taxpayer is deemed to have
received items of gross income which have been
credited to or set apart for him without restriction.
On the other hand, appreciation in value of property
is not even an accrual of income to a taxpayer prior
to the realization of such appreciation through sale
or conversion of the property.
Manila Mandarin Hotels Inc. vs. CIR (1997)
Facts: Petitioner Manila Mandarin filed a protest on
the assessments made to them rendering them
with tax deficiencies on income. One of these
deficiencies includes a deficiency on percentage
tax assessment due to the imposition of the tax on
deposits made by its clients for the use of the hotel
facilities. Petitioner contends that these deposits, if
not applied against hotel bills are not subject to
percentage tax because these deposits partake of
the nature of a security deposit which cannot be
classified as income.
Issue: Whether or not the security deposits should
be treated as part of gross income subject to
percentage tax.
Held: No, it must not be part of gross income
subject to percentage tax.
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met: (a) the earning process is
complete or virtually complete, and (b) an
exchange has taken place. This principle requires
that revenue must be earned before it is recorded.
Thus, the amounts received in advance are not
treated as revenue of the period in which they are
received but as revenue of the future period or
periods in which they are earned. These amounts
are carried as unearned revenue, that is, liabilities
to transfer goods or render services in the future
until the earning process is complete.
Taxation Law
Hence, it is only upon the use of the
reserved facilities or the default of the reserving
guest to cancel the reservation on time that the
deposit is clearly convertible to revenues. Since the
deposits are payment for future services it cannot
be treated as part of its gross income until the
earning process is complete.
BIR Ruling No. DA-049-98
Case I
Facts: On October 1, 1997, Mr. A leased his lot to X
company for a period of 10 years at a monthly rent
of P1,000.00. The written lease contract requires
lessee X to make an advance rental payment
equivalent to 2 years rentals. X company paid a
lump sum of P24,000 corresponding to and
credited as rentals for the first 24 months of the
lease. Bothe the lessor and lessee are on a
calendar year tax cycle.
Issue: Whether or not the entire P24,000 is to be
recorded as taxable income during the year it was
received and whether or not X Company can
deduct the entire amount as deductible expense in
its income tax return.
Held: If the advance payment is prepaid rental, then
such payment is taxable to the lessor in the year
when received, even though the lessor is on the
accrual or cash method of accounting. On the part
of the lessee, such prepaid rental is to be treated
as capital expenditure and he cannot deduct in the
year of payment the full amount of the prepaid rent
as business expense but must spread them over
the entire remaining term of the lease.
Mr. A is required to declare the entire
amount of P24,000.00 as his taxable income for the
year 1997 when he received the same. On the
other hand, X company cannot deduct the entire
amount of P24,000 as deductible expense in its
income tax return for the year 1997 but must
amortize the same over the entire period of the
lease.
Case II
Facts: On September 1, 1997, Mr. B leased an
office unit to ABC Company for a period of 3 years
Alyssa Africa Page 31
at a monthly rent of P5,000. Bills for electricity,
telephone and water shall be paid by Lessee ABC
Company. The written lease contract required that
lessee ABC Company make a Security deposit in
cash in the amount of P15,000. This cash security
deposit will be held by the lessor Mr. B to answer
for whatever unpaid rentals, unpaid electrical,
telephone and water bills, and damages to the
leased premises, and the balance to be refunded
without interest to lessee ABC Company at the end
of the lease contract.
Issue: Whether or not the security deposit can be
declared as income by B and whether or not it is a
deductible expense on the part of ABC Company.
Held: No. A security deposit is an advanced
payment received by the lessor from the lessee, as
security for the lessees performance of his
obligations under the lease. It is not income to the
lessor when received, as the lessor is required to
return this deposit at the end of the lease period
upon fulfillment of all the obligations of the lessee.
In this respect, a security deposit is somewhat
analogous to a loan and the lessor has no income
and the lessee no deduction when the deposit is
made with the lessor, and the lessor has no
deduction and the lessee no income when it is
repaid. This rule applies even when the lessor has
the right to commingle and use the security deposit
for his own purposes without interest during the
term of the lease.
ii. Claim of Right Doctrine
BIR Ruling No. (C-168) 519-08
Facts: LHC entered into a contract with Transfield
Philippines Inc. for the construction of a power
station. They stipulated that should Transfield fail to
finish the project on time, LHC is entitled to
liquidated damages. When the project became
delayed, LHC claimed liquidated damages against
Transfield. This was objected to by the latter and
counter-claims were charged against the former. It
was brought to an Arbitral Tribunal which ruled in
favor of Transfield. When Transfield sought the
recognition of this award in our courts, it was
Taxation Law
deemed contrary to public policy, causing the
parties to settle for a compromise agreement
wherein LHC agreed to return liquidated damages
amounting to P14Million.
Issue: Whether or not the return of the liquidated
damages which was part of the sum previously
reported as gross income of LHC in 2000 and 2001
is an allowable deduction from LHCs gross income
for tax purposes.
Held: Yes, it is an allowable deduction.
Generally, the tax treatment of the return of
previously recognized income is dependent on the
tax treatment of the income previously reported. If
the taxpayer received an income and reported the
same as part of taxable gross income, but later on
was made to return the said income, the taxpayer is
allowed a deduction for the amount returned
against the gross income. The deduction must be
made at the time of the return. This treatment
follows the rationale behind allowing sales return as
a deduction from gross sales not only from income
tax but also for value-added tax purposes.
The Claim of Right Doctrine provides that if a
taxpayer receives earnings under a claim of right
and without restriction as to its disposition, he has
received income even though one may claim he is
not entitled to the money. Should it later appear that
the taxpayer was not entitled to keep the money,
the taxpayer would be entitled to a deduction in the
year of repayment.
Manila Electric Company vs. CIR (2010)
Facts: Meralco claimed a tax refund or credit due to
alleged overpayment of income taxes. This was
granted by the Supreme court in several cases and
likewise ordered Meralco to refund or credit its
customers. Said order had already been final and
executory on May 5, 2003.
Prior to that, however, on December 23,
1993, Meralco filed with the Energy Regulatory
Board an application for the revision of its rate and
schedules. On January 28, 1994, a provisional
increase was granted on the condition that after
hearing and evaluation, should Meralco be entitled
to a lesser increase in rates, the excess previously
collected will be refunded to its customers. Hence,
Alyssa Africa Page 32
Meralco paid the income tax due based on such
distribution rate.
On February 16, 1998, the ERB rendered a
decision granting a lesser rate increase. Meralco
was ordered to refund or credit to its customers the
excess paid.
On November 27, 2003, Meralco filed a
claim for tax refund or credit of excess income tax
payments with the CIR, which was later on elevated
to the SC. The CIR claims that it had not granted
the claim on the ground that Meralco should have
refunded to or credited to bill customers first as
mandated by the Supreme Court.
Issue: Whether or not petitioner has the right to
recover its excess income tax payments for the
taxable years 1994-1998 and 2000.
Held: Though the Court explains that the SC never
made the refund be subject to the condition that
refund or credit to future consumption be actually
given or credited to the consumer, the SC said that
the releases or issuances of the Tax Credit
Certificate covering the tax refund should be
proportionate to the amount actually disbursed to
be just and equitable not only for the Meralco and
the government but also the general public
considering that there were discrepancies in the
amount to be given and actually given or actually
received by Meralcos customers.
In the exercise of this Courts jurisdiction
also as a court of equity, it is only but fair to allow
Meralco to recover its excess income tax payments
for the taxable years 1994-1998 and 2000, which
would have prescribed (2yr prescription) if not for
the special circumstance in the instant case, in
proportion to or that the refund or credit to future
consumption due the customers concerned in the
average amount of P0.167 per kilowatthour should
have been actually given or credited to them by
Meralco. It would be the height of injustice if
Meralco can recover all the excess income tax
payments when it did not refund all to the
customers what Meralco is mandated to refund
from which the excess income tax payments would
arise.
Taxation Law
Dissenting Opinion of Justice Castaneda (Voted for
Dismissal):
In the claim of right doctrine, a taxpayer who
previously claimed as income the amount he
subsequently repays, is to claim it as deduction
from income in the year of repayment. The 2 year
prescriptive period is a mandatory provision not
subject to any qualification. The instant case cannot
be considered a special circumstance worthy of the
relaxation of the 2 year prescriptive period.
Under the claim of right doctrine, if the
taxpayer who has included amounts in income
pursuant to the claim of right doctrine subsequently
repays those amounts, the taxpayer may be
entitled to a deduction in the year of repayment.
However, to be entitled to a deduction, the taxpayer
must meet the requirements of a statutory provision
entitling him or to a deduction.
In this case, the claim of right doctrine finds
application to Meralco when it recognized a bona
fide claim over the amounts received out of its
overcharged rate. Consistent with the recognition of
income and deduction under the NIRC of 1997,
Meralcos remedy is to claim the repayments as
deduction from its income instead of filing a refund
considering that it is not a case of an erroneously
paid tax.
The words of Section 229 clearly, plainly,
and explicitly state that the 2 year prescriptive
period is not affected by any supervening cause,
hence, the phrase regardless of any supervening
cause.
Manila Electric Company vs. CIR (2011)
Facts: CIR assailed the CTA decision and argues
that a claim for refund filed after the 2 year
prescriptive period provided under Section 229 of
the 1997 NIRC, as amended, effectively bars
recovery of any refundable amount. Apparently,
among the several issues previously stipulated and
agreed upon by the parties to be resolved by this
Court, respondent only assails the findings and
conclusions pertaining to prescription.
Meralco, on the other hand, argues that the
2 year prescriptive period is not just jurisdictional
and may be suspended for reason of equity and
other special circumstance.
Alyssa Africa Page 33
CIR maintains that the petitioner had the
opportunity to claim for refund as early as 1998
when ERB issued its decision but failed to do so by
reason that it chose to go through court processes.
Issue: Whether or not the 2 year prescriptive period
under Section 229 of the 1997 NIRC may be
suspended.
Held: Yes. It may be suspended. It is noted that
previously recognized income using the provisional
rate increase from which taxes were collected was
ordered to be returned to the consumer. The CIR
cannot collect taxes on income that does not exist.
Correspondingly, a taxpayer should not be
prohibited from recovering taxes paid on income
that does not exist or ceases to exist. To do so is a
clear case of unjust enrichment for the government
at the expense of the taxpayer.
In North American Oil vs. Burnet the court
states the claim of right doctrine as follows: if a
taxpayer receives earnings under a claim of right
and without restriction as to its disposition, he has
received income which he is required to return,
even though it may still be claimed that he is not
entitled to retain the money, and even though he
may still be adjudged liable to restore its
equivalent. Claim of right prohibits a taxpayer to
amend prior-years return.
Considering that the Philippines adopted the
US tax laws, said doctrine may come into play only
in determining whether the treatment of an item of
income should be influenced by the fact that the
right to receive or keep it is in dispute, but the full
application of the said doctrine especially the
deduction of those repayments previously claimed
and taxed as income in different taxable years
should not be given effect.
In view of the inequities related to this so-
called claim of right doctrine as well as the fact
that our legislature did not adopt nor enact a statute
regarding the deductibility of repayment under the
claim of right situation similar to Section 1341 of the
US Internal Revenue Code, it is our best interest
not to fully adopt the same in our jurisdiction. If it
were the intent of the legislature to have a
deduction based on claim of right situation, a
similar provision of Section 1341 of the US Internal
Taxation Law
Revenue Code would have been expressly
provided in the NIRC of 1977 or 1997, or in any
amendments made thereon but there is none.
Inevitably, neither should we adopt the deductibility
of repayments under the claim of right situation
since our legislature intentionally did not adopt the
same.
While taxes are the lifeblood of the
government and so should be collected without
unnecessary hindrance, such collection should be
made in accordance with law as any arbitrariness
will negate the very reason for government itself.
The power of taxation is sometimes called the
power to destroy; it should be exercised with
caution to minimize injury to the proprietary rights of
a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kills the hen that
lays the golden egg. And, in order to maintain the
general publics trust and confidence in the
government this power must be used justly and not
treacherously.
iii. All Events Test
CIR vs. Isabela Cultural Corporation
Facts: The BIR disallowed the ICCs claimed
expense deductions for professional and security
services billed and paid by ICC in 1986 to (1) SGV
and Co for auditing services for the year ending
December 31, 1985, (2) to the law firm Bengzon
Zarraga Narciso Culada Pecson Azcuna &
Bengson for legal services for the years 1984 and
1985, and (3) expenses or security services of El
Tigre Security and Investigation agency for April
and May 1986.
The CTA reversed the assessment and
ruled that deductions for professional and security
services were properly claimed in 1986 because it
was only in that year that the bills demanding
payment were sent to ICC.
CIR contended that ICC uses the accrual
method of accounting, hence, it should have
declared in the year it was incurred and not on the
year paid.
Issue: Whether or not the CA correctly sustained
the deduction of the expenses for professional and
security services from ICCs gross income.
Alyssa Africa Page 34
Held: The requisites for the deductibility of ordinary
and necessary trade, business or professional
expenses, like expenses paid for legal and auditing
services are: (a) the expenses must be ordinary
and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have
been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent
papers.
Revenue Audit Memorandum Order No. 1-
2000, provides that under the accrual method of
accounting, expenses not being claimed as
deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction
from income for the succeeding year.
The accrual of income and expense is
permitted when the all events test has been met.
The all events test requires: (1)fixing of a right to
income or liability to pay, and (2) the availability of
the reasonable accurate determination of such
income or liability.
The all events test requires the right to
income or liability be fixed, and the amount of such
income of liability or liability be determined with
reasonable accuracy. However, the test does not
demand that the amount of income or liability be
known absolutely, only that the taxpayer has at his
disposal the information necessary to compute the
amount with reasonable accuracy. The all events
test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is
satisfied where a computation may be known but is
not as much as unknowable, within the taxable
year. The amount of liability does not have to be
determined exactly; it must be determined with
reasonable accuracy. Accordingly, the term
reasonable accuracy implies something less than
an exact or completely accurate amount.
The propriety of an accrual must be judged
by the facts that a taxpayer know, or could
reasonably be expected to have known, at the
closing of its books for the taxable year.
ICC failed to establish when the 1984 tax
problems were completed, or whether there was
reasonable diligence in inquiring the amount of
liability due for accounting purposes.
Taxation Law
of his death if not otherwise properly allowable in
D. Accounting Periods and Methods Correlate respect of such period or as prior period.
with recognition of income and expense
Section 46. Change of Accounting Period if a
1. Section 43-50 of the NIRC
taxpayer, other than an individual, changes his
Section 43. General Rule. The taxable income
accounting period from fiscal year to calendar year,
shall be computed upon the basis of the taxpayers
from calendar year to fiscal year, or from one fiscal
annual accounting period in accordance with the
year to another, the net income shall, with the
method of accounting regularly employed in
approval of the Commissioner, be computed on the
keeping the books of such taxpayer; but if no such
basis of such new accounting period, subject to the
method of accounting has been so employed, or if
provisions of Section 47.
the method employed does not clearly reflect the
income, the computation shall be made in
Section 47. Final or Adjustment Returns for a
accordance with such method as in the opinion of
Period of Less than Twelve (12) Months
the Commissioner clearly reflects the income. If the
(A) Returns for Short Period Resulting from Change
taxpayers annual accounting period is other than a
of Accounting Period if a taxpayer, other than an
fiscal year, as defined in Section 22(Q), or if the
individual, with the approval of the Commissioner,
taxpayer has no annual accounting period, or does
changes the basis of computing net income from
not keep books, or if the taxpayer is an individual,
fiscal year to calendar year, a separate final or
the taxable income shall be computed on the basis
adjustment return shall be made for the period
of the calendar year.
between the close of the last fiscal year for which
return was made and the following December 31. If
Section 44. Period in which Items of Gross Income
the change is from calendar year to fiscal year, a
Included The amount of all items of gross income
separate final or adjustment return shall be made
shall be included in the gross income for the
for the period between the close of the last
taxable year in which received by the taxpayer,
calendar year for which return was made and the
unless, under methods of accounting permitted
date designated as the as the close of the fiscal
under Section 43, any such amounts are to be
year.
properly accounted for as of a different period. In
(B) Income Computed on Basis of Short Period
the case of the death of a taxpayer, there shall be
Where a separate final or adjustment return is
included in computing taxable income for the
made under Subsection (A) on account of a change
taxable period in which falls the date of his death,
in the accounting period, and in all other cases
amounts accrued up to the date of his death if not
where a separate final or adjustment return is
otherwise properly includible in respect of such
required or permitted by the Secretary of Finance,
period or a prior period.
upon recommendation of the Commissioner, to be
made for a fractional part of a year, then the income
Section 45. Period for which Deductions and shall be computed on the basis of the period for
Credits Taken The deductions provided for in this which separate final or adjustment return is made.
Title shall be taken for the taxable year in which
paid or accrued or paid or incurred, dependent Section 48. Accounting for Long-term Contracts
upon the method of accounting upon the basis of Income from long-term contracts shall be reported
which the net income is computed, unless in order for tax purposes in the manner as provided in this
to clearly reflect the income, the deductions should Section. As used herein, the term long-term
be taken as of a different period. In the case of the contracts means building, installation or
death of the taxpayer, there shall be allowed as construction contracts covering a period in excess
deductions for the taxable period in which falls the of 1 year. Persons whose gross income is derived
date of the death, amounts accrued up to the date in whole or in part from such contracts shall report

Alyssa Africa Page 35

Taxation Law
such income upon the basis of percentage of
completion. The return should be accompanied by
a return certificate of architects or engineers
showing the percentage of completion during the
taxable year of the entire work performed under
contract. There should be deducted from such
gross income all expenditures made during the
taxable year on account of the contract, account
being taken of the material and supplies on hand at
the beginning and end of the taxable period for use
in connection with the completion of a contract, it is
found that the taxable net income arising
thereunder has not been clearly reflected for any
year or years, the Commissioner may permit or
require an amended return.
Section 49. Installment Basis
(A) Sales of Dealers in Personal Property Under
rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner, a person who regularly sells or
otherwise disposes of personal property on the
installment plan may return as income therefrom in
any taxable year that proportion of the installment
payments actually received in that year, which the
gross profit realized or to be realized when
payment is completed, bears to the total contract
price.
(B) Sales of Realty and Casual Sales of Personality
In the case (1) of a casual sale or other casual
disposition of personal property (other then
property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the
close of the taxable year), for a price exceeding
P1,000, or (2) of a sale or other disposition of real
property, if in either case the initial payments do not
exceed 25% of the selling price, the income may,
under rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner be returned on the basis and in the
manner above prescribed in this Section. As used
in this Section. As used in this Section, the term
initial payments means the payments received in
cash or property other than evidences of
indebtedness of the purchaser during the taxable
period in which the sale or other disposition is
made.
Alyssa Africa Page 36
(C) Sales of Real Property Considered as Capital
Asset by Individuals An individual who sells or
disposes of real property, considered as capital
asset, and is otherwise qualified to report the gain
therefrom under Subsection (B) may pay the capital
gains tax in installments under rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner.
(D) Change from Accrual to Installment Basis If a
taxpayer entitled to the benefits of Subsection (A)
elects for any taxable year to report his taxable
income on the installment basis, then in computing
his income for the year of change or any
subsequent year, amounts actually received during
any such year on account of sales or other
dispositions of property made in any prior year shall
not be excluded.
Section 50. Allocation of Income and Deductions.
In the case of two or more organizations, trades or
businesses (whether or not incorporated and
whether or not organized in the Philippines) owned
or controlled directly or indirectly by the same
interests, the Commissioner is authorized to
distribute, apportion, or allocate gross income or
deduction between or among such organizations,
trade or business, if he determines that such
distribution, apportionment, or allocation is
necessary in order to prevent evasion of taxes or
clearly to reflect the income of any such
organizations, trades or businesses.
2. Change in Accounting Period
E. Individual Income Taxation
1. Kinds of Individuals (Sec. 22)
1. Resident Citizens
2. Resident Aliens
3. Non-resident Citizens
a. Overseas Contract Workers
4. Non-resident Alien Engaged in Trade or
Business
5. Non-resident Aliens not Engaged in Trade or
Business
6. Others
a. Minimum Wage Earners
Taxation Law
b. Estate and Trusts Taxed as Individuals
c. Aliens Employed by Regional or Area
Headquarters and Regional Operating
Headquarters of Multinational Companies
d. Aliens Employed by Off-Shore Banking Units
e. Aliens Employed by Petroleum Service
Contractor and Sub-contractor
Section 22. Definitions When used in this Title:
(A) The term person means an individual, a
trust, estate, or corporation.
(B) The term corporation shall include
partnerships, no matter how created or
organized, joint-stock companies, joint accounts,
associations, 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 or consortium agreement under a
service contract with the Government. General
professional partnerships are partnerships
formed by persons for the sole purpose of
exercising their common profession, no part of
the income of which is derived from engaging in
any trade or business.
(C) The term domestic, when applied to a
corporation, means created or organized in the
Philippines or under its laws.
(D) The term foreign, when applied to a
corporation, means a corporation which is not
domestic.
i. Resident Citizens
He is a citizen of the Philippines residing therein.
ii. Resident Aliens
Section 22
(F) The term resident alien means an
individual whose residence is within the
Philippines and who is not a citizen thereof.
1. Sec. 5 of RR No. 2-40
Section 5. Definition. A non-resident alien
individual means an individual
(a) Whose residence is not within the
Philippines; and
Alyssa Africa Page 37
(b) Who is not a citizen of the Philippines;
An alien actually present in the Philippines
who is not a mere transient is a resident of the
Philippines for purposes of income tax. Whether
he is a transient or not is determined by his
intentions with regard to the length and nature of
his stay. A mere floating intention indefinite as to
time, to return to another country is not sufficient
to constitute him as a transient. If he lives in the
Philippines and has no definite intention as to his
stay, he is a resident. One who comes to the
Philippines for a definite purpose which in its
nature may be promptly accomplished is a
transient. But if his purpose is of such a nature
that an extended stay may be necessary for its
accomplishment, and to that end makes his
home temporarily in the Philippines, he 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.
iii. Non-resident citizens
Section 22
(E) The term nonresident citizen means
(1) A citizen of the Philippines who establishes
to the satisfaction of Commissioner the fact of
his physical presence abroad with a definite
intention to reside therein.
(2) A citizen of the Philippines who leaves the
Philippines during the taxable year to reside
abroad, either as an immigrant or for
employment on a permanent basis.
(3) A citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be
physically present abroad for most of the time
during the taxable year.
(4) A citizen who has been previously
considered as nonresident citizen and who
arrives in the Philippines at any time during the
taxable year to reside permanently in the
Philippines shall likewise be treated as a
nonresident citizen for the taxable year in
which he arrives in the Philippines with respect
to his income derived from sources abroad
until the date of his arrival in the Philippines.
Taxation Law
(5) The taxpayer shall submit proof to the
Commissioner to show his intention of leaving
the Philippines to reside permanently abroad
or to return to and reside in the Philippines as
the case may be for purposes of this Section.
1. Overseas Contract Workers
a. Sec. 23 of the NIRC
Section 23
(C) An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
from sources within the Philippines: Provided, That
a seaman who is a citizen of the Philippines who
receives compensation for services rendered
abroad as a member of a complement of a vessel
engaged exclusively in international trade shall be
treated as an overseas contract worker.
b. Secs. 2 and 3(A) of RR No. 1-11 dated
February 24, 2011
Section 2. Definition of an OCW
OCW refer to Filipino citizens employed in foreign
countries, commonly referred to as OFWs, who are
physically present in a foreign country as a
consequence of their employment thereat. Their
salaries and wages are paid by an employer
abroad as is not borne by any entity or person in
the Philippines.
Requisites:
1. Registered with the Philippine Overseas
Employment Administration
2. Valid Overseas Employment Certificate
Seaferers or seamen are Filipino citizens who
receive compensation for services rendered abroad
as a member of the complement of a vessel
engaged exclusively in international trade.
To be considered as an OCW or OFW they must:
1. Be duly registered as such with the POEA
2. Valid Overseas Employment Certificate
3. Valid Seaferers Identification Record Book
(SIRB) or Seamans Book issued by the Maritime
Industry Authority
Section 3 refer to actual RR
Alyssa Africa Page 38
2. Meaning of Most of the Time
a. BIR Ruling No. 033-00 dated September 5,
2000
Section 22 (E) Nonresident citizen
(3) A citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be physically
present abroad for most of the time during the
taxable year.
Most of the time said citizen shall have stayed
abroad for at least 183 days in a taxable year
iv. Non-resident alien engaged in trade or
business
1. Sec. 25(A)(1) of the NIRC
Section 25.
(A) Nonresident Alien Engaged in Trade or
Business within the Philippines
(1) In General A nonresident alien individual
engaged in trade or business in the Philippines
shall be subject of an income tax in the same
manner as an individual citizen and a resident alien
individual, on taxable income received from all
sources within the Philippines. A nonresident alien
individual who shall come to the Philippines and
stay therein for an aggregate period of more than
one hundred eighty (180) days during any calendar
year shall be deemed a nonresident alien doing
business in the Philippines, Section 22(G) of this
Code notwithstanding.
2. Sec. 8 of RR No. 2-40
Section 8
The phrase engaged in trade or business
within the Philippines includes the performance of
personal services within the Philippines. Whether a
non-resident alien has an office or place of
business, however, implies a place for the regular
transaction of business and does not include a
place where casual or incidental transactions might
be, or are, affected. Neither the beneficiary nor the
grantor of a trust, whether revocable or irrevocable,
is deemed to be engaged in trade or business in
the Philippines or to have an office or place of
business therein, merely because the trustee is
 Taxation Law
engaged in trade or business in the Philippines or
has an office or place of business therein.
v. Non-resident aliens not engaged in trade or
business
1. Sec. 25(B) of the NIRC
Section 25
(B) Nonresident Alien Individual Not Engaged in
Trade or Business Within the Philippines There
shall be levied, collected and paid for each taxable
year upon the entire income received from all
sources within the Philippines by every nonresident
alien individual not engaged in trade or business
within the Philippines as interest, cash and/or
property dividends, rents, salaries, wages,
premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual
or periodic or casual gains, a tax equal to 25% of
such income. Capital gains realized by a
nonresident alien individual not engaged in trade or
business in the Philippines from the sale of shares
of stock in any domestic corporation and real
property shall be subject to the income tax
prescribed under Subsections (C) and (D) of
Section 24.
vi. Others
1. Minimum Wage Earners
a. Sec. 22(HH)
Section 22(HH)
(H) The term minimum wage earner shall refer to
a worker in the private sector paid the statutory
minimum wage; or to an employee in the public
sector with compensation income of not more than
the statutory minimum wage in the non-agricultural
sector where he/she is assigned.
b. Sec. 1 of RR No. 10-08 dated July 8, 2008
De Minimis Benefits Listed
MWEs receiving other benefits exceeding the
P30,000 limit shall be taxable on the excess
benefits, ,as well as on his salaries, wages and
allowances, just like an employee receiving
compensation income beyond the SMW
Statutory Minimum Wage
Alyssa Africa Page 39
The rate fixed by the Regional Tripartite Wage and
Productivity Board (RTWPB), as defined by the
Bureau of Labor and Employment Statistics of the
DOLE. The RTWPB of each region shall determine
the wage rates in the different regions based on
established criteria and shall be the basis of
exemption from income for this purpose.
Other Income of MWEs
MWEs receiving other income such as income from
the conduct of trade, business, or practice of
profession, except income subject to final tax, in
addition to compensation income are not exempted
from income tax on their entire income earned
during the taxable year.
2. Estates and trusts taxed as individuals (Sec.
60 to 66 of the NIRC) to be discussed under
Part O of the syllabus
3. Aliens employed by Regional or Area
Headquarters and Regional Operating
Headquarters of Multinational Companies
a. Sec. 25 (C) of the NIRC
Section 25
(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating
Headquarters of Multinational Companies There
shall be levied, collected and paid for each taxable
year upon the gross income received by every alien
individual employed by regional or area
headquarters and regional operating headquarters
established in the Philippines by multinational
companies as salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and allowances,
,from such regional or area headquarters and
regional operating headquarters, a tax equal to
15% of such gross income: Provided, however, that
the same tax treatment shall apply to Filipinos
employed and occupying the same position as
those of aliens employed by these multinational
companies. For purposes of this Chapter, the term
multinational company means a foreign firm or
entity engaged in international trade with affiliates
or subsidiaries or branch offices in the Asia-Pacific
Region and other foreign markets.
Taxation Law
b. Same tax treatment to Filipinos occupying
Technical and Managerial positions
i. Sec. 2.57.1(D) of RR No. 2.-98 dated April 17,
1998
Section 2.57.1
(D) Income Derived by Alien Individuals Employed
by Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies
A final withholding tax equivalent to 15% shall be
withheld by the withholding agent from the gross
income received by every alien individual
occupying managerial and technical positions in
regional or area headquarters and regional
operating headquarters and representative offices
established in the Philippines by multinational
companies as salaries, wages, annuities,
compensation, remuneration, and other
emoluments, such as honoraria and allowances,
except income which is subject to the fringe
benefits tax, from such regional area or area
headquarters and regional operating headquarters
and representative offices established in the
Philippines by multinational companies as salaries,
wages, annuities, compensation, remuneration, and
other emoluments, such as honoraria and
allowances, except income which is subject to the
fringe benefits tax, from such regional or area
headquarters and regional operating headquarters.
The same tax treatment shall apply to Filipinos
employed and occupying the same as those of
alien employed by these multinational companies.
The term multinational company means a
foreign firm or entity engaged in international trade
with its affiliates or subsidiaries or branch offices in
the Asia Pacific Region and other foreign markets.
ii. Secs. 1 to 4 of RR 11-2010 dated October 26,
2010
Section 1
Consideration
Alien individuals occupying Managerial and
Technical Positions in Regional or Area
Headquarters or Regional Operating Headquarters
of Multinational Companies
Tax
Alyssa Africa Page 40
Final Withholding Tax of 15% from the gross
income
Requisite:
(1) Same tax treatment to Filipinos employed and
occupying the same positions as those aliens
employed by regional or area headquarters and
regional operating headquarters of multinational
companies, regardless of whether or not there is an
alien executive occupying the same position.
(2) Such Filipinos have the option to be taxed at
either 15% of gross income or at the regular rate on
their taxable income in accordance with the Tax
Code
Technical Position
Limited only to positions that are (1) highly
technical in nature or (2) where there are no
Filipinos who are competent, able and willing to
perform the services for which the aliens are
desired.
Section 2
Who are Qualified
Filipinos employed by ROHQs or RHQs in a
managerial or technical position shall have the
option to be taxed at the regular income tax rate on
taxable compensation income.
Section 3
Eligibility to the 15% Preferential Tax Rate
1. Position and Function Test
a. Must occupy a managerial position or
technical position; AND
b. Must actually be exercising such
managerial or technical functions pertaining
to said positions
2. Compensation Threshold Test Employee must
have received, or is due to receive under a contract
of employment, a gross annual taxable
compensation income of AT LEAST P975,000.00
WHETHER OR NOT ACTUALLY RECEIVED
(NOTE: Change in compensation leading to a
lesser compensation threshold subjects the
individual to regular income tax)
Taxation Law
3. Exclusivity Test Exclusively working for the
RHQ or ROHQ as a regular employee and not just
as a consultant or contractual worker.
Section 4
Gross Compensation
Not Included:
1. retirement and/or separation pay/benefits
whether or not taxable
2. items considered as de minimis benefits
(Note: such items are considered in determining
income tax due at the time of employees
retirement or separation.
4. Aliens employed by Offshore Banking Units
a. Sec. 25 (D) of the NIRC
Section 25
(D) Alien Individual Employed by Offshore Banking
Units There shall be levied, collected and paid for
each taxable year upon the gross income received
by every alien individual employed by offshore
banking units established in the Philippines as
salaries, wages, annuities, compensation,
remuneration and other emoluments, such as
honoraria and allowances, from such offshore
banking units, a tax equal to 15% of such gross
income: Provided, however, That the same tax
treatment shall apply to Filipinos employed and
occupying the same position as those of aliens
employed by these offshore banking units.
b. Same tax treatment to Filipinos
5. Aliens employed by Petroleum Service
Contractor and Subcontractor
a. Sec. 25(E) of the NIRC
Section 25
(E) Alien Individual Employed by Petroleum Service
Contractor and Subcontractor An alien individual
who is a permanent resident of a foreign country
but who is employed and assigned in the
Philippines by a foreign service contractor of by a
foreign service subcontractor engaged in petroleum
operations in the Philippines shall be liable to a tax
of 15% of the salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and allowances,
Alyssa Africa Page 41
received from such contractor or subcontractor:
Provided, however, That the same tax treatment
shall apply to a Filipino employed and occupying
the same position as an alien employed by
petroleum service contractor and subcontractor.
Any income earned from all other sources
within the Philippines by the alien employees
referred to under Subsections (C), (D) and (E)
hereof shall be subject to the pertinent income tax,
as the case may be, imposed under this Code.
(NOT: Law states Alien individual must be a
PERMANENT RESIDENT of the foreign country)
b. Same tax treatment to Filipinos
2. General Principles of Income Taxation
i. Sec. 23 of the NIRC
Section 23. General Principles of Income Taxation
in the Philippines Except when otherwise
provided in this Code:
(A) A citizen of the Philippines residing therein is
taxable on all income derived from sources within
and without the Philippines;
(B) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
from sources within the Philippines: Provided, That
a seaman who is a citizen of the Philippines and
who receives compensation for services rendered
abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as overseas contract worker;
(D) An alien individual, whether a resident or not of
the Philippines, is taxable only on income derived
from sources within the Philippines;
(E) A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
(F) A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only
on income derived from sources within the
Philippines.
3. Kinds of Income
Taxation Law
i. Income subject to ordinary income tax
1. Business/Profession Income
2. Compensation Income
ii. Income subject to final tax
1. Sec. 2.57(A) of RR No. 2-98
Section 2.57 Withholding of Tax at Source
(A) Final Withholding Tax. Under the final
withholding tax system the amount of income tax
withheld by the withholding agent is constituted as
a full and final payment of the income tax due for
the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the
deficiency of tax shall be collected from the
payor/withholding agent. The payee is not required
to file an income tax return for the particular
income.
The finality of the withholding tax is limited
only to the payees income tax liability on the
particular income .It does not extend to the payees
other tax liability on said income, such as when the
said income is further subject to a percentage tax.
For example, if a bank received income subject to
final withholding tax, the same shall be subject to a
percentage tax.
2. Sec. 24 and 25 of the NIRC
Section 24
(A) Rates of Income Tax on Individual Citizen and
Individual Resident Alien of the Philippines
(1) Income tax is imposed on all taxable income
other than income under subsection (B Certain
Passive Income), (C Capital gains from sale of
shares of stock not traded in the stock exchange),
and (D Capital gains from sale of real property) of
this Section.
(a) from all sources within and without the
Philipines by resident citizens
(b) from all sources within the Philippines by
non-resident citizens including overseas contract
workers
Alyssa Africa Page 42
(c) from all sources within the Philippines by
an individual alien who is a resident of the
Philippines
(2) Rates of Tax on Taxable Income of Individuals
Married Individuals
Husband and wife shall compute separately their
individual income tax based on their respective total
taxable income
If any income cannot be definitely attributed to or
identified as income exclusively earned or realized
by either of the spouses, the same shall be divided
equally between the spouses for the purpose of
determining their respective taxable income
Minimum Wage Earners
Exempt from payment of income tax on their
taxable income including holiday pay, overtime pay,
nightshift differential pay, and hazard pay
[Refer to Tax Table]
4. Personal and additional Exemptions
i. Sec. 35 of the NIRC
Section 35. Allowance of Personal Exemptions for
Individual Taxpayer
(A) In General
Basic Personal Exemption
amounting to P50,000 for each individual
taxpayer
Note: Married Individuals where only one of the
spouses is deriving gross income, only such
spouse shall be allowed the personal exemption
(B) Additional Exemptions for Dependents
Dependent not Exceeding 4
P25,000 for each
claimed only by one spouse
if legally separated spouse who has custody
Total amount of additional exemptions that may
be claimed by both shall not exceed the
maximum additional exemptions therein
allowed
Dependent
(1)
Taxation Law
(a) legitimate, illegitimate or legally adopted
child;
(b) chiefly dependent upon and living with the
taxpayer
(c) not more than 21 years old
(d) not gainfully employed
(2)
(a) incapable of self-support because of mental
or physical defect
(b) chiefly dependent upon and living with the
taxpayer
(c) not gainfully employed
(C) Change of Status
(1) if marries or have dependents may be
claimed in full for such year
(2) if dies estate may still claim
(3) if spouses or any dependents die, or marries
or becomes 21 or gainfully employed may still
claim the same in the tax year
(D) Personal Exemption Allowable to Nonresident
Alien Individual
NRAETBorP entitled to personal exemption in the
amount equal to the exemptions allowed in the
income tax law in the country of which he is subject
or citizen
- It should not exceed the amount fixed in this
Section as exemption for citizens or
residents of the Philippines
(NOTE: nonresident alien should file a true and
accurate return of the total income received by him
from all sources in the Philippines, as required by
this Title.
ii. Senior Citizens
1. Secs. 2(a), 2(c) and 11 of RR no. 7-10 dated
July 20, 2010
Section 2 Definitions For purposes of these
Regulations, the following terms and phrases shall
be defined as follows:
(a) Senior Citizen or Elderly refers to any
(1)Filipino citizen who is a (2) resident of the
Philippines and who is (3) 60 years old or above. It
may apply to senior citizens with dual citizenship
status provided they prove their Filipino citizenship
and have at least 6 months residency in the
Philippines.
Alyssa Africa Page 43
(c) Benefactor refers to (1) any person whether
related or not to the senior citizen who (2) provides
care or who gives any form of assistance to
him/her, and (3) on whom the senior citizen is
dependent on for primary care and material
support, as (4) certified by the City or Municipal
Social Welfare and Development Office.
Section 11. Personal Exemptions of Benefactors of
Senior Citizens A Benefactor of a Senior Citizen
shall be entitled to claim the basic personal
exemption of P50,000.00 which is the amount of
basic personal exemption allowed under RA 9504
for all taxpayers required to file income tax returns
thereby removing the classification of tax filers into
single, head of the family and married. A Senior
Citizen who is not gainfully employed, living with
and dependent upon his benefactor for chief
support, although treated as dependent under the
Act, will not entitle the benefactor to claim the
additional personal exemption of P25,000. The
entitlement to claim the additional personal
exemption per dependent (not exceeding four) is
allowable only to individual taxpayers with a
qualified dependent child or children subject to the
conditions set forth under Section 35(B) of the Tax
Code, as amended.
If required to file an income tax return, the
Benefactor shall state therein the name, birthday
and OSCA (Office for Senior Citizens Affairs) ID
number of the dependent Senior Citizen.
5. Premium payments on health and/or
hospitalization insurance
i. Sec. 34(M) of the NIRC
Section 34 Deductions from Gross Income
Except for taxpayers earning compensation income
arising from personal services rendered under an
employer-employee relationship where no
deductions shall be allowed under this Section
other than under Subsection (M) hereof, in
computing taxable income subject to income tax
under Sections 24(A); 25(A); 26(A); 27(A), (B) and
(C); and 28(A)(1), there shall be allowed the
following deductions from gross income:
(M) Premium Payments on Health and/or
Hospitalization Insurance of an Individual Taxpayer
Taxation Law
The amount of premiums not to exceed P2,400 (b) chiefly dependent upon and living
per family or P200 a month paid during the taxable with the taxpayer
year for health and/or hospitalization insurance (c) not more than 21 years old
taken by the taxpayer for himself, including his (d) not gainfully employed
family, shall be allowed as a deduction from his (2)
gross income: Provided, That said family has a (a) incapable of self-support because of
gross income of not more than P250,000 for the mental or physical defect
taxable year: Provided, finally, That in case of (b) chiefly dependent upon and living
married taxpayers, only the spouse claiming the with the taxpayer
additional exemption for dependents shall be (c) not gainfully employed
entitled to this deduction.
Notwithstanding the provisions of the
preceding Subsections, the Secretary of Finance,
upon recommendation of the Commissioner, after a
public hearing shall have been held for this
purpose, may prescribe by rules and regulations,
limitations or ceilings for any of the itemized
deductions under Subsections (A) to (J) of the
Section: Provided, That for purposes of determining
such ceilings or limitations, the Secretary of
Finance shall consider the following factors: (1)
adequacy of the prescribed limits on the actual
expenditure requirements of each particular
industry; and (2) effects of inflation on expenditure
levels: Provided, further, That no ceilings shall
further be imposed on items of expense already
subject to ceilings under present law.

Exemptions:
1. Basic Personal Exemption (P50,000)
Requisite: Income Tax Payer
2. Basic Personal Exemption as Benefactor of
Senior Citizen (P50,000)
Requisite: Benefactor
(a) any person related to the senior or not
(b) provides care or who gives any form of
assistance to him/her, and
(c) on whom the senior citizen is dependent
on for primary care and material support,
(4) certified by the City or Municipal Social
Welfare and Development Office.
3. Additional Exemptions of (P25,000) for each
dependents not exceeding 4
Requisites: Dependent must be
(1)
(a) legitimate, illegitimate or legally
adopted child;

Alyssa Africa Page 44

Taxation Law
F. Corporate Income Taxation
1. Definition Sec. 22(B) of the NIRC
Section 22
(B) The term corporation shall include
partnerships, no matter how created or organized,
joint-stock companies, joint accounts, associations,
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 or consortium
agreement under a service contract with the
Government. General professional partnerships
are partnerships formed by persons for the sole
purpose of exercising their common profession, no
part of the income of which is derived from
engaging in any trade or business.
2. Partnerships taxed as a corporation
i. Joint Ventures engaged in construction
projects
1. Secs. 2 and 3 of RR No. 10-12 dated June 1,
2012
Section 2
Corporation shall include partnerships, no matter
how created or organized, joint-stock companies,
joint accounts (cuentas en participacion),
associations, or insurance companies, but does not
include general professional partnerships and 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 or consortium
agreement under a service contract with the
Government.
Section 3. Joint Ventures not Taxable as
Corporations:
1. for the undertaking of a construction project; and
2. should involve joining or pooling of resources by
licensed local contracts; that is licensed as general
contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of
Trade and Industry (DTI);
3. these local contractors are engaged in
construction business; and
Alyssa Africa Page 45
4. the Joint Venture itself must likewise be duly
licensed as such by the Philippine Contractors
Accreditation Board (PCAB) of the Department of
Trade and Industry(DTI)
Requisites that will treat Joint Ventures Involving
Foreign Contractors as Non-Taxable Corporations:
a. Member foreign contractor must be covered by a
special license as contractor by the PCAB of the
DTI; and
b. Construction project is certified by the
appropriate Tendering Agency that the project is a
foreign financed/internationally-funded project and
that international bidding is allowed under the
Bilateral Agreement entered into by and between
the Philippine Government and the foreign/
International financing institution pursuant to the
implementing rules and regulations of RA 4566,
Contractors License Law.
NOTE: Tax-exempt joint venture or consortium as
herein defined shall not include those who are mere
suppliers of goods, services or capital to a
construction project.
Members to a joint venture not taxable as a
corporation must each be responsible in reporting
and paying appropriate income taxes on their
respective share to the joint ventures profit
CIR vs. Batangas Transportation Co. (1958)
take note of the discussion of the Evangelista
Case
Facts: Max Blouse was the President of both
Batangas Transporatio and Laguna Tayabas Bus
Company. During the war, the 2 corporations
ceased operations. However, in 1945 they were
able to acquire buses which they divided between
themselves.
Later on, the two entered into a Joint
Emergency Operation to economize overhead
expenses. At the end of each calendar year all
receipts and expenses were divided equally
between the parties and both prepare their own
separate income tax return on the theory that they
had both pooled their resources in the
establishment of this operation.
Taxation Law
Batangas Transporation and Laguna-
Tayabas Bus Company were both assessed and
demanded to pay deficiency income taxes. The CIR
theorized that the Joint Emergency Operation was
a corporation distinct from the 2 companies and so
liable to income tax.
Issue: Whether or not the two transportation
companies herein involved are liable to the
payment of income tax as a corporation on the
theory that the Joint Emergency Operation
organized and operated by them is a corporation.
Held: It is a corporation. Considering that the
Batangas Transportation and Laguna Bus operated
different lines, sometimes in different provinces or
territories, under different franchises, with different
equipment and personnel, it cannot possibly be true
and correct to say that the end of each year, the
gross receipts and income in the gross expense of
the 2 companies are exactly the same for purposes
of the payment of income tax. What was actually
done in this case was that although no legal
personality may have been created by the Joint
Emergency Operation, nevertheless, said Joint
Emergency Operation joint venture or joint
management operated the business affairs of the 2
companies as though they constituted a single
entity ,company or partnership, thereby obtaining
substantial economy and profits in the operation.
Ona vs. CIR (1972)
Facts: When Julia Bunales died, she left her
spouse and children her estate. Her children were
still minors then so the father became the
administrator of the estate who filed for petition of
the project of partition which was approved by the
court.
Though approved the petition was
approved, no division of the properties were ever
made. Lorenzo Ona used the properties in
business by leasing selling them and investing the
income derived therefrom and the proceeds from
the sales thereof in real properties and securities.
Every year, their shares were divided
among them though the petitioners do not actually
receive income. CIR subjected them to corporate
Alyssa Africa Page 46
income tax on the ground that they have formed an
unregistered partnership.
Issue: Whether or not the petitioners were liable for
corporate income tax as an unregistered
partnership.
Held: Yes, they are taxable as an unregistered
partnership. Petitioners engaged, thru Lorenzo
Ona, in the purchase and sale of corporate
securities. It is likewise admitted that all the profits
from these ventures were divided among
petitioners proportionately in accordance with their
respective shares in the inheritance. In these
circumstances, it is our considered view that rom
the moment petitioners allowed not only the
incomes from their respective shares of the
inheritance but even the inherited properties
themselves to be used by Lorenzo Ona as a
common fund in undertaking several transactions
or in business with the intention of dividing profit to
be shared by time proportionately, such act was
tantamount to actually contributing such incomes to
a common fund and, in effect, they thereby formed
an unregistered partnership within the purview of
the above mentioned provision in the Tax Code.
Obillos vs. CIR (1985)
Facts:
Issue:
Held: Their original purpose was to divide the lots
for residential purposes. If later on they found it not
feasible to build their residences on the lots
because of the high cost of construction, then they
had no choice but to resell the same to dissolve the
co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership.
Co-ownership who own properties which
produce income should not automatically be
considered partners of an unregistered partnership,
or a corporation, within the purview of the Income
Tax Law.
Pascual vs. CIR (1988)
Facts:
Issue:
Held: The essential elements of a partnership are
2, namely: (a) an agreement to contribute money,
Taxation Law
property or industry to a common fund; and (b)
intent to divide the profits among the contracting
parties. The first element is undoubtedly present in
the case at bar, for admittedly, the petitioners have
agreed to, and did, contribute money and property
to a common fund.
In the instant case, petitioners bought 2
parcels of land in 1965. They did not sell the same
nor make any improvements thereon. In 1966, they
bought another 3 parcels of land from one seller. It
was only in 1968 when they sold the 2 parcels of
land after which they did not make any additional or
new purchase. The remaining 3 were sold by them
in 1970. The transactions were isolated. The
character of habituality peculiar to business
transactions for the purpose of gain was not
present.
AFISCO Insurance Corporation vs. CA (1999)
Facts:
Issue:
Held: The following unmistakably indicates a
partnership or an association covered by Section
24 of the NIRC.
1. the pool has a common fund, consisting of
money and other valuables that are deposited in
the name and credit of the pool. This common fund
pays for the administration and operation expenses
of the pool.
2. The pool functions through an executive board,
which resembles the board of directors of a
corporation, composed of one representative for
each of the ceding companies.
3. Pool itself is not a reinsurer and does not issue
any insurance policy; however, its work is
indispensable, beneficial, and economically useful
to the business of the ceding company and Munich,
because without it they would not have received
their premiums.
ii. Income of partners in a regular partnership
Sec. 73(D)
Section 73. Distribution of Dividends or Assets by
Corporations
(D) Net Income of a Partnership Deemed
Constructively Received by Partners The taxable
income declared by a partnership for a taxable year
which is subject to tax under Section 27(A) of this
Alyssa Africa Page 47
Code, after deducting the corporate income tax
imposed therein, shall be deemed to have been
actually or constructively received by the partners
in the same taxable year and shall be taxed to them
in their individual capacity, whether actually
distributed or not.
3. Kinds of Corporations
i. Domestic
ii. Resident Foreign Corporation
iii. Non-resident Foreign Corporation
Marubeni Corporation vs. CIR (1989)
Facts: Marubeni Corporation, a foreign corporation
duly organized and existing under the laws of
Japan and duly licensed to engaged in business
under Philippine laws. Marubeni had equity
investments in AG&P Manila. In 1981, AG&P
declared and paid cash dividends to Marubeni for
the first and third quarters. AG&P as a withholding
agent, paid 15% branch profit remittance tax and
directly remitted the cash dividends to petitioners
head office in Tokyo, Japan.
In a letter dated January 29, 1981,
petitioner, sought a ruling from the Bureau of
Internal Revenue on whether or not the dividends
petitioner received from AG&P are connected with
its conduct of business in the Philippines to
consider it branch profits subject to 15% profit
remittance tax under Section 24(b)(2) of the NIRC.
The acting Commissioner replied by stating that
investing in shares of stock is not an activity which
is effectively connected with its trade or business in
the country.
Consequently, Marubeni, believing that as a
Philippine branch of Marubeni Japan, it was in
effect a resident foreign corporation, wrote a letter
to the CIR to claim its refund or issuance of tax
credit for the profit tax remittance erroneously paid
on dividends. In response, the CIR denied the claim
on the ground that while it is not subject to profit
remittance tax, because it is a non-resident
stockholder, it is subject to dividend income of 25%
pursuant to Article 10(2)(b) of the Tax Treaty. The
CTA affirmed the decision.
Issue: Whether or not Marubeni Japan is a resident
foreign corporation subject to only 10%
Taxation Law
intercorporate final tax on dividends received from
a domestic corporation.
Held: The Solicitor General has adequately refuted
petitioner's arguments in this wise:
The general rule that a foreign corporation is
the same juridical entity as its branch office in
the Philippines cannot apply here. This rule is
based on the premise that the business of the
foreign corporation is conducted through its
branch office, following the principal agent
relationship theory. It is understood that the
branch becomes its agent here. So that when
the foreign corporation transacts business in
the Philippines independently of its branch, the
principal-agent relationship is set aside. The
transaction becomes one of the foreign
corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted
through the branch office, the latter becomes the
taxpayer, and not the foreign corporation.
iv. Others
1. Private Educational Institutions and Non-
Profit Hospitals
a. Sec. 27(B) of the NIRC
Section 27. Rates of Income Tax on Domestic
Corporations
(B) Proprietary Educational Institutions and
Hospitals. Proprietary educational institutions and
hospitals which are nonprofit shall pay a tax of 10%
on their taxable income except those covered by
Subsection (D) hereof: Provided, That if the gross
income from unrelated trade, business or other
activity exceeds 50% of the total gross income
derived by such educational institutions or hospitals
from all sources, the tax prescribed in Subsection
(A) hereof shall be imposed on the entire taxable
income. For purposes of this Subsection, 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. A
proprietary educational institution is any private
school maintained and administered by private
individuals or groups with an issued permit to
Alyssa Africa Page 48
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.
Requisites of Proprietary Educational
Institution
a. Private School
b. Maintained and administered by private
individuals or groups
c. with issued permit to operate from DECS or
CHED or TESDA in accordance with existing laws
and regulations
Unrelated Trade, Business or Other Activity
Not substantially related to the exercise of
performance by such educational institution or
hospital of its primary purpose or function.
b. Sec. 34(A)(2) of the NIRC
Section 34. Deductions from Gross Income
Except for taxpayers earning compensation income
arising from personal services rendered under
employer-employee relationship where no
deductions shall be allowed under this Section
other than under Subsection (M) hereof, in
computing taxable income subject to income tax
under Sections 24(A); 25(A); 26; 27(A), (B) and (C);
and 28(A)(1), there shall be allowed the following
deductions from gross income;
(A) Expenses.
(2) Expenses Allowable to Private Educational
Institutions. In addition to the expenses allowable
as deductions under this Chapter, a private
educational institution, referred to Under Section
27(B) of this Code, may at its option elect either: (a)
to deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred
during the taxable year for the expansion of school
facilities, or (b) to deduct allowance for depreciation
thereof under Subsection (F) hereof.
CIR vs. St. Lukes Medical Center (2012)
Facts: BIR assessed a deficiency taxes against St.
Lukes comprised of VAT, income tax, withholding
tax on compensation and expanded withholding
Taxation Law
tax. St. Lukes filed an administrative protest on the
ground that it was except under Section 30(E) and
(G) of the NIRC. It was later on appealed to the
CTA. The CTA First Division and En Banc decision
partially granted St. Lukes petition on account that
St. Lukes is a charitable institution which does not
lose its charitable character and its exemption from
taxation merely because recipients of its benefits
who are able to pay are required to do so, where
funds derived in this manner are devoted to the
charitable purposes of the institution.
Issue: Whether St. Lukes is liable for deficiency
income tax in 1998 under Section 27(B) of the
NIRC, which imposes a preferential tax rate of 10%
on the income of proprietary non-profit hospitals
Held: The Court partly grants the petition of the BIR
but on a different ground. We hold that Section
27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand,
and Section 30(E) and (G) on the other hand, can
be construed together without the removal of such
tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary non-
profit educational institutions 36 and proprietary non-
profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under
Section 27(B) instead of the ordinary 30%
corporate rate under the last paragraph of Section
30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10%
preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2)
proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be
proprietary and non-profit. "Proprietary" means
private, following the definition of a "proprietary
educational institution" as "any private school
maintained and administered by private individuals
or groups" with a government permit. "Non-profit"
means no net income or asset accrues to or
benefits any member or specific person, with all the
net income or asset devoted to the institution's
purposes and all its activities conducted not for
profit.
"Non-profit" does not necessarily mean "charitable."
Alyssa Africa Page 49
The Court finds that St. Luke's is a corporation that
is not "operated exclusively" for charitable or social
welfare purposes insofar as its revenues from
paying patients are concerned. This ruling is based
not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and
plain text of Section 30(E) and (G). Section 30(E)
and (G) of the NIRC requires that an institution be
"operated exclusively" for charitable or social
welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or
(G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income
from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at
the preferential 10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy
granted by the State because an exempt institution
is spared from sharing in the expenses of
government and yet benefits from them. Tax
exemptions for charitable institutions should
therefore be limited to institutions beneficial to the
public and those which improve social welfare. A
profit-making entity should not be allowed to exploit
this subsidy to the detriment of the government and
other taxpayers.
St. Luke's fails to meet the requirements under
Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains
a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net
income from its for-profit activities.
2. International Carrier
a. Sec. 28(A)(3) of the NIRC
Section 28. Rates of Income Tax on Foreign
Corporations
(A) Tax on Resident Foreign Corporations
(3) International Carrier. An international carrier
doing business in the Philippines shall pay a tax of
2 % on its Gross Philippine Billings as defined
hereunder:
(a) International Air Carrier Gross
Philippine Billings refers to the amount of gross
revenue derived from carriage of persons,
excess baggage, cargo and mail originating
Taxation Law
from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the
ticket or passage document: Provided, That
tickets revalidated, exchanged and/or indorsed
to another international airline form part of the
Gross Philippine Billings if the passenger
boards a plane in a port of point in the
Philippines: Provided, further, That for a flight
which originates from the Philippines, but
transshipment of passenger takes place at any
part outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment shall
form part of the Gross Philippine Billings.
(b) International Shipping Gross Philippine
Billings means gross revenue whether for
passenger, cargo or mail originating from the
Philippines up to final destination, regardless of
the place of sale or payments of the passage or
freight documents; Provided, That international
carriers doing business in the Philippines may
avail of a preferential rate of exemption from the
tax herein imposed on their gross revenue
derived from the carriage of persons and their
excess baggage on the basis of an applicable
tax treaty or international agreement to which
the Philippines is a signatory on the basis of
reciprocity such that an international carrier,
whose home country grants income tax
exemption to Philippine carriers, shall likewise
be exempt from the tax imposed under this
provision.
b. Secs. 2 to 5 and 8 of RR No. 15-02 dated May
30, 2002
c. Sec. 1 of RA No. 10378 dated March 7, 2013
i. Secs. 1 to 4 of RR No. 15-13 dated September
20, 2013
CIR vs. British Overseas Airways Corporation
(1987)
Facts:
Issue:
Alyssa Africa Page 50
Held: The absence of flight operations to and from
the Philippines is not determinative of the source of
income or the site 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 ... which produced the
income. 11 Unquestionably, the passage
documentations in these cases were sold in the
Philippines and the revenue therefrom was derived
from a activity regularly pursued within the
Philippines. business a And even if the BOAC
tickets sold covered the "transport of passengers
and cargo to and from foreign cities", 12 it cannot
alter the fact that income from the sale of tickets
was derived from the Philippines. The word
"source" conveys one essential idea, that of origin,
and the origin of the income herein is the
Philippines.13
It should be pointed out, however, that the
assessments upheld herein apply only to the fiscal
years covered by the questioned deficiency income
tax assessments in these cases, or, from 1959 to
1967, 1968-69 to 1970-71. For, pursuant to
Presidential Decree No. 69, promulgated on 24
November, 1972, international carriers are now
taxed as follows:
... Provided, however, That international
carriers shall pay a tax of 2- per cent on
their cross Philippine billings. (Sec. 24[b]
[21, Tax Code).
Presidential Decree No. 1355, promulgated on 21
April, 1978, provided a statutory definition of the
term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross
revenue realized from uplifts anywhere in
the world by any international carrier doing
business in the Philippines of passage
documents sold therein, whether for
passenger, excess baggage or mail
provided the cargo or mail originates from
the Philippines. ...
Taxation Law
The foregoing provision ensures that international
airlines are taxed on their income from Philippine
sources. The 2- % tax on gross Philippine billings
is an income tax. If it had been intended as an
excise or percentage tax it would have been place
under Title V of the Tax Code covering Taxes on
Business.
South African Airways vs. CIR (2010)
Facts:
Issue:
Held: the general rule is that resident foreign
corporations shall be liable for a 32% income tax on
their income from within the Philippines, except for
resident foreign corporations that are international
carriers that derive income "from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines" which shall be
taxed at 2 1/2% of their Gross Philippine Billings.
Petitioner, being an international carrier with no
flights originating from the Philippines, does not fall
under the exception. As such, petitioner must fall
under the general rule. This principle is embodied
in the Latin maxim, exception firmat regulam in
casibus non exceptis, which means, a thing not
being excepted must be regarded as coming within
the purview of the general rule.11
To reiterate, the correct interpretation of the above
provisions is that, if an international air carrier
maintains flights to and from the Philippines, it shall
be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers
that do not have flights to and from the Philippines
but nonetheless earn income from other activities in
the country will be taxed at the rate of 32% of such
income.
Air Canada vs. CIR (2016)
Facts:
Issue:
Held: The tax (Gross Philippine
Billings)attaches only when the carriage
of persons, excess baggage, cargo,and mail
originated from thePhilippines in a continuous
anduninterrupted flight, regardless ofwhere the
passage documents weresold. Not having
flights to and from thePhilippines, petitioner is
clearly notliable for the Gross PhilippineBillings
tax.While petitioner is taxable as aresident foreign
corporation underSection 28(A)(1) of the
Alyssa Africa Page 51
1997 National Internal Revenue Code on its taxable
income116 from sale of airline tickets in the
Philippines, it could only be taxed at a maximum of
1 1/2% of gross revenues, pursuant to Article VIII of
the Republic of the Philippines-Canada Tax Treaty
that applies to petitioner as a "foreign corporation
organized and existing under the laws of Canada.
3. Foreign Currency Deposit Units
a. Sec. 27(D)(3) of the NIRC
Section 27. Rates of Income Tax on Domestic
Corporations
(D) Rate of Tax on Certain Passive Incomes
(3) Tax on Income Derived under the Expanded
Foreign Currency Deposit System Income
derived by a depository bank under the expanded
foreign currency deposit system from foreign
currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial
banks, including branches of foreign banks that
may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign
currency deposit system units and other depository
banks under the expanded foreign currency deposit
system shall be exempt from all taxes, except net
income from such transactions as may be specified
by the Secretary of Finance, upon recommendation
by the Monetary Board to be subject to the regular
income tax payable by banks; Provided, however,
That interest income from foreign currency loans
granted by such depository banks under said
expanded foreign system to residents other than
offshore banking units in the Philippines or other
depository banks under the expanded system, shall
be subject to a final tax at the rate of 10%.
Any income of nonresidents, whether
individuals or corporations, from transactions with
depository banks under the expanded system shall
be exempt from income tax.
b. Sec. 28(A)(7)(b) of the NIRC
Section 28. Rates of Income Tax on Foreign
Corporations
(A) Tax on Resident Foreign Corporations.
(7) Tax on Certain Incomes Received by a Resident
Foreign Corporation.
(b) Income Derived under the Expanded Foreign
Currency Deposit System Income derived by a
Taxation Law
depository bank under the expanded foreign
currency deposit system from foreign currency
transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks
including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency
deposit system units and other depository banks
under the expanded foreign currency deposit
system shall be exempt from all taxes, except net
income from such transactions as may be specified
by the Secretary of Finance, upon recommendation
by the Monetary Board to be subject to the regular
income tax payable by banks: Provided, however,
That interest income from foreign currency loans
granted by such depository banks under said
expanded system to residents other than
depository banks under the expanded system shall
be subject to final tax at the rate of 10%
Any income of nonresidents, whether
individuals or corporations, from transactions with
depository banks under the expanded system shall
be exempt from income tax.
c. Sec. 5 of RR No. 14-12 dated November 7,
2012
Section 5. Tax Treatment of Interest Income from
FCDU
Subject to 7.5% Final Withholding Tax if received
by:
a. citizens
b. resident citizens
c. domestic corporations
d. resident foreign corporations
Non-residents whether individuals or corporations
are EXEMPT.
Joint ownership by non-resident and resident (50-
50)
Interest Income from Foreign Currency Loans
Granted by Such Depository Banks to Residents
(except Offshore Banking Units or other Depository
banks) 10% final tax
4. Offshore Banking Units
a. Sec. 28(A)(4) of the NIRC
Alyssa Africa Page 52
Section 28. Rates of Income Tax on Foreign
Corporations
(A) Tax on Resident Foreign Corporations.
(4) Offshore Banking Units The provisions of any
law to the contrary notwithstanding, income derived
by offshore banking units authorized by the Bangko
Sentral ng Pilipinas (BSP), from foreign currency
transactions with nonresidents, other offshore
baking units, local commercial banks, including
branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking units shall
be exempt from all taxes except net income from
such transactions as may be specified by the
Secretary of Finance, upon recommendation of the
Monetary Board, which shall be subject to the
regular income tax payable by banks; Provided,
however, That any interest income derived from
foreign currency loans granted to residents, other
than offshore banking units or local commercial
banks, including total branches of foreign banks
that may be authorized by the BSP to transact
business with offshore banking units, shall be
subject only to a final tax at the rate of 10%.
Any income of nonresidents, whether
individuals or corporations, from transactions with
said offshore banking units shall be exempt from
income tax.
b. Sec. 6 of RR No. 14-12 dated November 7,
2012
5. Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies
a. Secs. 22(DD) and 22(EE)
Section 22. Definitions. When used in this Title:
(DD) The term regional or area headquarters shall
mean a branch established in the Philippines by
multinational companies and which headquarters
do not earn or derive income from the Philippines
and which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries,
or branches in the Asia-Pacific Region and other
foreign markets.
(EE) The term regional operating headquarters
shall mean a branch established in the Philippines
Taxation Law
by multinational companies which are engaged in
any of the following services: general administration
and planning; business planning and coordination;
sourcing and procurement of raw materials and
components; corporate finance advisory services;
marketing control and sales promotion; training and
personnel management; logistic services; research
and development services and product
development; technical support and maintenance;
data processing and communication; and business
development.
Regional Area Headquarters
a. Branch established in the Philippines by
multinational companies;
b. Headquarters do not derive income from the
Philippines
c. Acts as supervisory, communications, and
coordinating center for their affiliates, subsidiaries
or branches in the Asia-Pacific Region and other
foreign markets
Regional Operating Headquarters
a. Branch established in the Philippines by
multinational companies;
b. Engaged in any of the following services: (a)
general administration and planning; (b) business
planning and coordination; (c) sourcing and
procurement of raw materials and components; (d)
corporate finance advisory services; (e) marketing
control and sales promotion; (f) training and
personnel management; (g) logistic services; (i)
research and development services and product
development; (j) technical support and
maintenance; (k) date processing and
communication; and (l) business development
Section 28. Rates of Income Tax on Foreign
Corporations
(A) Tax on Resident Foreign Corporations
(6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies
(a) Regional or area headquarters as defined in
Section 22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in
Section 22(EE) shall pay a tax of 10% of their
taxable income.
Alyssa Africa Page 53
6. Other Non-Resident Foreign Corporations
a. Secs. 28(B)(2) to 4
Section 28. Rates of Income Tax on Foreign
Corporations
(B) Tax on Nonresident Foreign Corporation
(2) Nonresident Cinematographic Film Owner,
Lessor or Distributor. A cinematographic film
owner, lessor or distributor shall pay a tax of 25% of
its gross income from all sources within the
Philippines
(3) Nonresident Owner or Lessor of Vessels
Chartered by Philippine Nationals A nonresident
owner of lessor of vessels shall be subject to a tax
of 4 % of gross rentals, lease or charter fees from
leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry
Authority.
(4) Nonresident Owner or Lessor of Aircraft,
Machineries and Other Equipment Rentals,
charters and other fees derived by a nonresident
lessor of aircraft, machineries and other equipment
shall be subject to a tax of 7 % of gross rentals or
fees.
4. Exempt Corporations
i. GOCCS
1. Sec. 27(C) of the NIRC
Section 27. Rates of Income Tax on Domestic
Corporations.
(C) Government-owned or Controlled Corporations,
Agencies or Instrumentalities The provisions of
existing special or general laws to the contrary
notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the
Government, except the GSIS, SSS, Philippine
Insurance Corporation (PHIC), the local water
districts (LWDs) and PCSO shall pay such rate of
tax upon their taxable income as are imposed by
this Section upon corporations or associations
engaged in a similar business, industry, or activity.
NOTE: PAGCOR was deleted from exempt GOCCs
per R.A. No. 9337.
2. RA 10026 dated March 11, 2010
PAGCOR vs. The BIR (2014)
Taxation Law
Facts:
Issue:
Held: In other words, there was no need for
Congress to grant tax exemption to petitioner with
respect to its income from gaming operations as
the same is already exempted from all taxes of any
kind or form, income or otherwise, whether national
or local, under its Charter, save only for the five
percent (5%) franchise tax. The exemption
attached to the income from gaming operations
exists independently from the enactment of R.A.
No. 8424. To adopt an assumption otherwise would
be downright ridiculous, if not deleterious, since
petitioner would be in a worse position if the
exemption was granted (then withdrawn) than when
it was not granted at all in the first place.
ii. Sec. 30 of the NIRC
Section 30. Exemptions from Tax on
Corporations. The following organizations shall
not be taxed under this Title 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 a mutual
aid association or a non-stock corporation
organized by employees providing for the
payment of life, sickness, accident, or there
benefits exclusively to the members of such
society, order, or association, or nonstock
corporation or their dependents;
(D)Cemetery company owned and operated
exclusively for the benefit of its members;
(E) Nonstock corporation or association
organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no
part of its net income or asset shall belong to or
inure to the benefit of any member, organizer,
officer of any specific person;
Alyssa Africa Page 54
(F) Business league, chamber of commerce, or
board of trade, not organized for profit and no
part of the net income of which insures to the
benefit of any private stockholder or individual;
(G) Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare;
(H) A nonstock and nonprofit educational
institution;
(I) Government educational institution;
(J) Farmers or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consist 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.
1. DOF Order No. 137-87 dated December 16,
1987
2. DOF Order No. 149-95 dated November 24,
1995
Non-stock, non-profit educational institutions are
exempt from taxes on all their revenues and assets
used actually, directly, and exclusively for
educational purposes.
Subject to taxes on income from trade, business or
other activity the conduct of which is not related to
the exercise or performance by such educational
institution of its educational purpose or function.
Taxation Law
3. Sec. 30 of RR No. 2-40 on what may be
considered income exempt from income tax
Section 30. Religious, charitable, scientific,
athletic, cultural and educational corporations
- Exempt from tax on its income IF such
corporation meets two tests:
a. It must be organized and operated for
one or more of the specified purposes
b. no part of its net income must inure to the
benefit of private stockholders or individuals
4. RMC No. 65-2012 on taxability of
condominium corporations;
Amounts paid in as dues or fees by members and
tenants of a condominium corporation form part of
the gross income of the latter subject to income tax.
Rationale: Condominium corporations furnishes
members and tenants with benefits advantages and
privileges.
Likewise subject to VAT whether nonstock nonprofit
private organization or not
5. RMC No. 9-2013 on taxability of homeowners
associations
Association dues, membership fees and other
assessments/charges collected by a homeowners
association constitute income payments or
compensation for beneficial services it provide to its
members and tenants.
Likewise subject to VAT
6. RMC No. 35-2012 on taxability of clubs
operated exclusively for pleasure, recreation
and other non-profit purposes
Income of recreational clubs from whatever source,
including but not limited to membership fees,
assessment dues, rental income and service fees
are subject to income tax.
Likewise subject to VAT
CIR vs. VG Sinco Educational Corporation
(1956)
Facts:
Alyssa Africa Page 55
Issue:
Held: While the acquisition of additional facilities,
may redound to the benefit of the institution itself, it
cannot be positively asserted that the same will
redound to the benefit of its stockholders, for no
one can predict the financial condition of the
institution upon its dissolution. At any rate, it has
been held by several authorities that the mere
provision for the distribution of its assets to the
stockholders upon dissolution does not remove the
right of an educational institution from tax
exemption. Thus, in the case of U. S. vs. Picwick
Electric Membership Corp., 158 F. 2d 272, 277, it
was held The fact that the members may
receive some benefit on dissolution upon
distribution of the assets is a contingency too
remote to have any material bearing upon the
question where the association is admittedly not a
scheme to avoid taxation and its good faith and
honesty or purpose is not challenged.
With regard to the claim
of Appellant that Appellee is not entitled to
exemption because it has not complied with the
requirement of section 24, Regulation No. 2 of the
Department of Finance, we find correct the
following observation of the Court of Tax Appeals:
And regarding the proof of exemption required by
section 24, Regulation No. 2, Department of
Finance which, according to the Defendant, is a
condition precedent before an educational
institution can avail itself of the exemption under
consideration, we understand that it was probably
promulgated for the effective enforcement of the
provisions of the Tax Code pursuant to Section 338
of the National Internal Revenue Code. Intended to
relieve the taxpayer of the duty of filing returns and
paying the tax, it cannot be said that the failure to
observe the requirement called for therein
constitutes a waiver of the right to enjoy the
exemption. To hold otherwise would be tantamount
to incorporating into our tax laws some legislative
matter by administrative regulation.
CIR vs. St. Lukes Medical Center (2012)
Facts:
Issue:
Held: The Court partly grants the petition of the BIR
but on a different ground. We hold that Section
27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand,
and Section 30(E) and (G) on the other hand, can
Taxation Law
be construed together without the removal of such
tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary non-
profit educational institutions 36 and proprietary non-
profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under
Section 27(B) instead of the ordinary 30%
corporate rate under the last paragraph of Section
30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10%
preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2)
proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be
proprietary and non-profit. "Proprietary" means
private, following the definition of a "proprietary
educational institution" as "any private school
maintained and administered by private individuals
or groups" with a government permit. "Non-profit"
means no net income or asset accrues to or
benefits any member or specific person, with all the
net income or asset devoted to the institution's
purposes and all its activities conducted not for
profit.
"Non-profit" does not necessarily mean "charitable."
The Court finds that St. Luke's is a corporation that
is not "operated exclusively" for charitable or social
welfare purposes insofar as its revenues from
paying patients are concerned. This ruling is based
not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and
plain text of Section 30(E) and (G). Section 30(E)
and (G) of the NIRC requires that an institution be
"operated exclusively" for charitable or social
welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or
(G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income
from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at
the preferential 10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy
granted by the State because an exempt institution
is spared from sharing in the expenses of
government and yet benefits from them. Tax
exemptions for charitable institutions should
therefore be limited to institutions beneficial to the
public and those which improve social welfare. A
profit-making entity should not be allowed to exploit
Alyssa Africa Page 56
this subsidy to the detriment of the government and
other taxpayers.
St. Luke's fails to meet the requirements under
Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains
a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net
income from its for-profit activities.
Ateneo de Manila vs. CIR (2010)
Facts:
Issue:
Held: Supreme Court gave only two requirements
that the educational institution must
prove, that: (1) it falls under the classification non-
stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is
used actually, directly, and exclusively for
educational purposes.
As regards the first requisite, the parties already
stipulated that petitioner is a non-stock, non-profit
educational institution. Hence, no evidence is
necessary to prove the same.
As regards the second requisite, petitioner's
witness, Mr. Jose P. Salvador, Jr., testified that the
canteen in Grade School is used as a medium for
teaching Preparatory Level and Grade School
students since it links the students' classroom
lessons with practical applications in real life.
Petitioner's witness, Ms. Leonora P. Wijancho,
affirmed that income
from cafeteria concession fees is commingled with
the other funds that make up "other educational
income," and such income is made available for
school operations such as salaries, employee
benefits, faculty development, supplies and
expenses, new books, scholarships, research, new
equipment, and major improvements.
De La Salle University, Inc. vs. CIR (2010)
Facts:
Issue:
Held: Failed to prove that the income in question is
actually, directly and exclusively used for
educational purposes.
CIR vs. CA (1998)
Facts:
Taxation Law
Issue:
Held: In the instant case, the exemption claimed by
the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of
the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any
of their properties, real or personal, be subject to
the tax imposed by the same Code. Because the
last paragraph of said section unequivocally
subjects to tax the rent income of the YMCA from
its real property, 20the Court is duty-bound to abide
strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction.
such fact does not necessarily convert it into a
profit-making enterprise. The bar and restaurant
are necessary adjuncts of the Club to foster its
purposes and the profits derived therefrom are
necessarily incidental to the primary object of
developing and cultivating sports for the healthful
recreation and entertainment of the stockholders
and members. That a Club makes some profit,
does not make it a profit-making Club. As has been
remarked a club should always strive, whenever
possible, to have surplus (Jesus Sacred Heart
College v. Collector of Int. Rev., G.R. No. L-6807,
May 24, 1954; Collector of Int. Rev. v. Sinco
Educational Corp., G.R. No. L-9276, Oct. 23,
1956).

It is axiomatic that where the language of the law is

iii. Secs. 1, 2, 6, and 9-12 of RMO 20-13 dated
clear and unambiguous, its express terms must be
July 22, 2013
applied. 21Parenthetically, a consideration of the
question of construction must not even begin,
Requires a ruling that they are exempt under
particularly when such question is on whether to
Section 30, of the NIRC upon meeting the
apply a strict construction or a liberal one on
following:
statutes that grant tax exemptions to "religious,
charitable and educational propert[ies] or
a. Must be a nonstock corporation or association
institutions." 22
organized and operated exclusively for religious,
charitable, scientific, athletic or cultural purposes,
The last paragraph of Section 27, the YMCA
or for the rehabilitation of veterans.
argues, should be "subject to the qualification that
b. Application for tax exemption and revalidation
the income from the properties must arise from
c. Documentary Requirements
activities 'conducted for profit' before it may be
d. Meet the following tests:
considered taxable." 23 This argument is erroneous.
1. Organizational Test requires that the
As previously stated, a reading of said paragraph
corporation or associations constitutive
ineludibly shows that the income from any property
documents exclusively limit its purposes to one
of exempt organizations, as well as that arising
or more of those described in par. E of Section
from any activity it conducts for profit, is taxable.
30
The phrase "any of their activities conducted for
2. Operational Test mandates that the regular
profit" does not qualify the word "properties." This
activities of the corporation or association be
makes from the property of the organization
exclusively devoted to the accomplishment of
taxable, regardless of how that income is used
the purposes specified in paragraph E. A
whether for profit or for lofty non-profit purposes.
corporation who fails to meet the test may be
considered activities conducted for profit
e. All net income or assets of the corporation or
CIR vs. Club Filipino de Cebu (1962) on
association must be devoted to its purpose and no
definition of Non-profit, discussed in the St.
part of its net income should inure to the benefit of
Lukes Case
any members or specific persons
Facts:
f. must not be a branch of a foreign non-stock
Issue:
nonprofit org.
Held: It is conceded that the Club derived profit
from the operation of its bar and restaurant, but
Alyssa Africa Page 57
Taxation Law
Validity of the ruling: 3 years from the date of Each partner shall report as a gross income
effectivity of the specified ruling his distributive share, actually or constructively
received, in the net income of the partnership.
1. RMO No. 44-2016 dated July 25, 2016
Non-stock, non-profit educational institution is 3. RMC 3-12 dated January 11, 2012
exempt by virtue of the Constitution but it must
prove that:
a. it is a non-stock non-profit educational institution;
and
b. that its income is actually, directly and
exclusively used for educational purposes

iv. Inurement Prohibition

1. RMC 51-14 dated June 6, 2014

v. General Professional Partnerships

1. Sec. 22(B) of the NIRC
Section 22. Definitions When used in this Title:
(B) The term corporation shall include
partnerships, no matter how created or organized,
joint-stock companies, joint accounts, associations,
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 or consortium
agreement under a service contract with the
Government. General professional partnerships
are partnerships formed by persons for the sole
purpose of exercising their common profession, no
part of the income of which is derived from
engaging in any trade or business.

2. Sec. 26 of the NIRC

Section 26. Tax Liability of Members of General
Professional Partnerships
A general professional partnership as such shall not
be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners
in a general professional partnership shall be liable
for income tax only on their separate and individual
capacities.
For purposes of computing the distributive
share of the partners, the net income of the
partnership shall be computed in the same manner
as a corporation.

Alyssa Africa Page 58

Taxation Law
G. Income Subject to Final Tax Applicable to
both Individuals and Corporations
1. Final Income Tax on Interests, Royalties,
Prizes and Other Winnings
i. RR No. 14-12
ii. Sec. 24(B) Citizens and Resident Aliens
1. OCWs
a. Sec. 3 of RR NO. 1-11
iii. Sec. 25(A)(2) Non-resident Alien Engaged
in Trade or Business
iv. Sec. 27(D)(1) and (3) Domestic
Corporations
v. Sec. 28(A)(7)(a) and (b) Resident Foreign
Corporations
vi. Sec. 28(B)(1)(5)(a) Non-resident Foreign
Corporation
Section 28. Rates of Income Tax on Foreign
Corporations.
(B) Tax on Nonresident Foreign Corporation
(1) In General. Except as otherwise provided in
this Code, a foreign corporation not engaged in
trade or business in the Philippines shall pay a tax
equal to 35% of the gross income received during
each taxable year from all sources within the
Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains,
profits and income, and capital gains, except capital
gains subject to tax under subparagraph 5(c):
Provided, That effective January 1, 2009, the rate
of income tax shall be 30%.
(5) Tax on Certain Incomes Received by a
Nonresident Foreign Corporation.
(a) Interest on Foreign Loans. A final withholding
tax at the rate of 20% is hereby imposed on the
amount of interest on foreign loans contracted on or
after August 1, 1986
1. Interest on Foreign Loans
Alyssa Africa Page 59
Iconic Beverages, Inc. vs. CIR (2015)
Facts:
Issue:
Held:
vii. Deposit Substitutes
1. 20-lender Rule
2. Sec. 22(Y) of the NIRC
Section 22. Definitions When used in this Title
(Y) The term deposit substitutes shall mean an
alternative form of obtaining funds from the public
other than deposits through the issuance,
endorsement
Public borrowing from 20 or more individual or
corporate lenders at one time
19 Lender Rule borrowing must be made from 20
or more individual or corporate lenders at any one
time. If 19 or less it is not deemed as a deposit
substitute.
viii. Long-Term Deposits
1. Sec. 3 of RR No. 14-12
2. Sec. 22(F) of the NIRC
BDO vs. Republic of the Philippines (2015)
Meaning of "at any one time"
Thus, from the point of view of the financial market,
the phrase "at any one time" for purposes of
determining the "20 or more lenders" would mean
every transaction executed in the primary or
secondary market in connection with the purchase
or sale of securities.
For example, where the financial assets involved
are government securities like bonds, the reckoning
of "20 or more lenders/investors" is made at any
transaction in connection with the purchase or sale
of the Government Bonds
When, through any of the foregoing transactions,
funds are simultaneously obtained from 20 or
morelenders/investors, there is deemed to be a
public borrowing and the bonds at that point intime
are deemed deposit substitutes. Consequently, the
seller is required to withhold the 20% final
withholding tax on the imputed interest income from
the bonds
Taxation Law
2. Final Income Tax on Cash and Property
Dividends
i. Sec. 24(B)(2) Citizens and Resident Aliens
ii. Sec. 25(A)(2) Non-resident Alien Engaged in
Trade or Business
iii. Sec. 27(D)(4) Domestic Corporations
(4) Intercorporate Dividends Dividends received
by a domestic corporation from another domestic
corporation shall not be subject to tax.
iv. Sec. 28(A)(7)(d) Resident Foreign
Corporations
(7) Tax on Certain Incomes Received by a Resident
Foreign Corporation.-
(d) Intercorporate Dividends Dividends received
by a resident foreign corporation from a domestic
corporation liable to tax under this Code shall not
be subject to tax under this title.
v. Sec. 28(B)(1)(5)(b) Non-resident Foreign
Corporation
(B) Tax on Nonresident Foreign Corporation
(b) Intercorporate Dividends A final withholding
tax at the rate of 15% is hereby imposed on the
amount of cash and/or property dividends received
from a domestic corporation, which shall be
collected and paid as provided in Section 57(A) of
this Code, subject to the condition that the country
in which the nonresident foreign corporation is
domiciled, shall allow the credit against the tax due
from the resident foreign corporation taxes deemed
to have been paid in the Philippines equivalent to
20%.....
Marubeni Corporation vs. CIR (1989)
Facts: Marubeni Corporation, a foreign corporation
duly organized and existing under the laws of
Japan and duly licensed to engaged in business
under Philippine laws. Marubeni had equity
investments in AG&P Manila. In 1981, AG&P
declared and paid cash dividends to Marubeni for
the first and third quarters. AG&P as a withholding
agent, paid 15% branch profit remittance tax and
directly remitted the cash dividends to petitioners
head office in Tokyo, Japan.
In a letter dated January 29, 1981,
petitioner, sought a ruling from the Bureau of
Alyssa Africa Page 60
Internal Revenue on whether or not the dividends
petitioner received from AG&P are connected with
its conduct of business in the Philippines to
consider it branch profits subject to 15% profit
remittance tax under Section 24(b)(2) of the NIRC.
The acting Commissioner replied by stating that
investing in shares of stock is not an activity which
is effectively connected with its trade or business in
the country.
Consequently, Marubeni, believing that as a
Philippine branch of Marubeni Japan, it was in
effect a resident foreign corporation, wrote a letter
to the CIR to claim its refund or issuance of tax
credit for the profit tax remittance erroneously paid
on dividends. In response, the CIR denied the claim
on the ground that while it is not subject to profit
remittance tax, because it is a non-resident
stockholder, it is subject to dividend income of 25%
pursuant to Article 10(2)(b) of the Tax Treaty. The
CTA affirmed the decision.
Issue: Whether or not Marubeni Japan is a resident
foreign corporation subject to only 10%
intercorporate final tax on dividends received from
a domestic corporation.
Held: The Solicitor General has adequately refuted
petitioner's arguments in this wise:
The general rule that a foreign corporation is
the same juridical entity as its branch office in
the Philippines cannot apply here. This rule is
based on the premise that the business of the
foreign corporation is conducted through its
branch office, following the principal agent
relationship theory. It is understood that the
branch becomes its agent here. So that when
the foreign corporation transacts business in
the Philippines independently of its branch, the
principal-agent relationship is set aside. The
transaction becomes one of the foreign
corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted
through the branch office, the latter becomes the
taxpayer, and not the foreign corporation.
1. Tax Sparing Rule
CIR vs. Wander Philippines (1988)
Taxation Law
Two requisites of tax sparing:
a. dividends must be received by a nonresident
foreign corporation from a domestic corporation;
b. there should be a preferential withholding tax of
15%
c. 20% is deemed paid on the ground that that the
home country of the nonresident foreign
corporation grants tax credit on the same amount
based on the difference between the normal
income tax of 35% on corporations and the
prefential income tax.
CIR vs. Proctor & Gamble Philippine
Manufacturing Corp. (1991)
iv. Se. 27(D)(5) Domestic Corporations
SMI-ED Technology Corporation, Inc. vs. CIR
(2014)
v. RR No. 8-98 dated August 25, 1998
vi. Foreclosure Sales
1. RR No. 4-99 dated March 9, 1999
2. RMC No. 058-08 dated August 15, 2008 who
should pay/statutory seller
3. RR No. 9-2012 dated May 31, 2012
vii. Sale of Principal Residence
1. RR No. 13-99 dated July 26, 1999
2. RR No. 14-00 dated November 20, 1999

3. Final Income Tax on Sale of Shares of Stock

i. Sec. 24(C) Citizens and Resident Aliens

ii. Sec. 25(A)(3) Non-resident Alien Engaged in

Trade or Business

iii. Sec. 25(B) Non-resident Alien Not Engaged

in Trade or Business

iv. Sec. 27(D)(2) Domestic Corporations

Jardine Davies vs. CIR

v. Sec. 28(A)(7)(c) Resident Foreign

Corporations

vi. Sec. 28(B)(1)(5)(c) Non-resident Foreign

Corporation

vii. Stock Transaction Tax

1. Sec. 127 of the NIRC

viii. RR No. 6-2008 dated April 22, 2008

4. Final Income Tax on Sale of Real Property

i. Sec. 24(D)(1) Citizens and Resident Aliens

ii. Sec. 25(A)(3) Non-resident Alien Engaged in

Trade or Business
iii. Sec. 25(B) Non-resident Alien Not Engaged
in Trade or Business

Alyssa Africa Page 61

Taxation Law
H. Taxes Applicable to Corporations
i. Regular Corporate Income Tax vs. Minimum
Corporate Income Tax
1. Regular Corporate Income Tax
Section 27. Rates of Income Tax on Domestic
Corporations.
(A) In General Except as otherwise provided in
this Code, an income tax of 35% is hereby imposed
upon the taxable income derived during each
taxable year from all sources within and without the
Philippines by every corporation, as defined in
Section 22(B) of this Code and taxable under this
Title as a corporation, organized in, or existing
under the laws of the Philippines: Provided, That
effective January 1, 2009, the rate of income shall
be 30%.
In the case of corporations adopting the fiscal-
year accounting period, the taxable income shall be
computed without regard to the specific date when
specific sales, purchases and other transactions
occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and
spent equally for each month of the period.
The corporate income tax rate shall be applied
on the amount computed by multiplying the number
of months covered by the new rate within the fiscal
year by the taxable income of the corporation for
the period divided by 12.
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may
effective January 1, 2000, allow corporations the
option to be taxed at 15% of gross income as
defined herein, after the following conditions have
been satisfied:
(1) A tax effort ratio of 20% of Gross National
Product;
(2) A ratio of 40% of income tax collection to
total tax revenues;
(3) A VAT tax effort of 4% of GNP; and
(4) A 0.9% ratio of the Consolidated Public
Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income
shall be available only to firms whose ratio of cost
of sales to gross sales or receipts from all sources
does not exceed 55%
The election of the gross income tax option by
the corporation shall be irrevocable for 3
Alyssa Africa Page 62
consecutive taxable years during which the
corporation is qualified under the scheme.
For purposes of this Section, the term gross
income derived from business shall be equivalent
to gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods
sold shall include all business expenses directly
incurred to produce the merchandise to bring them
to their present location and use.
For a trading or merchandising concern,
cost of goods sold shall include the invoice cost
of the goods sold, plus import duties, freight in
transporting goods to the place where the goods
are actually sold, including insurance while the
goods are in transit.
For a manufacturing concern, cost of goods
manufactured and sold shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or
warehouse.
In the case of taxpayers engaged in the sale of
service, gross income means gross receipts
less sales returns, allowances and discounts.
Corporations Liable: Domestic Corporations and
Resident Foreign Corporations
Tax Rate:30%
Tax Base: Taxable Income
Formula:
Gross Sales
Less: Sales returns
Sales allowances
Sales discounts
= Net Sales
Less: Cost of goods sold
= Gross Income from Sales
Add: Incidental Income/Other Income
=Gross Income
Less: Allowable Deductions
=Taxable Income
Multiply by: 30%
=RCIT due
2. Minimum Corporate Income Tax
a. Secs. 27(E) and 28(A)(2) of the NIRC
Taxation Law
Section 27. Rates of Income Tax on Domestic
Corporations
(E) Minimum Corporate Income Tax on Domestic
Corporations
(1) Imposition of Tax A minimum corporate
income tax of 2% of the gross income as of the end
of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title,
beginning on the 4th taxable year immediately
following the year in which such corporation
commenced its business operations, when the
minimum income tax is greater than the tax
computed under Subsection (A) of this Section for
the taxable year.
(2) Carry Forward of Excess Minimum Tax Any
excess of the minimum corporate income tax over
the normal income tax as computed under
Subsection (A) of this Section shall be carried
forward and credited against the normal income tax
for the 3 immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax
Under Certain Conditions The Secretary of
Finance is hereby authorized to suspend the
imposition of the minimum corporate income tax on
any corporation which suffers losses on account of
prolonged labor dispute, or because of force
majeure, or because of legitimate business
reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Commissioner, the necessary rules and regulations
that shall define the terms and conditions under
which he may suspend the imposition of the
minimum corporate income tax is a meritorious
case.
(4) Gross Income Defined For purposes of
applying the minimum corporate income tax
provided under Subsection (E) hereof, the term
gross income shall mean gross sales less sales
returns, discounts, and allowances and cost of
goods sold. Cost of goods sold shall include all
business expenses directly incurred to produce the
merchandise to bring them to their present location
and use.
For a trading or merchandising concern, cost of
goods sold shall include the invoice of the goods
sold, plus imports duties, freight in transporting the
goods to the place where the goods are actually
Alyssa Africa Page 63
sold including insurance while the goods are in
transit.
Fore a manufacturing concern, cost of goods
manufactured and sold shall include all costs of
productions of finished goods, such as raw
materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to
the factory or warehouse.
In the case of taxpayers engaged in the sale of
service, gross income means gross receipts less
sales returns, allowances, discounts and cost of
services. Cost of services shall mean all direct
costs and expenses necessarily incurred to provide
the services required by the customers and clients
including (A) salaries and employee benefits of
personnel, consultants and specialists directly
rendering the service and (B) cost of facilities
directly utilized in providing the services such as
depreciation or rental of equipment used and cost
of supplies: Provided, however, That in the case of
banks, cost of services shall include interest
expense.
Section 28. Rates of Income Tax on Foreign
Corporations
(A) Tax on Resident Foreign Corporations.
(2) Minimum Corporate Income Tax on Resident
Foreign Corporations A minimum corporate
income tax of 2% of gross income, as prescribed
under Section 27(E) of this Code, shall be imposed,
under the same conditions, on a resident foreign
corporation taxable under paragraph (1) of this
Subsection.
b. RR No. 9-98 dated August 25, 1998
NOTE: Applies to domestic and resident foreign
corporations
MCIT applies:
(a) on the beginning of the 4 th taxable year
immediately following the taxable year in which
such corporation (DC and RFC) commenced its
business operations; and
(b) whenever such corporation has zero or negative
taxable income or whenever the amount of
minimum-corporate income tax is greater than the
normal income tax due from such corporation;
 Taxation Law
NOTE: in case of domestic corporations whose
operations or activities are partly covered by the
regular income tax system and partly covered
under a special income tax system, MCIT apply on
operations covered by the regular income tax
system;
Carry Forward of Excess Minimum Corporate
Income Tax
Excess over the normal shall be carried forward on
an annual basis and credited against the normal
income tax for the 3 immediately succeeding
taxable year.
The corporation can credit the excess of its MCIT
over the normal income tax if the RCIT is greater
than the MCIT, and it can be creditable within the
next 3 years from payment thereof.
Relief from the MCIT under Certain Conditions
requisites:
(a) submission of proof by the applicant-
corporation, duly verified by the Commissioners
authorized representative that the corporation
sustained substantial losses on account of:
(i.) prolonged labor dispute;
(ii) force majeure; or
(iii) legitimate business reverses
(b) Recommendation of the Commissioner to the
Secretary of Finance
Substantial Losses from a Prolonged Labor
Dispute (CLAWS)
(a) Losses;
(b) Arising from a strike staged by employees;
(c) Strike lasted for more than 6 months;
(d) Within a taxable period;
(e) Caused the temporary shutdown of business
operations;
Force Majeure
A cause due to an irresistible force as by Act of
God like lightning, earthquake, storm, flood and
the like; this includes armed conflicts like war or
insurgency.
Legitimate Business Reverses
Alyssa Africa Page 64
Substantial losses sustained due to:
(a) fire;
(b) robbery;
(c) theft or embezzlement; or
(d) other economic reason as determined by the
Secretary of Finance
Period When a Corporation Becomes Subject to
the MCIT (DC and RFC)
Taxable Year in which Business Operations
Commenced - Period in which the domestic
corporation is registered with the BIR
Transitory Rule for 1998 Apportionment formula
should the imposition of the MCIT cover only part of
the taxable year for businesses using fiscal year
basis.
Manner of Filing and Payment
Paid on a taxable year basis; tax return to be
submitted with the corporate annual final
adjustment income tax return
Accounting Treatment of the Excess Minimum
Corporate Income Tax Paid
Recorded as deferred charges-MCIT in the
corporate books
Provision for income tax for RCIT
Exempted Domestic Corporations from MCIT
(a) Domestic corporations Operating as Proprietary
Educational Institutions Subject to tax of 10% on
their taxable income; or
(b) Domestic corporations engaged in hospital
operations which are non-profit subject to tax at
10% on their taxable income; and
(c) Domestic corporations engaged in business as
depository banks under the expanded foreign
currency deposit system, otherwise known as
FCDU, on their income from foreign currency
transactions with local commercial banks, including
branches of foreign banks, authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system,
including their interest income from foreign
currency loans granted to residents of the
Philippines under the expanded foreign currency
deposit system, subject to final income tax of 10%
of such income;
 Taxation Law
(d) Firms taxed under a special income tax regime
(i.e. PEZA law and Bases Conversion Development
Act);
Exempted Resident Foreign Corporations from
MCIT
(a) Resident foreign corporations engaged in
business as international carrier subject to tax at 2
% of GPB;
(b) Resident foreign corporations engaged in
business as Offshore Banking Units(OBUs) on their
income from foreign currency transactions with
local commercial banks, including branches of
foreign banks, authorized by the BSP to transact
business with OBUs including interest income from
foreign currency loans granted to residents of the
Philippines, subject to a final income tax of 10% of
such income; and
(c) Resident foreign corporations engaged in
business as regional operating headquarters
subject to tax at 10% of their taxable income;
(d) Firms that are taxed under a special income tax
regime (i.e. PEZA law, and Bases Conversion
Development Act, respectively)
c. RR No. 12-07 dated October 10, 2007
Computation and Payment of MCIT
Likewise apply at the time of filing the quarterly
corporate income tax return (2% gross income at
the end of taxable quarter)
Excess MCIT from the previous taxable years, not
allowed to be credited
Credited expanded withholding tax, quarterly
corporate income tax payments under RCIT, MCIT
paid in previous taxable quarters
Filing of the Quarterly Income Tax Return
Computation is on cumulative basis covering
previous taxable quarters of the same taxable year
CREBA vs. Romulo (2010)
Facts:
Issue:
Held:
Manila Banking Corporation vs. CIR (2006)
Facts:
Alyssa Africa Page 65
Issue:
Held:
ii. Branch Profit Remittance Tax
1. Sec. 28(A)(5) of the NIRC
Section 28. Rates of Income Tax on Foreign
Corporations
(A) Tax on Resident Foreign Corporations
(5) Tax on Branch Profits Remittance Any profit
remitted by a branch to its head office shall be
subject to a tax of 15% which shall be based on the
total profits applied to earmarked for remittance
without any deduction for the tax component
thereof (except those activities which are registered
with PEZA). The tax shall be collected and paid in
the same manner as provided in Sections 57 and
58 of this Code: Provided, That interests, dividends,
rents, royalties, including remuneration for technical
services, salaries, wages, premiums, annuities,
emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital
gains received by a foreign corporation during each
taxable year from all sources within the Philippines
shall not be treated as branch profits unless the
same are effectively connected with the conduct of
its trade or business in the Philippines.
Bank of America NT &SA vs. CA (1994)
Facts: Petitioner Bank of America NT & SA argues
that the 15% branch profit remittance tax on the
basis of the above provision should be assessed on
the amount actually remitted abroad, which is to
say that the 15% profit remittance tax itself should
not form part of the tax base. Respondent
Commissioner of Internal Revenue, contending
otherwise, holds the position that, in computing the
15% remittance tax, the tax should be inclusive of
the sum deemed remitted.
Issue:
Held: In the 15% remittance tax, the law specifies
its own tax base to be on the "profit remitted
abroad." There is absolutely nothing equivocal or
uncertain about the language of the provision. The
tax is imposed on the amount sent abroad, and the
law (then in force) calls for nothing further. The
taxpayer is a single entity, and it should be
understandable if, such as in this case, it is the
Taxation Law
local branch of the corporation, using its own local
funds, which remits the tax to the Philippine
Government.
The remittance tax was conceived in an attempt to
equalize the income tax burden on foreign
corporations maintaining, on the one hand, local
branch offices and organizing, on the other hand,
subsidiary domestic corporations where at least a
majority of all the latter's shares of stock are owned
by such foreign corporations. Prior to the
amendatory provisions of the Revenue Code, local
branches were made to pay only the usual
corporate income tax of 25%-35% on net income
(now a uniform 35%) applicable to resident foreign
corporations (foreign corporations doing business
in the Philippines). While Philippine subsidiaries of
foreign corporations were subject to the same rate
of 25%-35% (now also a uniform 35%) on their net
income, dividend payments, however, were
additionally subjected to a 15% (withholding) tax
(reduced conditionally from 35%). In order to avert
what would otherwise appear to be an unequal tax
treatment on such subsidiaries vis-a-vis local
branch offices, a 20%, later reduced to 15%, profit
remittance tax was imposed on local branches on
their remittances of profits abroad. But this is where
the tax pari-passu ends between domestic
branches and subsidiaries of foreign corporations.
iii. Improperly Accumulated Earnings Tax
1. Sec. 29 of the NIRC
Section 29. Imposition of Improperly Accumulated
Earnings Tax
(A) In General In addition to other taxes imposed
by this Title, there is hereby imposed for each
taxable year on the improperly accumulated taxable
income of each corporation described in
Subsection B hereof, on improperly accumulated
earnings tax equal to 10% of the improperly
accumulated taxable income.
(B) Tax on Corporations Subject to Improperly
Accumulated Earnings Tax
(1) In General The improperly accumulated
earnings tax imposed in the preceding
Subsection shall apply to 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
Alyssa Africa Page 66
accumulate instead of being divided or
distributed.
(2) Exceptions The improperly accumulated
earnings tax as provided for under this Section
shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial
intermediaries; and
(c) Insurance companies
(C) Evidence of Purpose to Avoid Income Tax
(1) Prima Facie Evidence The fact that any
corporation is a mere holding company or
investment company shall be prima facie
evidence of a purpose to avoid the tax upon its
shareholders or members.
(2) Evidence Determinative of Purpose The
fact that the earnings or profits of a corporation
are permitted to accumulate beyond the
reasonable needs of the business shall be
determinative of the purpose to avoid the tax
upon its shareholders or members unless the
corporation, by the clear preponderance of
evidence, shall prove to the contrary.
(D) Improperly Accumulated Taxable Income For
purposes of this Section, the term improperly
accumulated taxable income means taxable
income adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-
over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid;
and
(2) Income tax payable.
Provided, however, That for corporations using the
calendar year basis, the accumulated earnings tax
shall not apply on improperly accumulated income
as of December 31, 1997. In the case of
corporations adopting the fiscal year accounting
period, the improperly accumulated income not
subject to this tax, shall be reckoned, as of the end
of the month comprising the 12 month period of
fiscal year 1997-1998.
(E) Reasonable Needs of the Business For
purposes of this Section, the term reasonable
Taxation Law
needs of the business includes the reasonably
anticipated needs of the business.
2. RR No. 2-01 dated February 12, 2001
Rationale
If the earnings and profits were distributed, the
shareholders would then be liable to income tax
thereon, whereas if the distribution were not made
to them, they would incur no tax in respect to the
undistributed earnings and profits of the
corporation. Thus, a tax being imposed in the
nature of a penalty to the corporation for the
improper accumulation of its earnings, and as a
form of deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends
tax on the earnings distributed to them by the
corporation.
3. Immediacy Test
Cyanamid Phils., Inc. vs. CA (2000)
Facts:
Issue:
Held: To determine the "reasonable needs" of the
business in order to justify an accumulation of
earnings, the Courts of the United States have
invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the
business" to mean the immediate needs of the
business, and it was generally held that if the
corporation did not prove an immediate need for
the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of
the business, and the penalty tax would apply.

Basis of Liability
Purpose behind the accumulation of the income
and not the consequence of accumulation. If the
failure to pay dividends is due to some other
causes, such as the use of undistributed earnings
and profits for the reasonable needs of the
business, such purpose would not generally make
the accumulated or undistributed earnings subject
to the tax.

Corporations Exempt from Improperly

Accumulated Earnings Tax
(a) Banks and other non-bank financial
intermediaries;
(b) Insurance Companies;
(c) Publicly-held Corporations;
(d) Taxable Partnerships;
(e) General Professional Partnerships;
(f) Non-taxable joint ventures; and
(g) Enterprises duly registered with PEZA and
Bases Conversion Development Act, and special
economic zones.

a. Clarification by RMC No. 35-11 dated March

14, 2011
Reasonable Needs of the Business shall be
100% of the paid-up capital of the amount
contributed to the corporation representing the par
value of the shares of stock, hence, any excess
capital over and above the par shall be excluded.
Alyssa Africa Page 67
Taxation Law
I. Inclusions from Gross Income
1. Sec. 32(A)
Section 32 Gross Income
(A) General Definition Except when otherwise
provided in this Title, gross income means all
income derived from whatever source, including but
not limited to the following items:
(1) Compensation for services in whatever form
paid, including but not limited to fees, salaries,
wages, commissions, and similar items;
(2) Gross income derived from the conduct of
trade or business or the exercise of a
profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partners distributive share from the net
income from the general professional
partnership.
2. Compensation
i. Sec. 2.78.1(A) of RR No. 2-98
(A) Compensation Income Defined. In general,
the term "compensation" means all remuneration
for services performed by an employee for his
employer under an employer-employee
relationship, unless specifically excluded by the
Code.
The name by which the remuneration for services is
designated is immaterial. Thus, salaries, wages,
emoluments and honoraria, allowances,
commissions (e.g. transportation, representation,
entertainment and the like); fees including director's
fees, if the director is, at the same time, an
employee of the employer/corporation; taxable
bonuses and fringe benefits except those which are
subject to the fringe benefits tax under Sec. 33 of
the Code; taxable pensions and retirement pay;
and other income of a similar nature constitute
compensation income.
The basis upon which the remuneration is paid is
immaterial in determining whether the remuneration
constitutes compensation. Thus, it may be paid on
the basis of piece-work, or a percentage of profits;
and may be paid hourly, daily, weekly, monthly or
annually.
Alyssa Africa Page 68
Remuneration for services constitutes
compensation even if the relationship of employer
and employee does not exist any longer at the time
when payment is made between the person in
whose employ the services had been performed
and the individual who performed them.
(1) Compensation paid in kind.
Compensation may be paid in money or in some
medium other than money, as for example, stocks,
bonds or other forms of property. If services are
paid for in a medium other than money, the fair
market value of the thing taken in payment is the
amount to be included as compensation subject to
withholding. If the services are rendered at a
stipulated price, in the absence of evidence to the
contrary, such price will be presumed to be the fair
market value of the remuneration received.
If a corporation transfers to its employees its own
stock as remuneration for services rendered by the
employee, the amount of such remuneration is the
fair market value of the stock at the time the
services were rendered.
(2) Living quarters or meals.
If a person receives a salary as remuneration for
services rendered, and in addition thereto, living
quarters or meals are provided, the value to such
person of the quarters and meals so furnished shall
be added to the remuneration paid for the purpose
of determining the amount of compensation subject
to withholding. However, if living quarters or meals
are furnished to an employee for the convenience
of the employer, the value thereof need not be
included as part of compensation income.
(3) Facilities and privileges of a relatively small
value.
Ordinarily, facilities and privileges (such as
entertainment, medical services, or so called
"courtesy" discounts on purchases), furnished or
offered by an employer to his employees generally,
are not considered as compensation subject to
withholding if such facilities or privileges are of
relatively small value and are offered or furnished
by the employer merely as a means of promoting
the health, goodwill, contentment, or efficiency of
his employees.
Where compensation is paid in property other than
money, the employer shall make necessary
arrangements to ensure that the amount of the tax
required to be withheld is available for payment to
the Commissioner.
Taxation Law
(4) Tips and gratuities.
Tips or gratuities paid directly to an employee by a
customer of the employer which are not accounted
for by the employee to the employer are considered
as taxable income but not subject to withholding.
(5) Pensions, retirement and separation pay.
Pensions, retirement and separation pay constitute
compensation subject to withholding, except those
provided under Subsection B of this section.
(6)Fixed or variable transportation,
representation and other allowances
(a) IN GENERAL, fixed or variable transportation,
representation and other allowances which are
received by a public officer or employee or officer
or employee of a private entity, in addition to the
regular compensation fixed for his position or office,
is compensation subject to withholding.
(b) Any amount paid specifically, either as
advances or reimbursements for travelling,
representation and other bonafide ordinary and
necessary expenses incurred or reasonably
expected to be incurred by the employee in the
performance of his duties are not compensation
subject to withholding, if the following
conditions are satisfied:
i) It is for ordinary and necessary travelling and
representation or entertainment expenses paid or
incurred by the employee in the pursuit of the trade,
business or profession; and
(ii) The employee is required to account/liquidate
for the foregoing expenses in accordance with the
specific requirements of substantiation for each
category of expenses pursuant to Sec. 34 of the
Code. The excess of actual expenses over
advances made shall constitute taxable income if
such amount is not returned to the employer.
Reasonable amounts of reimbursements/ advances
for travelling and entertainment expenses which are
pre-computed on a daily basis and are paid to an
employee while he is on an assignment or duty
need not be subject to the requirement of
substantiation and to withholding.
(7) Vacation and sick leave allowances.
Amounts of "vacation allowances or sick leave
credits" which are paid to an employee constitute
compensation. Thus, the salary of an employee on
vacation or on sick leave, which are paid
notwithstanding his absence from work, constitutes
compensation. However, the monetized value of
unutilized vacation leave credits of ten (10) days or
less which were paid to the employee during the
Alyssa Africa Page 69
year are not subject to income tax and to the
withholding tax.
(8) Deductions made by employer from
compensation of employee.
Any amount which is required by law to be
deducted by the employer from the compensation
of an employee including the withheld tax is
considered as part of the employee's compensation
and is deemed to be paid to the employee as
compensation at the time the deduction is made.
(9) Remuneration for services as employee of a
nonresident alien individual or foreign entity.
The term "compensation" includes remuneration for
services performed by an employee of a
nonresident alien individual, foreign partnership or
foreign corporation, whether or not such alien
individual or foreign entity is engaged in trade or
business within the Philippines. Any person paying
compensation on behalf of a non-resident alien
individual, foreign partnership, or foreign
corporation which is not engaged in trade or
business within the Philippines is subject to all
provisions of law and regulations applicable to an
employer.
(10) Compensation for services performed
outside the Philippines.
Remuneration for services performed outside the
Philippines by a resident citizen for a domestic or a
resident foreign corporation or partnership, or for a
non-resident corporation or partnership, or for a
non-resident individual not engaged in trade or
business in the Philippines shall be treated as
compensation which is subject to tax.
A non-resident citizen as defined in these
regulations is taxable only on income derived from
sources within the Philippines. In general, the situs
of the income whether within or without the
Philippines, is determined by the place where the
service is rendered.
3. Gross Income from Trade or Business
i. Forgiveness of Indebtedness
1. Sec. 50 of RR No. 2-40
SECTION 50. Forgiveness of indebtedness.
The cancellation and forgiveness of indebtedness
may amount to a payment of income, to a gift, or to
a capital transaction, dependent upon the
circumstances. If, for example, an individual
performs services for a creditor, who, in
consideration thereof cancels the debt, income to
Taxation Law
that amount is realized by the debtor as
compensation for his services. If, however, a
creditor merely desires to benefit a debtor and
without any consideration therefor cancels the debt,
the amount of the debt is a gift from the creditor to
the debtor and need not be included in the latter's
gross income. If a corporation to which a
stockholder is indebted forgives the debt, the
transaction has the effect of the payment of a
dividend.
Creditor cancels the debt based on consideration
taxable
Creditor cancels the debt without consideration
not taxable/gift
4. Gains from Dealings in Property
5. Interests
i. Rule on Imputation of Interest on Loans
CIR vs. Filinvest Development Corporation
(2011)
Facts:
Issue:
Held:
6. Rents
i. Rule on Improvements
1. Sec. 49 of RR No. 2-40
SECTION 49. Improvements by lessees.
When buildings are erected or improvements made
by a lessee in pursuance of an agreement with the
lessor, and such buildings or improvements are not
subject to removal by the lessee, the lessor may at
his option report the income therefrom upon either
of the following bases;
(a) The lessor may report as income at the time
when such buildings or improvements are
completed the fair market value of such buildings or
improvements subject to the lease.
(b) The lessor may spread over the life of the lease
the estimated depreciated value of such buildings
or improvements at the termination of the lease and
report as income for each year of the lease an
aliquot part thereof.
If for any other reason than a bona fide purchase
from the lessee by the lessor the lease is
terminated, so that the lessor comes into
possession or control of the property prior to the
time originally fixed for the termination of the lease,
the lessor receives additional income for the year in
Alyssa Africa Page 70
which the lease is so terminated to the extent that
the value of such buildings or improvements when
he became entitled to such possession exceeds the
amount already reported as income on account of
the erection of such buildings or improvements. No
appreciation in value due to causes other than the
premature termination of the lease shall be
included. Conversely, if the building or
improvements are destroyed prior to the expiration
of the lease, the lessor is entitled to deduct as a
loss for the year when such destruction takes place
the amount previously reported as income because
of the erection of such buildings or improvements,
less any salvage value subject to the lease to the
extent that such loss was not compensated for by
insurance. If the buildings or improvements
destroyed were acquired prior to March 1, 1913,
the deduction shall be based on the cost or the
value subject to the lease to the extent that such
loss was not compensated for by insurance.
7. Royalties
8. Dividends
Any distribution made by a corporation to its
shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in
other property. (Sec. 73(A))
i. Cash and/or Property Dividends
ii. Forgiveness of Indebtedness
1. Sec. 50 of RR No. 2-40
SECTION 50. Forgiveness of indebtedness.
The cancellation and forgiveness of indebtedness
may amount to a payment of income, to a gift, or to
a capital transaction, dependent upon the
circumstances. 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 services. If, however, a
creditor merely desires to benefit a debtor and
without any consideration therefor cancels the debt,
the amount of the debt is a gift from the creditor to
the debtor and need not be included in the latter's
gross income. If a corporation to which a
stockholder is indebted forgives the debt, the
transaction has the effect of the payment of a
dividend.
Taxation Law
iii. Stock Dividends
1. Sec. 73(B) of the NIRC
Section 73. Distribution of Dividends of Assets by
Corporations
(B) Stock Dividend A stock dividend representing
the transfer of surplus to capital account shall not
be subject to tax. However, if a corporation cancels
or redeems stock issued as a dividend at such time
and in such manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption
or cancellation of the stock shall be considered as
taxable income to the extent that it represents a
distribution of earnings or profits.
CIR vs. Manning (1975)
Facts:
Issue:
Held:
CIR vs. CA (1999)
Facts:
Issue:
Held:
iv. Liquidating Dividends
1. Sec. 73(A) of the NIRC
Section 73. Distribution of Dividends or Assets by
Corporation
(A) Definition of Dividends The term dividends
when used in this Title means any distribution made
by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders,
whether in money or in other property.
Where a corporation distributes all of its assets
in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder,
whether individual or corporate, is a taxable income
or a deductible loss as the case may be.
2. RR. No. 6-2008 dated April 22, 2008
Persons Liable to Tax
(a) Individual taxpayer, whether citizen or alien;
(b) Corporate taxpayer, whether domestic or
foreign; and
Alyssa Africa Page 71
(c) Other taxpayers not falling under a and b such
as estates, trust funds, and pension funds among
others
Persons not Liable to the Tax. The taxes
imposed herein shall not apply to the following:
(a) Dealers in securities;
(b) Investors in shares of stock in a mutual fund
company, as defined in Section 22 (BB) of the Tax
Code, as amended, and Sec. 2 (s) of these
Regulations, in connection with the gains realized
by said investor upon redemption of said shares of
stock in a mutual fund company; and (c) All other
persons, whether natural or juridical, who are
specifically exempt from national internal revenue
taxes under existing investment incentives and
other special laws.
Sale, Barter or Exchange of Shares of Stock Listed
and Traded Through the Local Stock Exchange.
There shall be levied, assessed and collected on
every sale, barter, exchange or other disposition of
Shares of Stock Listed and Traded through the
Local Stock Exchange other than the sale by a
dealer of securities, under the following rules:
(a) Tax Rate. A stock transaction tax at the rate
of one-half of one percent (1/2 of 1%) based on the
amount determined in subsection (b) hereunder.
(b) Tax Base. Gross selling price or gross value
in money of the shares of stock sold, bartered,
exchanged or otherwise disposed which shall be
assumed and paid by the seller or transferor
through the remittance of the stock transaction tax
by the seller or transferor's broker.
Sale, Barter or Exchange, or Issuance of Shares
of Stock Through IPO. There shall be levied,
assessed and collected on every sale, barter,
exchange or other disposition through initial public
offering (IPO) of shares of stock in closely held
corporations, as defined in Sec. 2 (q) hereof, under
the following rules:
CSTEHI
(a) Tax Rates. A tax at the rates provided
hereunder shall be imposed based on subsection
(b) hereof in accordance with the proportion of
shares of stock sold, bartered, exchanged or
otherwise disposed to the total outstanding shares
of stock after the listing in the Local Stock
Exchange: Proportion of Disposed Shares to
Outstanding Shares Tax Rate Up to twenty-five
percent (25%) 4% Over twenty-five percent (25%)
but not over thirty three and one-third percent (33
Taxation Law
1/3%) 2% Over thirty-three and one third percent
(33 1/3%) 1%
(b) Tax Base. Gross selling price or gross value
in money of the shares of stock sold, bartered,
exchanged or otherwise disposed of.
(c) Determination of the Persons Liable to Pay the
Tax.
(c.1) Primary Offering. The tax herein imposed
shall be paid by the issuer corporation with respect
to the Shares of Stock corresponding to the
Primary Offering.
(c.2) Secondary Offering. The tax herein
imposed shall be paid by the selling shareholder(s)
with respect to the Shares of Stock corresponding
to the Secondary Offering.
Sale, Barter or Exchange of Shares of Stock Not
Traded Through a Local Stock Exchange
Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D)
(2), 28 (A) (7) (C), 28 (B) (5) (C) of The Tax Code,
as Amended.
(a) Tax Rate. The provisions of Sec. 39 (B) of
the Tax Code, as amended, notwithstanding, a final
tax at the rates prescribed below is hereby imposed
on the sale, barter or exchange of shares of stock
not traded through the Local Stock Exchange
pursuant to Secs. 24 (C), 25 (A) (3), 25 (B), 27 (D)
(2), 28 (A) (7) (c), 28 (b) (5) (c) of the said Tax
Code, as amended.
Amount of Capital Gain Tax Rate
Not over Php100,000 5%
On any amount in excess of Php100,000 10%
(b) Tax Base. The tax imposed in Subsection (a)
above shall be upon the net capital gains realized
during the taxable year from the sale, barter,
exchange or disposition of shares of stock, except
shares sold or disposed of through the Local
Stock Exchange which is covered by the provisions
of Secs. 5 and 6 above.
Wise & Co., Inc. vs. Meer (1947)
Facts:
Issue:
Held: Liquidated dividends received by the
stockholders of a dissolved corporation must be
deemed as taxable income because and no stock
can be redeemed by a dissolved corporation.
9. Annuities
10. Prizes and Winnings
Alyssa Africa Page 72
11. Pensions
12. Partners distributive share from the net
income of the general professional partnership
i. Sec. 26 of the NIRC
Section 26. Tax Liability of Members of General
Professional Partnerships
A general professional partnership as such shall not
be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners
in a general professional partnership shall be liable
for income tax only on their separate and individual
capacities.
For purposes of computing the distributive
share of the partners, the net income of the
partnership shall be computed in the same manner
as a corporation.
Each partner shall report as a gross income
his distributive share, actually or constructively
received, in the net income of the partnership.
ii. RMC 3-12 dated January 11, 2012
General Professional Partnerships
- not subject to income tax or withholding of
creditable withholding tax
Persons engaging in business as partners in a
general professional partnership shall be liable for
income tax only in their separate and individual
capacities.
NOTE: Income payments made periodically or at
the end of the taxable year by a GPP to the
partners, such as drawings, advances, sharings,
allowances, stipends and the like, are subject to the
15% if the payments to the partner for the current
year exceeds P720,000.00 and 10% creditable
withholding tax if otherwise.
13. Tax Benefit Rule
i. Refunded Taxes
1. Sec. 34(C)(1) of the NIRC
Section 34. Deductions from Gross Incomes
Except for taxpayers earning compensation income
arising from personal services rendered under an
employer-employee relationship where no
deductions shall be allowed under this Section
other than under Subsection (M) hereof, in
computing taxable income subject to income tax
Taxation Law
under Sections 24(A)[Individual Citizen and
Individual Resident Alien]; 25(A)[Nonresident Alien
Engaged in Trade or Business within the
Philippines]; 26[Members of General Professional
Partnerships]; 27(A)[Domestic Corporations], (B)
[Proprietary Education Institutions and Hospitals]
and (C)[Government-owned or Controlled
Corporations, Agencies or Instrumentalities]; and
28(A)(1)[Resident Foreign Corporation], there shall
be allowed the following deductions from gross
income:
(C) Taxes
(1) In General Taxes paid or incurred within the
taxable year in connection with the taxpayers
profession, trade or business, shall be allowed as
deduction, except:
(a) The income tax provided for under this
Title;
(b) Income taxes imposed by authority of any
foreign country; but this deduction shall be
allowed in the case of a taxpayer who does
not signify in his return his desire to have to
any extent to the benefits of paragraph (3) of
this Subsection (relating to credits for taxes of
foreign countries);
(c) Estate and donors taxes; and
(d) Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed.
Provided, That taxes allowed under this
Subsection, when refunded or credited, shall be
included as part of the gross income in the year of
receipt to the extent of the income tax benefit of
said deduction.
ii. Recovered Bad Debts
1. Sec. 34(E)(1) of the NIRC
Section 34. Deductions from Gross Income
(E) Bad Debts.
(1) In General. Debts due to the taxpayer actually
ascertained to be worthless and charged off within
the taxable year except those not connected with
profession, trade or business and those sustained
in a transaction entered into between parties
mentioned under Section 36(B) of this Code:
Provided, That recovery of bad debts previously
allowed as deduction in the preceding years shall
be included as part of the gross income in the year
Alyssa Africa Page 73
of recovery to the extent of the income tax benefit
of said deduction.
Following Items not Subject to Bad Debts
(a) Transactions not connected with profession,
trade or business;
(b) Losses from sales or exchanges or property
between: (Section 36B)
(1) Family members (spouse, ancestors, lineal
descendants, and brothers and sisters whether by
the whole of half blood);
(2) In case of distributions in liquidation
between an individual and a corporation more than
50% in value of the OS of which is owned, directly
or indirectly, by or for such individual;
(3) Distributions in liquidations between 2
corporations more than 50% in value of the OS of
each of which is owned, directly or indirectly, by of
for the same individual if either one of such
corporations with respect to the taxable year of the
corporation preceding the date of the sale or
exchange was, under the law applicable to such
taxable year, a personal holding company or a
foreign personal holding company; or
(4) Grantor and fiduciary of any trust;
(5) Fiduciary of a trust and fiduciary of another
trust if the same person is a grantor with respect to
each trust; or
(6) Fiduciary trust and a beneficiary of such
trust
2. Sec. 4 of RR No. 5-99 dated March 10, 1999
Section 4. Tax Benefit Rule The recovery of bad
debts previously allowed as deduction in the
preceding year or years shall be included as part of
the taxpayers gross income in the year of such
recovery to the extent of the income tax benefit of
said deduction. Example: If in the year the taxpayer
claimed deduction of bad debts written-off, he
realized a reduction of the income tax due from him
on account of the said deduction, his subsequent
recovery thereof from his debtor shall be treated as
a receipt of realized taxable income. Conversely, if
the said taxpayer did not benefit from the deduction
of the said bad debt written-off because it did not
result to any deduction of his income tax in the year
of such deduction (i.e. where the result of his
business operation was a net loss even without
Taxation Law
deduction of the bad debts written-off), then his
subsequent recovery thereof shall be treated as a
mere recovery or a return of capital, hence, not
treated as receipt of realized taxable income.

Alyssa Africa Page 74

Taxation Law
J. Exclusions from Gross Income
1. Life Insurance
i. Secs. 32(B)(1) and (2) of the NIRC
Section 32. Gross Income
(B) Exclusions from Gross Income The following
items shall not be included in gross income and
shall be exempt from taxation under this Title:
(1) Life Insurance The proceeds of life insurance
policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or
otherwise, but if such amounts are held by the
insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross
income;
(2) Amount Received by Insured as Return of
Premium The amount received by the insured, as
a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either
during the term or at the maturity of the term
mentioned in the contract or upon surrender of the
contract.
2. Gifts, Bequests, and Devises
i. Sec. 32(B)(3) of the NIRC
Section 32
(B) Exclusions from Gross Income
(3) Gifts, Bequests, and Devises The value of
property acquired by gift, bequest, devise, or
descent: Provided, however, That income from
such property, as well as gift, bequest, devise or
descent of income from any property, in cases of
transfers of divided interest shall be included in
gross income.
ii. Are damages Taxable?
Section 32
(B) Exclusions from Gross Income
(4) Compensation for Injuries or Sickness.
Amount received, through Accident or Health
Insurance or under Workmens Compensation Acts,
as compensation for personal injuries or sickness,
plus the amounts of any damages received whether
by suit or agreement, on account of such injuries or
sickness.
4. Income under Tax Treaty
Section 32
(B) Exclusions from Gross Income
Alyssa Africa Page 75
(5) Income Exempt under Treaty Income of any
kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.
5. Retirement Benefits, Pensions, Gratuities,
etc.
i. Secs. 32(B)(6)(a) to (f) of the NIRC
Section 32 Gross Income
(B) Exclusions from Gross Income
(6) Retirement Benefits, Pensions, Gratuities, etc.
(a) Retirement benefits received under RA no.
7642 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
ii. Art. 287 of the Labor Code
Art. 287. Retirement. Any employee may be
retired upon reaching the retirement age
established in the collective bargaining agreement
or other applicable employment contract.
In case of retirement, the employee shall be entitled
to receive such retirement benefits as he may have
earned under existing laws and any collective
bargaining agreement and other agreements:
Provided, however, That an employees retirement
benefits under any collective bargaining and other
agreements shall not be less than those provided
therein.
In the absence of a retirement plan or agreement
providing for retirement benefits of employees in
the establishment, an employee upon reaching the
age of sixty (60) years or more, but not beyond
sixty-five (65) years which is hereby declared the
compulsory retirement age, who has served at least
five (5) years in the said establishment, may retire
and shall be entitled to retirement pay equivalent to
at least one-half (1/2) month salary for every year
of service, a fraction of at least six (6) months being
considered as one whole year.
Unless the parties provide for broader inclusions,
the term one-half (1/2) month salary shall mean
fifteen (15) days plus one-twelfth (1/12) of the 13th
Taxation Law
month pay and the cash equivalent of not more
than five (5) days of service incentive leaves.
Retail, service and agricultural establishments or
operations employing not more than ten (10)
employees or workers are exempted from the
coverage of this provision.
Violation of this provision is hereby declared
unlawful and subject to the penal provisions under
Article 288 of this Code.
iii. Sec. 2.78.1(B)(1)(a) and (b) of RR No. 2-98
SECTION 2.78.1. Withholding of Income Tax on
Compensation Income.
(B) Exemptions from withholding tax on
compensation. The following income payments
are exempted from the requirement of withholding
tax on compensation:
(1) Remunerations received as an incident of
employment, as follows:
(a) Retirement benefits received under Republic Act
under 7641 and those received by officials and
employees of private firms, whether individual or
corporate, under a reasonable private benefit plan
maintained by the employer which meet the
following requirements:
(i) The plan must be reasonable;
(ii) The benefit plan must be approved by the
Bureau;
(iii) The retiring official or employee must have
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 retirement; and
(iv) The retiring official or employee should not
have previously availed of the privilege under the
retirement benefit plan of the same or another
employer.
(b) Any amount received by an official or employee
or by his heirs from the employer due to death,
sickness or other physical disability or for any
cause beyond the control of the said official or
employee, such as retrenchment, redundancy, or
cessation of business.
The phrase "for any cause beyond the control of
the said official or employee" connotes
involuntariness on the part of the official or
employee. The separation from the service of the
official or employee must not be asked for or
initiated by him. The separation was not of his own
making. Whether or not the separation is beyond
Alyssa Africa Page 76
the control of the official or employee, being
essentially a question of fact, shall be determined
on the basis of prevailing facts and circumstances.
It shall be duly established by the employer by
competent evidence which should be attached to
the monthly return for the period in which the
amount paid due to the involuntary separation was
made.
Amounts received by reason of involuntary
separation remain exempt from income tax even if
the official or the employee, at the time of
separation, had rendered less than ten (10) years
of service and/or is below fifty (50) years of age.
Any payment made by an employer to an employee
on account of dismissal, constitutes compensation
regardless of whether the employer is legally bound
by contract, statute, or otherwise, to make such
payment.
CIR vs. CA (1991)
. . . commutation of leave credits, more commonly
known as terminal leave, is applied for by an officer
or employee who retires, resigns or is separated
from the service through no fault of his own.
(Manual on Leave Administration Course for
Effectiveness published by the Civil Service
Commission, pages 16-17). In the exercise of
sound personnel policy, the Government
encourages unused leaves to be accumulated. The
Government recognizes that for most public
servants, retirement pay is always less than
generous if not meager and scrimpy. A modest nest
egg which the senior citizen may look forward to is
thus avoided. Terminal leave payments are given
not only at the same time but also for the same
policy considerations governing retirement benefits.
In Re Zialcita AM No. 90-6-015-SC dated
October 18, 1990
The case of Atty. Bernardo Zialcita (entitled
Administrative Matter No. 90-6-015-SC) is merely
an administrative matter involving an employee of
this Court who applied for retirement benefits and
who questioned the deductions on the benefits
given to him. Hence, our resolution applies only to
employees of the Judiciary.
Terminal Leaves and Retirement benefits
Taxation Law
- Both exempt from income taxation
International Broadcasting Corporation, Inc. vs.
Amarilla (2006)
Facts:
Issue: Whether the retirement benefits of
respondents are part of their gross income
Held: Respondents were qualified to retire
optionally from their employment with petitioner.
However, there is no evidence on record that the
1993 CBA had been approved or was ever
presented to the BIR; hence, the retirement
benefits of respondents are taxable.
An agreement to pay the taxes on the retirement
benefits as an incentive to prospective retirees and
for them to avail of the optional retirement scheme
is not contrary to law or to public morals. Petitioner
had agreed to shoulder such taxes to entice them
to voluntarily retire early, on its belief that this would
prove advantageous to it. Respondents agreed and
relied on the commitment of petitioner. For
petitioner to renege on its contract with
respondents simply because its new management
had found the same disadvantageous would
amount to a breach of contract. There is even no
evidence that any "new management" was ever
installed by petitioner after respondents retirement;
nor is there evidence that the Board of Directors of
petitioner resolved to renege on its contract with
respondents and demand the reimbursement for
the amounts remitted by it to the BIR.
BIR Ruling No. DA-151-04 dated March 31, 2004
BIR Ruling No. 052-00 dated October 30, 2000
BIR Ruling No. 496-14 dated December 12, 2014
6. Income Derived by Foreign Government
i. Sec. 32(B)(7)(a) of the NIRC
Section 32 Gross Income
(B) Exclusions from Gross Income
(7) Miscellaneous Items
(a) Income Derived by Foreign Government.
Income derived from investments in the Philippines
in loans, stocks, bonds, or other domestic
securities, or from interest on deposit in banks in
the Philippines by (i) foreign governments, (ii)
financing institutions owned, controlled or enjoying
refinancing from foreign governments, and (iii)
Alyssa Africa Page 77
international or regional financial institutions
established by foreign governments.
CIR vs. Mitsubishi Metal Corporation, (1990)
Facts:
Issue:
Held: The contract between Eximbank and
Mitsubishi is entirely different. It is complete in
itself, does not appear to be suppletory or collateral
to another contract and is, therefore, not to be
distorted by other considerationsaliunde. The
application for the loan was approved on May 20,
1970, or more than a month after the contract
between Mitsubishi and Atlas was entered into on
April 17, 1970. It is true that under the contract of
loan with Eximbank, Mitsubishi agreed to use the
amount as a loan to and in consideration for
importing copper concentrates from Atlas, but all
that this proves is the justification for the loan as
represented by Mitsubishi, a standard banking
practice for evaluating the prospects of due
repayment. There is nothing wrong with such
stipulation as the parties in a contract are free to
agree on such lawful terms and conditions as they
see fit. Limiting the disbursement of the amount
borrowed to a certain person or to a certain
purpose is not unusual, especially in the case of
Eximbank which, aside from protecting its financial
exposure, must see to it that the same are in line
with the provisions and objectives of its charter.
7. Income Derived by the Government or its
Political Subdivisions
i. Sec. 32(B)(7)(b) of the NIRC
Section 32 Gross Income
(B) Exclusions from Gross Income
(7) Miscellaneous Items
(b) Income Derived by the Government of its
Political Subdivisions Income derived from any
public utility or from the exercise of any essential
governmental function accruing to the Government
of the Philippines or to any political subdivisions
thereof.
8. Prizes and Awards
i. Secs. 32(B)(7)(c) and (d) of the NIRC
Taxation Law
Section 32 Gross Income
(B) Exclusions from Gross Income
(7) Miscellaneous Items
(c) Prizes and Awards Prizes and awards made
primarily in recognition of religious, charitable,
scientific, educational, artistic, literary or civic
achievement but only if:
(i) The recipient was selected without any
action on his part to enter the contest or
proceedings; and
(ii) The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
(d) Prizes and Awards in Sports Competitions All
prizes and awards granted to athletes in local and
international sports competitions and tournaments
whether held in the Philippines or abroad and
sanctioned by their national sports associations.
9. 13th Month Pay and Other Benefits
i. RA No. 10653 dated February 12, 2015
ii. Sec. 32(B)(7)(e) of the NIRC
Section 32 Gross Income
(B) Exclusions from Gross Income
(7) Miscellaneous Items
(e) 13th Month Pay and Other Benefits Gross
benefits received by officials and employees of
public and private entities: Provided, however, That
the total exclusion under this subparagraph shall
not exceed P82,000 which shall cover:
(i) Benefits received by officials and
employees of the national and local
government pursuant to RA No. 6686;
(ii) Benefits received by officials and
employees not covered by PD No. 852 as
amended by MO 28 dated August 13, 1986;
and
(iv) Other benefits such as productivity
incentives and Christmas bonus: Provided,
That every 3 years after the effectivity of this
Act, the President of the Philippines shall
adjust the amount herein stated to its
present value using the Consumer Price
index(CPI) as published by the NSO.
iii. Rule on excess De Minimis Benefits
Sec. 1 of RR No. 10-08
Alyssa Africa Page 78
10. Gains from Sale of Bonds, Debentures or
Other Certificates of Indebtedness
i. Secs. 32(B)(7)(c) and (e) of the NIRC
Section 32 Gross Income
(B) Exclusions from Gross Income
(7) Miscellaneous Items
(c) Prizes and Awards Prizes and awards made
primarily in recognition of religious, charitable,
scientific, educational, artistic, literary or civic
achievement but only if:
(i) The recipient was selected without any
action on his part to enter the contest or
proceedings; and
(ii) The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
th
(e) 13 Month Pay and Other Benefits Gross
benefits received by officials and employees of
public and private entities: Provided, however, That
the total exclusion under this subparagraph shall
not exceed P82,000 which shall cover:
(i) Benefits received by officials and
employees of the national and local
government pursuant to RA No. 6686;
(ii) Benefits received by officials and
employees not covered by PD No. 852 as
amended by MO 28 dated August 13, 1986;
and
(iv) Other benefits such as productivity
incentives and Christmas bonus: Provided,
That every 3 years after the effectivity of this
Act, the President of the Philippines shall
adjust the amount herein stated to its
present value using the Consumer Price
index(CPI) as published by the NSO.
BDO vs. Republic of the Philippines (2015)
Facts:
Issue: Whether the PEACe Bonds are "deposit
substitutes" and thus subject to 20% final
withholding tax under the 1997 National Internal
Revenue Code.
Held: It may seem that there was only one lender
RCBC on behalf of CODE-NGO to whom the
PEACe Bonds were issued at the time of
Taxation Law
origination. However, a reading of the underwriting
agreement221 and RCBC term sheet222reveals that
the settlement dates for the sale and distribution by
RCBC Capital (as underwriter for CODE-NGO) of
the PEACe Bonds to various undisclosed investors
at a purchase price of approximately P11.996
would fall on the same day, October 18, 2001,
when the PEACe Bonds were supposedly issued to
CODE-NGO/RCBC. In reality, therefore, the
entire P10.2 billion borrowing received by the
Bureau of Treasury in exchange for the P35 billion
worth of PEACe Bonds was sourced directly from
the undisclosed number of investors to whom
RCBC Capital/CODE-NGO distributed the PEACe
Bonds all at the time of origination or issuance.
At this point, however, we do not know as to how
many investors the PEACe Bonds were sold to by
RCBC Capital.
Should there have been a simultaneous sale to 20
or more lenders/investors, the PEACe Bonds are
deemed deposit substit7utes within the meaning of
Section 22(Y) of the 1997 National Internal
Revenue Code and RCBC Capital/CODE-NGO
would have been obliged to pay the 20% final
withholding tax on the interest or discount from the
PEACe Bonds. Further, the obligation to withhold
the 20% final tax on the corresponding interest from
the PEACe Bonds would likewise be required of
any lender/investor had the latter turnedaround and
sold said PEACe Bonds, whether in whole or part,
simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the
1997 National Internal Revenue Code, interest
income received by individuals from longterm
deposits or investments with a holding period of not
less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be
within the coverage of deposit substitutes, the
proper procedure was for the Bureau of Treasury to
pay the face value of the PEACe Bonds to the
bondholders and for the Bureau of Internal
Revenue to collect the unpaid final withholding tax
directly from RCBC Capital/CODE-NGO, orany
lender or investor if such be the case, as the
withholding agents.

Alyssa Africa Page 79

Taxation Law
K. Fringe Benefits Tax
1. Sec. 33 of the NIRC
Section 33. Special Treatment of Fringe Benefit
(A) Imposition of Tax A final tax of 34% effective
January 1, 1998; 33% effective January 1, 1999,
and 32% effective January 1, 2000 and thereafter,
is 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 66%
effective 1, 1998, 67% effective January 1, 1999,
and effective 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
therat: Provided, further that the grossed-up
monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of
the fringe benefit by the difference between 100%
and the applicable rates of income tax under
Subsections (B), (C), (D) and (E) of Section 25.
i. Definition of Fringe Benefits
Section 33. Special Treatment of Fringe Benefit.
(B) Fringe Benefit Defined For purposes of this
Section, the term fringe benefit means any good,
service or other benefit furnished or granted in cash
or in kind by an employer to an individual employee
(except rank-and-file employees as defined herein)
ii. Fringe Benefits subject to FBT
Section 33. (B)
such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
Alyssa Africa Page 80
(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 the actual rate granted;
(6) Membership fees, dues and other expenses
borne by the employer for the employee in social
athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employer 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.
iii. Fringe Benefits not subject to FBT
Section 33. Special Treatment of Fringe Benefit. -
(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 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.
iv. RR No. 3-98 dated May 21, 1998 (exclude tax
accounting rules)
Coverage
Only those given or furnished to managerial or
supervisory employees and not to the rank and file.
Rank and File Employees
All employees who are holding neither managerial
nor supervisory position.
Managerial Employee
One vested with powers or prerogatives to lay
down and execute management policies and/or to
hire, transfer, suspend, lay-off, recall, discharge,
assign, or discipline employees.
Taxation Law
Supervisory Employees
Those who, in the interest of the employer,
effectively recommend such managerial actions if
the exercise of such authority is not merely
routinary or clerical in nature but requires the use of
independent judgment.
Determination of the Amount Subject to the
Fringe Benefit Tax
(a) Valuation of the benefit granted; and
(b) Determination of the proportion or percentage of
the benefit which is subject to the fringe benefit tax.
Valuation of Fringe Benefits
(1) if the fringe benefit is granted in money, or is
directly paid for by the employer, then the value is
the amount granted or paid for.
(2) if the fringe benefit is granted or furnished by
the employer in property other than money and
ownership is transferred to the employee, then the
value of the fringe benefit shall be equal to the fair
market value of the property as determined in
accordance with Sec. 6(E) of the Code(Authority of
the Commissioner to Prescribe Real Property
Values)
(3) if the fringe benefit is granted or furnished by
the employer in property other than money but
ownership is not transferred to the employee, the
value of the fringe benefit is equal to the
depreciation value of the property.
Taxation of Fringe Benefit of NRANEIB
25% fringe benefit tax shall be imposed on the
grossed-up monetary value of the fringe benefit.
Tax base shall be computed by dividing the
monetary value of the fringe benefit by 75%
Taxation of Fringe Benefits Received by:
(1) an alien individual employed by regional or
area headquarters or regional operating
headquarters of a multinational company;
(2) an alien individual employed by an offshore
banking unit of a foreign bank established in
the Philippines;
(3) an alien individual employed by a foreign
service contractor of by a foreign service
Alyssa Africa Page 81
subcontractor engaged in petroleum operations
in the Philippines; and
(4) any of their Filipino individual employees
who are employed and occupying the same
position as those occupied or held by the alien
employees
15% Fringe Benefit Tax on the grossed-up
monetary value of the fringe benefit. The said tax
base shall be computed by dividing the monetary
value of the fringe benefit by 85%
Taxation of Fringe Benefit Received by
Employees in Special Economic Zones
Fringe benefits received by employees in special
economic zones, including Clark Special Economic
Zone and Subic Special Economic and Free Trade
Zone, are also covered by these regulations and
subject to the normal rate of fringe benefit tax or the
special rates of 25% of 15% as provided above.
Fringe Benefits Subject to Fringe Benefit Tax
(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 the actual rate granted;
(6) Membership fees, dues and other expenses
borne by the employer for the employee in social
athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employer 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.
(1) Housing Privilege
2. De Minimis Benefits
i. Definition
Those of relatively small value and offered or
furnished as a means of promoting the health,
goodwill, contentment and efficiency of an
Taxation Law
employee, and those furnished for the convenience 'other benefits' excluded from gross income under
of the employer. Section 32 (b) (7) (e) of the Code. Provided that,
the excess of the de minimis benefits over their
ii. Enumeration of De Minimis Benefits respective ceilings prescribed by these regulations
List of De Minimis Benefits which are exempt shall be considered as part of other benefits and
from income and fringe benefits tax: the employee receiving it will be subject to tax only
a) Monetized unused vacation leave credits of on the excess over the P82,000.00 ceiling.
private employees not exceeding ten (10) days Provided, further, that MWEs receiving 'other
during the year and the monetized value of leave
credits paid to government officials and employees; benefits' exceeding the P82,000.00 limit shall be
b) Monetized value of vacation and sick leave taxable on the excess benefits, as well as on his
credits paid to government officials and employees; salaries, wages and allowances, just like an
c) Medical cash allowance to dependents of employee receiving compensation income beyond
employees not exceeding Php750 per employee the SMW. (Revenue Regulations 5-2011, as
per semester or Php125 per month; amended)
d) Rice subsidy of Php1,500 or one (1) sack of 50-
kg. rice per month amounting to not more than
Php1,500; RR. No. 3-98 dated May 21, 1998
e) Uniform and clothing allowance not exceeding RR No. 8-00 dated August 21, 2000
Php5,000 per annum; RR No. 10-00 dated December 14, 2000
f) Actual yearly medical benefits not exceeding RR No. 05-08 dated April 17, 2008
Php10,000 per annum; RR No. 5-11 dated March 16, 2011
g) Laundry allowance not exceeding Php300 per RR No. 8-12 dated May 11, 2012
month;
RR No. 1-15 dated January 1, 2015
h) Employee achievement awards, e.g., for length
of service or safety achievement, which must be in
the form of a tangible personal property other than
cash or gift certificate, with an annual monetary
value not exceeding Php10,000 received by the
employee under an established written plan which
does not discriminate in favor of highly paid
employees;
i) Gifts given during Christmas and major
anniversary celebrations not exceeding Php5,000
per employee per annum;
j) Daily meal allowance for overtime work not
exceeding twenty-five percent (25%) of the basic
minimum wage; and,
k) Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
productivity incentive schemes provided that the
total annual monetary value received from both
CBA and productivity incentive schemes combined
do not exceed ten thousand pesos (Php10,000.00)
per employee per taxable year.

All other benefits given not included in the

enumeration above shall not be considered de
minimis benefits and shall be subject to withholding
tax on compensation income. (Enumeration now
exclusive)
The amount of de minimis benefits conforming to
the ceiling herein prescribed shall not be
considered in determining the P82,000.00 ceiling of
Alyssa Africa Page 82
Taxation Law
L. Deductions from Gross Income
1. Expenses
i. Sec. 34(A) of the NIRC
Section 34. Deductions from Gross Income
Except for taxpayers earning compensation income
arising from personal services rendered under an
employer-employee relationship where no
deductions shall be allowed under this Section
other than under Section (M) hereof, in computing
taxable income subject to income tax under Section
24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1),
there shall be allowed the following deductions from
gross income:
(A) Expenses
(1) Ordinary and Necessary Trade, Business or
Professional Expenses.
(a) In General. There shall be allowed as
deduction from gross income all the ordinary and
necessary expenses paid or incurred during the
taxable year in carrying on or which are directly
attributable to, the development, management,
operation and/or conduct of the trade, business or
exercise of a profession, including:
(i) A reasonable allowance for salaries,
wages, and other forms of compensation for
personal services actually rendered, including
the grossed-up monetary value of fringe benefit
furnished or granted by the employer to the
employee: Provided, That the final tax imposed
under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel
expenses, here and abroad, while away from
home in the pursuit of trade, business or
profession;
(iii) A reasonable allowance for rentals
and/or other payments which are 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;
(iv) A reasonable allowance for
entertainment, amusement and recreation
expenses during the taxable year, that are
directly connected to the development,
management and operation of the trade,
business or profession of the taxpayer, or that
Alyssa Africa Page 83
are directly related to or in furtherance of the
conduct of his title or its trade, business or
exercise of a profession not to exceed such
ceilings as the Secretary of Finance may, by
rules and regulations prescribe, upon
recommendation of the Commissioner, taking
into account the needs as well as the special
circumstances, nature and character of the
industry, trade, business or profession of the
taxpayer: Provided, That any expense incurred
for entertainment, amusement or recreation that
is contrary to law, morals, public policy, or public
order shall in no case be allowed as a
deduction.
(b) Substantiation Requirements No deduction
from gross income shall be allowed under
Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as
official receipts or other adequate records: (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.
(c) Bribes, Kickbacks and Other Similar Payments.
No deduction from gross income shall be allowed
under Subsection (A) hereof for any payment
made, directly or indirectly, to an official or
employee of the national government, or to an
official or employee of any local government unit, or
to an official or employee of a government-owned
or controlled corporation, or to an official or
employee or representative of a foreign
government, or to a private corporation, general
professional partnership, or a similar entity, if the
payment constitutes a bribe or kickback.
(2) Expenses Allowable to Private Educational
Institutions. In addition to the expenses allowable
as deductions under this Chapter, a private
educational institution, referred to under Section
27(B) of this Code, may at its option elect either: (a)
to deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred
during the taxable year for the expansion of school
facilities, or (b) to deduct allowable depreciation
thereof under Subsection (F) hereof.
1. RR No. 10-02 dated July 10, 2002
 Taxation Law
Section 1. Coverage These regulations shall
cover entertainment amusement and recreation
expenses of the following taxpayers:
a. Individuals engaged in business, including
taxable estates and trusts;
b. Individuals engaged in the practice of profession;
c. Domestic corporations;
d. Resident foreign corporations;
e. General professional partnerships including its
members
Section 2. Definition of Terms
Representation Expenses expenses incurred by a
taxpayer in connection with the conduct of his
trade, business or exercise of profession, in
entertaining, providing amusement and recreation
to, or meeting with, a guest or guests at a dining
place, place of amusement, country club, theater,
concert, play, sporting event, and similar events or
places.
- NOT fixed representation allowances subject to
withholding tax on wages.
In case
ii. Sec. 36(A) of the NIRC
Section 36. Items not Deductible
(A) General Rule In computing net income, no
deduction shall in any case be allowed in respect to
(1) Personal, living or family expenses;
(2) Any amount paid out of new buildings or for
permanent improvements, or betterments made
to increase the value of any property or estate.
This Subsection shall not apply to intangible
drilling and development costs incurred in
petroleum operations which are deductible under
Subsection (G)(1) of Section 34 of this Code;
(3) Any amount expended in restoring property or
in making good the exhaustion thereof for which
an allowance is or has been made; or
(4)Premiums paid on any life insurance policy
covering the life of any officer or employee, or of
any person financially interested in any trade or
business carried on by the taxpayer, individual or
corporate when the taxpayer is directly or
indirectly a beneficiary under such policy.
iii. Sec. 45 of the NIRC
Alyssa Africa Page 84
Section 45. Period for which Deductions and
Credits Taken.
The deductions provided for in this Title shall be
taken for the taxable year in which paid or
accrued or paid or incurred, dependent upon the
method of accounting upon the basis of which the
net income is computed, unless in order to clearly
reflect the income, the deductions should be taken
as of a different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for
the taxable period in which falls the date of his
death, amounts accrued up to the date of his death
if not otherwise properly allowable in respect of
such period or a prior period.
CIR vs. Isabela Cultural Corporation (2007)
Facts:
Issue:
Held:
CIR vs. General Foods (2003)
Facts:
Issue:
Held:
Atlas Consolidated Mining & Devt Corp (1981)
Facts:
Issue:
Held:
H. Tambunting Pawnshop, Inc. vs. CIR (2013)
Facts:
Issue:
Held:
2. Interest
i. Sec. 34(B) of the NIRC
Section 34. Deductions from Gross Income
(B) Interest
(1) In General. The amount of interest paid or
incurred within a taxable year on indebtedness in
connection with the taxpayers profession, trade or
business shall be allowed as deduction from gross
income: Provided, however, That the taxpayers
otherwise allowable deduction for interest expense
shall be reduced by 42% of the interest income
subject to final tax: Provided, That effective January
1, 2009, the percentage shall be 33%.
Taxation Law
(2) Exceptions. No deduction shall be allowed in
respect of interest under the succeeding
subparagraphs:
(a) If within the taxable year an individual
taxpayer reporting income on the case basis
incurs an indebtedness on which an interest is
paid in advance through discount or otherwise:
Provided, further, That if the indebtedness is
payable in periodic amortizations, the amount of
interest which corresponds to the amount of the
principal amortized or paid during the year shall
be allowed as deduction in such taxable year;
(b) If both the taxpayer and the person to
whom the payment has been made or is to be
made are persons specified under Section
36(B); or
(c) If the indebtedness is incurred to finance
petroleum exploration.
(3) Optional Treatment of Interest Expense. At the
option of the taxpayer, interest incurred to acquire
property used in trade, business or exercise of a
profession may be allowed as a deduction or
treated as a capital expenditure.
ii. Sec. 36 of the NIRC
Section 36. Items not Deductible
(A) General Rule. In computing net income, no
deduction shall in any case be allowed in respect t
to
Sky Internet vs. CIR
Facts:
Issue:
Held:
iii. RR NO. 13-00 dated November 20, 2000
iv. Tax Arbitrage Rule/Scheme
CIR vs. Vda. De Prieto (1960)
Facts:
Issue:
Held:
Paper Industries Corporation of the Philippines
vs. CA (1995)
Facts:
Issue:
Held:
Alyssa Africa Page 85
3. Taxes
i. Sec. 34(C) of the NIRC
(C) Taxes.
(1) In General. Taxes paid or incurred within
the taxable year in connection with the taxpayers
profession, trade or business, shall be allowed as
deduction, except:
(a) The income tax provided for under this
Title;
(b) Income taxes imposed by authority of
any foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not
signify in his return his desire to have to any
extent the benefits of paragraph (3) of this
Subsection (relating to credits for taxes of
foreign countries);
(c) Estate and donors taxes; and
(d) Taxes assessed against local benefits of
a kind tending to increase the value of the
property assessed.
Provided, That taxes allowed under this
Subsection, when refunded or credited, shall be
included as part of gross income in the year of
receipt to the extent of the income tax benefit of
said deduction.
(2) Limitations on Deductions. In the case of a
nonresident alien individual engaged in trade or
business in the Philippines and a resident foreign
corporation, the deductions for taxes provided in
paragraph (1) of this Subsection (C) shall be
allowed only if and to the extent that they are
connected with income from sources within the
Philippines.
(3)
CIR vs. Lednicky (1964)
Facts:
Issue:
Held:
CIR vs. Vda De Prieto (1960)
Facts:
Issue:
Held:
4. Losses
1. Sec. 34(D) of the NIRC
ii. Casualty Losses
Taxation Law
RMO 31-09 dated October 16, 2009 ii. RR No. 12-13 dated July 12, 2013
iii. Net Operating Loss Carry-Over
1. RR No. 14-01 dated August 27, 2001

Paper Industries Corporation of the Philippines

vs. CA (1995)
Facts:
Issue:
Held:

5. Bad Debts
i. Sec. 34(E) of the NIRC
(E) Bad Debts.
(1) In General. Debts due to the taxpayer
actually ascertained to be worthless and charged
off within the taxable year except those not
connected with profession, trade or business and
those sustained in a transaction entered into
between parties mentioned under Section 36(b)
ii. RR No. 5-99

Philippine Refining Company vs. CA (1996)

Fernandez Hermanos vs. CIR (1969)
6. Depreciation
i. Sec. 34(F) of the NIRC
ii. RR No. 12-12 dated October 12, 2012
Basilan Estates, Inc. vs. CIR (1967)
7. Depletion
1. Sec. 34(G) of the NIRC
8. Charitable and Other Contributions
i. Sec. 34(H) of the NIRC
ii. Secs. 3 and 5-8 of RR No. 13-98 dated
December 8, 1998
iii. Sec. 13(C) of RR No. 2-03 dated December
16, 2002
iv. RMC No. 86-2014 dated December 5, 2014
9. Research and Development
i. Sec. 34(l) of the NIRC
10. Pension Trusts
i. Sec. 34(J) of the NIRC
11. Optional Standard Deduction
i. Sec. 34(L) of the NIRC
ii. Secs. 1 to 7 of RR NO. 16-08 dated November
26, 2008
iii. RR no. 2-10 dated February 18, 2010
iv. Sec. 5 of RR No. 2-14 dated January 24, 2014
12. Additional Requirements for Deductibility
i. Sec. 34(K)
Alyssa Africa Page 86
Taxation Law
M. Gains and Losses from Sale or Exchange of CIR vs. Filinvest Development Corporation
Property (2011)
1. Capital Gains and Losses CIR vs. Rufino (1987)
3. Loss from Wash Sales of Stocks or Securities
i. Capital Assets vs. Ordinary Assets i. Sec. 38 of the NIRC
ii. Sec. 7 (c.6) of RR No. 6-08 dated April 22,
1. Sec. 39 of the NIRC 2008
Jardine Davies vs. CIR
Facts:
Issue:
Held:

2. Secs. 1 to 3 of RR No. 7-03 dated February 11,

2003

3. Sec. 22(Z) of the NIRC

ii. Loss Limitation Rule

iii. Holding Period Rule

iv. Net Capital Loss Carry-over Rule

Calasanz vs. CIR (1986)

Facts:
Issue:
Held:

China Banking Corporation vs. CA (2000)

Facts:
Issue:
Held:

2. Determination of Gain or Loss

i. Sec. 40 of the NIRC
ii. Cost Basis Depending on Mode of
Acquisition
iii. Tax Free Exchange
1. Merger or Consolidation
2. Transfers to Controlled Corporation
3. Sec. 40(C)(2) of the NIRC
4. RR No. 18-01 dated November 13, 2001
5. RMR No. 1-01 dated November 29, 2001
6. RMR No. 1-02 dated April 25, 2002
7. RR No. 6-2008 dated April 22, 2008
8. RMO 17-2016 dated May 5, 2016
Delpher Trades Corporation vs. IAC (1988)

Alyssa Africa Page 87

Taxation Law
N. Situs Rules
1. Sec. 42 of the NIRC
Section 42. Income from Sources within the
Philippines.
(A) Gross Income From Sources within the
Philippines. The following items of gross income
shall be treated as gross income from sources
within the Philippines:
(1) Interests. Interests derived from sources
within the Philippines, and interests on bonds,
notes, or other interest-bearing obligations of
residents, corporate or otherwise;
(2) Dividends The amount received as
dividends:
(a) From a domestic corporation; and
(b) From a foreign corporation, unless less
than 50% of the gross income of such foreign
corporation for the 3year 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 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) Services Compensation for labor or
personal services performed in the Philippines;
(4) Rentals and Royalties Rentals and royalties
from property located in the Philippines or from
any interest in such property including rentals
and royalties for
(a) The use of or the right or privilege to use
in the Philippines any copyright, patent,
design, or model, plan, secret formula or
process, goodwill, trademark, trade brand or
other like property or right;
(b) The use of, or the right to use in the
Philippines, any industrial, commercial or
scientific equipment;
(c) The supply of scientific, technical,
industrial, or commercial knowledge or
information;
(d) The supply of any assistance that in
ancillary and subsidiary to, and is furnished
as a means of enabling the application or
Alyssa Africa Page 88
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 in
mentioned in paragraph (c);
National Development Company vs. CIR (1987)
Facts: The National Development Company
entered into contracts in Tokyo with several
Japanese shipbuilding companies for the
construction of 12 ocean-going vessels. The
purchase price was to come from the proceeds of
the bonds issued by the Central Bank. Payments
were properly made and the vessels were
eventually completed and delivered to NDC in
Tokyo. Interest payments, however, were remitted
by NDC without withholding taxes. The
Commissioner held NDC liable for said taxes.
Issue: Whether or not the Japanese shipbuilders
were to be held liable for tax on interest remitted to
them.
Held: Yes, the Japanese shipbuilders must be held
liable.
Section 37 of the Tax Code states that:
Sec. 37. Income from sources within the Philippines
(a) Gross income from sources within the
Philippines. The following items of gross income
shall be treated as gross income from sources
within the Philippines;
(1) Interest. Interest derived from sources within
the Philippines, and interest on bonds, notes, or
other interest-bearing obligations of residents,
corporate or otherwise;
NDC argues that they should not be subject to tax
because the signing of the contract, payment of the
price, and delivery were all done in Tokyo. The law
however, does not speak of activity but of source,
which in this case is the NDC. This is a domestic
and resident corporation with principal offices in
Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the
law, that the Government's right to levy and collect
income tax on interest received by foreign
corporations not engaged in trade or business
Taxation Law
within the Philippines is not planted upon the
condition that 'the activity or labor and the sale
from which the (interest) income flowed had its
situs' in the Philippines. The law specifies: 'Interest
derived from sources within the Philippines, and
interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise.'
Nothing there speaks of the 'act or activity' of non-
resident corporations in the Philippines, or place
where the contract is signed. The residence of the
obligor who pays the interest rather than the
physical location of the securities, bonds or notes
or the place of payment, is the determining factor of
the source of interest income. (Mertens, Law of
Federal Income Taxation, Vol. 8, p. 128, citing A.C.
Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd.,
19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine
Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor
is a resident of the Philippines the interest payment
paid by him can have no other source than within
the Philippines. The interest is paid not by the
bond, note or other interest-bearing obligations, but
by the obligor. (See mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National
Development Company, a corporation duly
organized and existing under the laws of the
Republic of the Philippines, with address and
principal office at Calle Pureza, Sta. Mesa, Manila,
Philippines unconditionally promised to pay the
Japanese shipbuilders, as obligor in fourteen (14)
promissory notes for each vessel, the balance of
the contract price of the twelve (12) ocean-going
vessels purchased and acquired by it from the
Japanese corporations, including the interest on the
principal sum at the rate of five per cent (5%) per
annum. (See Exhs. "D", D-1" to "D-13", pp. 100-
113, CTA Records; par. 11, Partial Stipulation of
Facts.) And pursuant to the terms and conditions of
these promisory notes, which are duly signed by its
Vice Chairman and General Manager, petitioner
remitted to the Japanese shipbuilders in Japan
during the years 1960, 1961, and 1962 the sum of
$830,613.17, $1,654,936.52 and $1,541.031.00,
respectively, as interest on the unpaid balance of
the purchase price of the aforesaid vessels.
The law is clear. Our plain duty is to apply it
as written. The residence of the obligor which paid
the interest under consideration, petitioner herein,
is Calle Pureza, Sta. Mesa, Manila, Philippines; and
as a corporation duly organized and existing under
the laws of the Philippines, it is a domestic
corporation, resident of the Philippines. (Sec. 84(c),
National Internal Revenue Code.) The interest paid
Alyssa Africa Page 89
by petitioner, which is admittedly a resident of the
Philippines, is on the promissory notes issued by it.
Clearly, therefore, the interest remitted to the
Japanese shipbuilders in Japan in 1960, 1961 and
1962 on the unpaid balance of the purchase price
of the vessels acquired by petitioner is interest
derived from sources within the Philippines subject
to income tax under the then Section 24(b)(1) of the
National Internal Revenue Code.
It is also incorrect to suggest that the
Republic of the Philippines could not collect taxes
on the interest remitted because of the undertaking
signed by the Secretary of Finance in each of the
promissory notes that:
Upon authority of the President of the
Republic of the Philippines, the undersigned, for
value received, hereby absolutely and
unconditionally guarantee (sic), on behalf of the
Republic of the Philippines, the due and punctual
payment of both principal and interest of the above
note.
There is nothing in the above undertaking
exempting the interests from taxes. Petitioner has
not established a clear waiver therein of the right to
tax interests. Tax exemptions cannot be merely
implied but must be categorically and unmistakably
expressed. Any doubt concerning this question
must be resolved in favor of the taxing power.
Nowhere in the said undertaking do we find any
inhibition against the collection of the disputed
taxes. In fact, such undertaking was made by the
government in consonance with and certainly not
against the following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. All persons,
corporations and general co-partnership
(companies colectivas), in whatever capacity
acting, including lessees or mortgagors of real or
personal capacity, executors, administrators,
receivers, conservators, fiduciaries, employers, and
all officers and employees of the Government of the
Philippines having control, receipt, custody;
disposal or payment of interest, dividends, rents,
salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or
other fixed or determinable annual or categorical
gains, profits and income of any nonresident alien
individual, not engaged in trade or business within
the Philippines and not having any office or place of
business therein, shall (except in the cases
provided for in subsection (a) of this section) deduct
and withhold from such annual or periodical gains,
profits and income a tax to twenty (now 30%) per
centum thereof: ...
Taxation Law
Sec. 54. Payment of corporation income tax
at source. In the case of foreign corporations
subject to taxation under this Title not engaged in
trade or business within the Philippines and not
having any office or place of business therein, there
shall be deducted and withheld at the source in the
same manner and upon the same items as is
provided in section fifty-three a tax equal to thirty
(now 35%)per centum thereof, and such tax shall
be returned and paid in the same manner and
subject to the same conditions as provided in that
section:....
Manifestly, the said undertaking of the
Republic of the Philippines merely guaranteed the
obligations of the NDC but without diminution of its
taxing power under existing laws.
In suggesting that the NDC is merely an
administrator of the funds of the Republic of the
Philippines, the petitioner closes its eyes to the
nature of this entity as a corporation. As such, it is
governed in its proprietary activities not only by its
charter but also by the Corporation Code and other
pertinent laws.
The petitioner also forgets that it is not the
NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It
was the income of these companies and not the
Republic of the Philippines that was subject to the
tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency
taxes on the NDC is a penalty for its failure to
withhold the same from the Japanese shipbuilders.
Such liability is imposed by Section 53(c) of the Tax
Code, thus:
Section 53(c). Return and Payment.
Every person required to deduct and withhold any
tax under this section shall make return thereof, in
duplicate, on or before the fifteenth day of April of
each year, and, on or before the time fixed by law
for the payment of the tax, shall pay the amount
withheld to the officer of the Government of the
Philippines authorized to receive it. Every such
person is made personally liable for such tax, and
is indemnified against the claims and demands of
any person for the amount of any payments made
in accordance with the provisions of this section.
(As amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of
Internal Revenue and the Court of Tax Appeals, the
Court quoted with approval the following regulation
of the BIR on the responsibilities of withholding
agents:
In case of doubt, a withholding agent may
always protect himself by withholding the tax due,
Alyssa Africa Page 90
and promptly causing a query to be addressed to
the Commissioner of Internal Revenue for the
determination whether or not the income paid to an
individual is not subject to withholding. In case the
Commissioner of Internal Revenue decides that the
income paid to an individual is not subject to
withholding, the withholding agent may thereupon
remit the amount of a tax withheld. (2nd par., Sec.
200, Income Tax Regulations).
"Strict observance of said steps is required
of a withholding agent before he could be released
from liability," so said Justice Jose P. Bengson, who
wrote the decision. "Generally, the law frowns upon
exemption from taxation; hence, an exempting
provision should be construed strictissimi juris."
CIR vs. British Overseas Airways Corporation
(1987)
Facts: BOAC is a British Government-owned
corporation existing under the laws of the United
Kingdom. It operates air transportation service and
sells transportation tickets over the routes of the
other airline members of the Interline Air Transport
Association. BOAC had no landing rights for traffic
purposes in the Philippines, nor was it granted a
Certificate of public convenience and necessity to
operate in the Philippines by the Civil Aeronautics
Board (CAB). Hence, it did not carry
passengers/cargo to or from the Philippines, but
during the period when it was assessed by the CIR,
it maintained a general sales agent in the
Philippines Wamer Barnes and Company, Ltd.
and later Qantas Airways.
The CIR assessed BOAC for deficiency
income taxes covering the years 1959-1971 which
BOAC paid under protest on the ground that it must
not be subject of income tax as the service was not
performed by BOAC in the Philippines.
Issues: Whether or not the sale of tickets in the
Philippines by BOAC constitutes income from
Philippine sources, and is therefore, taxable; and
Whether or not during the fiscal years in question
BOAC is a resident foreign corporation doing
business in the Philippines or has an office or place
of business in the Philippines.
Held: Under Section 20 of the 1977 Tax Code:
Taxation Law
(h) the term resident foreign corporation engaged in
trade or business within the Philippines or having
an office or place of business therein.
(i) The term "non-resident foreign corporation"
applies to a foreign corporation not engaged in
trade or business within the Philippines and not
having any office or place of business therein
It is our considered opinion that BOAC is a
resident foreign corporation. There is no specific
criterion as to what constitutes "doing" or "engaging
in" or "transacting" business. Each case must be
judged in the light of its peculiar environmental
circumstances. 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 incident to, and in progressive
prosecution of commercial gain or for the purpose
and object of the business organization. "In order
that a foreign corporation may be regarded as
doing business within a State, there must be
continuity of conduct and intention to establish a
continuous business, such as the appointment of a
local agent, and not one of a temporary character.
BOAC, during the periods covered by the subject -
assessments, maintained a general sales agent in
the Philippines, That general sales agent, from
1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into
series of trips each trip in the series
corresponding to a different airline company; (3)
receiving the fare from the whole trip; and (4)
consequently allocating to the various airline
companies on the basis of their participation in the
services rendered through the mode of interline
settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA
Agreement." 4 Those activities were in exercise of
the functions which are normally incident to, and
are in progressive pursuit of, the purpose and
object of its organization as an international air
carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business,
the generation of sales being the paramount
objective. There should be no doubt then that
BOAC was "engaged in" business in the Philippines
through a local agent during the period covered by
the assessments. Accordingly, it is a resident
foreign corporation subject to tax upon its total net
income received in the preceding taxable year from
all sources within the Philippines.
Alyssa Africa Page 91
Next, we address ourselves to the issue of whether
or not the revenue from sales of tickets by BOAC in
the Philippines constitutes income from Philippine
sources and, accordingly, taxable under our income
tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and
income derived from salaries, wages or
compensation for personal service of
whatever kind and in whatever form paid, or
from profession, vocations, trades,business,
commerce, sales, or dealings in property,
whether real or personal, growing out of the
ownership or use of or interest in such
property; also from interests, rents,
dividends, securities, or thetransactions of
any business carried on for gain or
profile, or gains, profits, and income derived
from any source whatever (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive to
include proceeds from sales of transport
documents. "The words 'income from any source
whatever' disclose a legislative policy to include all
income not expressly exempted within the class of
taxable income under our laws." Income means
"cash received or its equivalent"; it is the amount of
money coming to a person within a specific time ...;
it means something distinct from principal or
capital. For, while capital is a fund, income is a flow.
As used in our income tax law, "income" refers to
the flow of wealth. 6
The records show that the Philippine gross income
of BOAC for the fiscal years 1968-69 to 1970-71
amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within
the Philippines",
The source of an income is the property, activity or
service that produced the income. 8 For the source
of income to be considered as coming from the
Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case,
Taxation Law
the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged
hands here and payments for fares were also made
here in Philippine currency. The site of the source
of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the
Philippine government. In consideration of such
protection, the flow of wealth should share the
burden of supporting the government.
A transportation ticket is not a mere piece of paper.
When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It
gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger
upon the terms and conditions set forth thereon.
The ordinary ticket issued to members of the
traveling public in general embraces within its terms
all the elements to constitute it a valid contract,
binding upon the parties entering into the
relationship. 9
True, Section 37(a) of the Tax Code, which
enumerates items of gross income from sources
within the Philippines, namely: (1) interest, (21)
dividends, (3) service, (4) rentals and royalties, (5)
sale of real property, and (6) sale of personal
property, does not mention income from the sale of
tickets for international transportation. However,
that does not render it less an income from sources
within the Philippines. Section 37, 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 Philippines. 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. "
The absence of flight operations to and from the
Philippines is not determinative of the source of
income or the site 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 ... which produced the
Alyssa Africa Page 92
income. Unquestionably, the passage
documentations in these cases were sold in the
Philippines and the revenue therefrom was derived
from a activity regularly pursued within the
Philippines. business a And even if the BOAC
tickets sold covered the "transport of passengers
and cargo to and from foreign cities", it cannot alter
the fact that income from the sale of tickets was
derived from the Philippines. The word "source"
conveys one essential idea, that of origin, and the
origin of the income herein is the Philippines.13
It should be pointed out, however, that the
assessments upheld herein apply only to the fiscal
years covered by the questioned deficiency income
tax assessments in these cases, or, from 1959 to
1967, 1968-69 to 1970-71. For, pursuant to
Presidential Decree No. 69, promulgated on 24
November, 1972, international carriers are now
taxed as follows:
... Provided, however, That international
carriers shall pay a tax of 2- per cent on
their cross Philippine billings. (Sec. 24[b]
[21, Tax Code).
Presidential Decree No. 1355, promulgated on 21
April, 1978, provided a statutory definition of the
term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross
revenue realized from uplifts anywhere in
the world by any international carrier doing
business in the Philippines of passage
documents sold therein, whether for
passenger, excess baggage or mail
provided the cargo or mail originates from
the Philippines. ...
The foregoing provision ensures that international
airlines are taxed on their income from Philippine
sources. The 2- % tax on gross Philippine billings
is an income tax. If it had been intended as an
excise or percentage tax it would have been place
under Title V of the Tax Code covering Taxes on
Business.
Taxation Law
CIR vs. Juliane Baier-Nickel (2006)
Facts: Juliane Baier-Nickel is a non-resident
German citizen is the president of JUBANITEX,
Inc., a domestic corporation engaged in
manufacturing, marketing, buying or acquiring,
holding, importing and exporting, selling and
disposing embroidered textile products.
In 1995, Juliane received sales commission from
the corporation from which 10% was withheld and
remitted to the BIR. Later on, she claimed a refund
over the said amount contending that it was not
income taxable in the Philippines because it was
compensation for her services rendered in
Germany and therefore, not considered as income
form sources outside of the Philippines.
Issue: Whether or not the respondents sales
commission income is taxable in the Philippines.
Held: The following discussions on sourcing of
income under the Internal Revenue Code of the
U.S., are instructive:
The Supreme Court has said, in a definition much
quoted but often debated, that income may be
derived from three possible sources only: (1) capital
and/or (2) labor; and/or (3) the sale of capital
assets. While the three elements of this attempt at
definition need not be accepted as all-inclusive,
they serve as useful guides in any inquiry into
whether a particular item is from "sources within the
United States" and suggest an investigation into the
nature and location of the activities or property
which produce the income.
If the income is from labor the place where the
labor is done should be decisive; if it is done in this
country, the income should be from "sources within
the United States." If the income is from capital, the
place where the capital is employed should be
decisive; if it is employed in this country, the income
should be from "sources within the United States."
If the income is from the sale of capital assets, the
place where the sale is made should be likewise
decisive.
Alyssa Africa Page 93
Much confusion will be avoided by regarding the
term "source" in this fundamental light. It is not a
place, it is an activity or property. As such, it has a
situs or location, and if that situs or location is
within the United States the resulting income is
taxable to nonresident aliens and foreign
corporations.
The intention of Congress in the 1916 and
subsequent statutes was to discard the 1909 and
1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the
"source," or situs of the activities or property which
produce the income. The result is that, on the one
hand, nonresident aliens and nonresident foreign
corporations are prevented from deriving income
from the United States free from tax, and, on the
other hand, there is no undue imposition of a tax
when the activities do not take place in, and the
property producing income is not employed in, this
country. Thus, if income is to be taxed, the recipient
thereof must be resident within the jurisdiction, or
the property or activities out of which the income
issues or is derived must be situated within the
jurisdiction so that the source of the income may be
said to have a situs in this country.
The underlying theory is that the consideration for
taxation is protection of life and property and that
the income rightly to be levied upon to defray the
burdens of the United States Government is that
income which is created by activities and property
protected by this Government or obtained by
persons enjoying that protection. 16
The important factor therefore which determines
the source of income of personal services is not the
residence of the payor, or the place where the
contract for service is entered into, or the place of
payment, but the place where the services were
actually rendered.17
The Court reiterates the rule that "source of
income" relates to the property, activity or service
that produced the income. With respect to rendition
of labor or personal service, as in the instant case,
it is the place where the labor or service was
performed that determines the source of the
Taxation Law
income. There is therefore no merit in petitioners
interpretation which equates source of income in
labor or personal service with the residence of the
payor or the place of payment of the income.
Having disposed of the doctrine applicable in this
case, we will now determine whether respondent
was able to establish the factual circumstances
showing that her income is exempt from Philippine
income taxation.
The decisive factual consideration here is not the
capacity in which respondent received the income,
but the sufficiency of evidence to prove that the
services she rendered were performed in Germany.
Though not raised as an issue, the Court is clothed
with authority to address the same because the
resolution thereof will settle the vital question posed
in this controversy.23
The settled rule is that tax refunds are in the nature
of tax exemptions and are to be
construed strictissimi jurisagainst the taxpayer.24 To
those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is
actually exempt from taxation.
CIR vs. CTA (1984)
Facts: Smith Kline and French Overseas Company
is a multinational firm domiciled in Philadelphia,
Pennsylvania licensed to do business in the
Philippines. It is engaged in the importation,
manufacture and sale of pharmaceutical drugs and
chemicals. In 1971, it filed its income tax return and
paid the corresponding taxes. The next year,
however, Smith Kline learned that its income tax
liability was greatly reduced by reason of
overpayment. Smith Kline filed a petition with the
CTA for the refund of the overpayment or grant of a
tax credit.
Issue: Whether or not Smith Kline is entitled to
refund or grant of tax credit.
Held: The governing law is found in section 37 of
the old National Internal Revenue Code,
Alyssa Africa Page 94
Commonwealth Act No. 466, which is reproduced in
Presidential Decree No. 1158, the National Internal
Revenue Code of 1977 and which reads:
SEC. 37. Income form sources within the
Philippines.
xxx xxx xxx
(b) Net income from sources in the
Philippines. From the items of gross
income specified in subsection (a) of this
section there shall be deducted the expenses,
losses, and other deductions properly
apportioned or allocated thereto and a ratable
part of any expenses, losses, or other
deductions which cannot definitely be
allocated to some item or class of gross
income. The remainder, if any, shall be
included in full as net income from sources
within the Philippines.
xxx xxx xxx
Revenue Regulations No. 2 of the Department of
Finance contains the following provisions on the
deductions to be made to determine the net income
from Philippine sources:
SEC. 160. Apportionment of deductions.
From the items specified in section 37(a), as
being derived specifically from sources within
the Philippines there shall be deducted the
expenses, losses, and other deductions
properly apportioned or allocated thereto and
a ratable part of any other expenses, losses
or deductions which can not definitely be
allocated to some item or class of gross
income. The remainder shall be included in
full as net income from sources within the
Philippines. The ratable part is based upon
the ratio of gross income from sources within
the Philippines to the total gross income.
The overhead expenses incurred by the parent
company in connection with finance, administration,
and research and development, all of which direct
benefit its branches all over the world, including the
Taxation Law
Philippines, fall under a different category however.
These are items which cannot be definitely
allocated or Identified with the operations of the
Philippine branch. For 1971, the parent company of
Smith Kline spent $1,077,739. Under section 37(b)
of the Revenue Code and section 160 of the
regulations, Smith Kline can claim as its deductible
share a ratable part of such expenses based upon
the ratio of the local branch's gross income to the
total gross income, worldwide, of the multinational
corporation.
In his petition for review, the Commissioner does
not dispute the right of Smith Kline to avail itself of
section 37(b) of the Tax Code and section 160 of
the regulations. But the Commissioner maintains
that such right is not absolute and that as there
exists a contract (in this case a service agreement)
which Smith Kline has entered into with its home
office, prescribing the amount that a branch can
deduct as its share of the main office's overhead
expenses, that contract is binding.
The Commissioner contends that since the share of
the Philippine branch has been fixed at $77,060,
Smith Kline itself cannot claim more than the said
amount. To allow Smith Kline to deduct more than
what was expressly provided in the agreement
would be to ignore its existence. It is a cardinal rule
that a contract is the law between the contracting
parties and the stipulations therein must be
respected unless these are proved to be contrary to
law, morals, good customs and public policy. There
being allegedly no showing to the contrary, the
provisions thereof must be followed.
On the other hand, Smith Kline submits that the
contract between itself and its home office cannot
amend tax laws and regulations. The matter of
allocated expenses which are deductible under the
law cannot be the subject of an agreement between
private parties nor can the Commissioner
acquiesce in such an agreement.
Smith Kline likewise submits that it has presented
ample evidence to support its claim for refund. To
this end, it has presented before the Tax Court the
authenticated statement of Peat, Marwick, Mitchell
Alyssa Africa Page 95
and Company to show that since the gross income
of the Philippine branch was P7,143,155
($1,098,617) for 1971 as per audit report prepared
by Sycip, Gorres, Velayo and Company, and the
gross income of the corporation as a whole was
$6,891,052, Smith Kline's share at 15.94% of the
home office overhead expenses was P1,427,484.
We hold that Smith Kline's amended 1971 return is
in conformity with the law and regulations. The Tax
Court correctly held that the refund or credit of the
resulting overpayment is in order.
O. Estates and Trusts
1. Taxable Trusts and Estates
i. Sec. 60(A) of the NIRC
Section 60. Imposition of Tax
(A) Application of Tax. The tax imposed by this
Title 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 a will
or trust;
(2) Income which is to be distributed currently by
the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to be
held or distributed as the court may direct;
(3) Income received by estates and deceased
persons during the period of administration or
settlement of estate; and
(4) Income which, in the discretion of the fiduciary,
may be either distributed to the beneficiaries or
accumulated.
2. Employees Trust
i. Sec. 60(B) of the NIRC
Section 60. Imposition of Tax
(B) Exception. The tax imposed by this Title shall
not apply to employees 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 contributors 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 (within the taxable
Taxation Law
year or thereafter) used for, or diverted to, purposes
other than for the exclusive benefit of his
employees; Provided, That any amount actually
distributed to any employee or distribute 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.
ii. RMC 39-14 dated May 12, 2014
Illustrations.
Situation No. 1. Non-contributory Pension Plan.
ABC Labor Union represents all the daily paid
employees of VCC Corporation. As a result of their
collective bargaining agreement, ABC Labor Union
and VCC Corporation established a provident fund.
The plan sets forth the terms and conditions of
membership therein and the benefits to be
provided. Under the terms of the agreement, VCC
Corporation is obligated to establish a trust fund
and to make contributions thereto at specified
rates. The daily paid employees of VCC
Corporation are not allowed to contribute to the
provident plan.
a. The provident fund distributed dividends to
the covered employees. As a result, the entire
amount of the dividends is subject to the
income tax on the part of the covered
employees in the year so distributed.
b. Mr. Q, an employee covered by the provident
plan, resigned from the VCC Corporation. He
received benefits from the provident plan that
do not qualify as tax-exempt separation or
retirement benefits. These benefits are subject
to the income tax on the part of Mr. Q to the
extent of the entire amount received in the year
so distributed.
Situation No. 2 Contributory Pension Plan Same
facts as Situation No. 1, except that in this situation,
the daily paid employees of VCC Corporation are
allowed to contribute up to P20,000 each year to
the provident plan.
a. The provident fund distributed dividends to
the covered employees. The dividends do not
constitute a return of the employees voluntary
contributions. As a result, the entire amount of
the dividends is subject to income tax on the
part of the covered employees in the year so
distributed.
b. Ms. M, an employee covered by the
provident plan, contributed a total of P60,000 to
the provident fund. Upon her resignation from
VCC Corporation, she received benefits from
Alyssa Africa Page 96
the provident plan in the amount of P300,000
that do not qualify as tax-exempt separation or
retirement benefits. Of this amount, P60,000
constitutes a return of her contribution to the
provident fund. The entire amount of P240,000
that Ms. M received in excess of her
contribution is subject to income tax on the part
of Ms. M in the year so distributed.
Ossorio Pension Foundation, Inc., vs. CA (2010)
Facts: Miguel J. Ossorio Pension Foundation,
Incorporated was organized to hold and administer
employees trust or retirement funds for the benefit
of the employees of Victorias Milling Company.
Ossorio claims that the income earned by the trust
fund is tax exempt under Section 53(b) of the
NIRC.
On March 25, 1992, Osorio invested part of the
employees trust fund to purchase a lot in the
Madrigal Business Park its share in the lot being
49.59% with VMC. Later on, the lot was sold to
meet the needed funds to pay the retirement to
Metrobank. Metrobank, as withholding agent,
withheld the tax on the sale.
Ossorio claims that it should not have been taxed,
hence, the income tax paid should have been
refunded. The BIR claims otherwise.
Issues: Whether or not the Petitioner is estopped
from claiming that the Employees Trust fund is the
beneficial owner of the 49.59% of the lot and
Whether or not they have sufficiently established
that the fund is entitled to tax exemption for its
share in the proceeds of the sale of the lot.
Held:
The Employees Trust Fund co-owned the lot as
proved by the notarized Memorandum of
Agreement of the parties though the Deed of
Absolute Sale is in the name of VMC.
Petitioners Articles of Incorporation state the
prupose for which the corporation was formed:
To hold legal title to, control, invest and administer
in the manner provided, pursuant to applicable
rules and conditions as established, and in the
interest and for the benefit of its beneficiaries
and/or participants, the private pension plan as
established for certain employees of Victorias
Milling Company, Inc., and other pension plans
of Victorias Milling Company affiliates and/or
subsidiaries, the pension funds and assets, as
well as accruals, additions and increments thereto,
and such amounts as may be set aside or
Taxation Law
accumulated for the benefit of the participants of
said pension plans; and in furtherance of the
foregoing and as may be incidental
thereto.43(Emphasis supplied)
Petitioner is a corporation that was formed to
administer the Employees' Trust Fund. Petitioner
invested P5,504,748.25 of the funds of the
Employees' Trust Fund to purchase the MBP lot.
When the MBP lot was sold, the gross income of
the Employees Trust Fund from the sale of the
MBP lot was P40,500,000. The 7.5% withholding
tax of P3,037,500 and brokers commission were
deducted from the proceeds. In Commissioner of
Internal Revenue v. Court of Appeals,44 the Court
explained the rationale for the tax-exemption
privilege of income derived from employees trusts:
It is evident that tax-exemption is likewise to be
enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result
in a diminution of accumulated income and reduce
whatever the trust beneficiaries would receive out
of the trust fund. This would run afoul of the very
intendment of the law.
3. Taxable Income
i. Section 61 of the NIRC
SEC. 61. Taxable Income. - The taxable income of
the estate or trust shall be computed in the same
manner and on the same basis as in the case of an
individual, except that:
(A) There shall be allowed as a deduction in
computing the taxable income of the estate or trust
the amount of the income of the estate or trust for
the taxable year which is to be distributed currently
by the fiduciary to the beneficiaries, and the amount
of the income collected by a guardian of an infant
which is to be held or distributed as the court may
direct, but the amount so allowed as a deduction
shall be included in computing the taxable income
of the beneficiaries, whether distributed to them or
not. Any amount allowed as a deduction under this
Subsection shall not be allowed as a deduction
under Subsection (B) of this Section in the same or
any succeeding taxable year.
(B) In the case of income received by estates of
deceased persons during the period of
administration or settlement of the estate, and in
the case of income which, in the discretion of the
fiduciary, may be either distributed to the
beneficiary or accumulated, there shall be allowed
as an additional deduction in computing the taxable
income of the estate or trust the amount of the
income of the estate or trust for its taxable year,
Alyssa Africa Page 97
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.
1. Deductions
2. Trust administered in foreign country
4. Exemption allowed to Estates and Trusts
i. Section 62 of the NIRC
Section 62. Exemption Allowed to Estates and
Trusts. For the purpose of the tax provided for in
this Title, there shall be allowed an exemption of
P20,000 from the income of the estate or trust.
5. Revocable Trusts
i. Section 63 of the NIRC
Section 63. 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 (1) 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 (2) 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.
6. Income for Benefit of Grantor
i. Section 64 of the NIRC
Section 64. Income for Benefit of the Grantor
(A) Where any part of the income of a trust (1) 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 (2) 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 (3) 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 any be
applied to the payment of premiums upon policies
of insurance on the life of the grantor, such part of
Taxation Law
the income of the trust shall be included in
computing the taxable income of the grantor.
(B) As used in this Section, the term in the
discretion of the grantor means in the discretion
of the grantor, either alone or in conjunction with
any person not having a substantial adverse
interest in the disposition of the part of the income
in question.
7. Other Matters
i. Sections 65 and 66 of the NIRC
Section 65. Fiduciary Returns. Guardians,
trustees, executors, administrators, receivers,
conservators and all person or corporations, acting
in any fiduciary capacity, shall render, in duplicate,
a return of the income of the person, trust or estate
for whom or which they act, and be subject to all
the provisions of this Title, which apply to
individuals in case such person, estate or trust has
a gross income of P20,000 or over during the
taxable year. Such fiduciary or person filing the
return for him or it, shall take oath that he has
sufficient knowledge of the affairs of such person,
trust or estate to enable him to make such return
and that the same is, to the best of his knowledge
and belief, true and correct, and be subject to all
the provisions of this Title which apply to
individuals: Provided, That a return made by or for
one or two or more joint fiduciaries filed in the
province where such fiduciaries reside; under such
rules and regulations as the Secretary of Finance,
upon recommendation of the Commissioner, shall
prescribe, shall be a sufficient compliance with the
requirements of this Section.
Section 66. Fiduciaries Indemnified Against
Claims for Taxes Paid. Trustees, executors,
administrators and other fiduciaries are indemnified
against the claims or demands of every beneficiary
for all payments of taxes which they shall be
required to make under the provisions of this Title,
and they shall have credit for the amount of such
payments against the beneficiary or principal in any
accounting which they make as such trustees or
other fiduciaries.
P. Returns and Payments of Tax under the NIRC
1. Individual Income Tax Returns
i. Section 51
SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this
Subsection, the following individuals are required to
file an income tax return:
Alyssa Africa Page 98
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the
Philippines, on his income from sources within the
Philippines;
(c) Every alien residing in the Philippines, on
income derived from sources within the Philippines;
and
(d) Every nonresident alien engaged in trade or
business or in the exercise of profession in the
Philippines.
(2) The following individuals shall not be required to
file an income tax return:
(a) An individual whose gross income does not
exceed his total personal and additional
exemptions for dependents under Section 35:
Provided, That a citizen of the Philippines and any
alien individual engaged in business or practice of
profession within the Philippine shall file an income
tax return, regardless of the amount of gross
income;
(b) An individual with respect to pure compensation
income, as defined in Section 32 (A)(1), derived
from sources within the Philippines, the income tax
on which has been correctly withheld under the
provisions of Section 79 of this Code: Provided,
That an individual deriving compensation
concurrently from two or more employers at any
time during the taxable year shall file an income tax
return.
(c) An individual whose sole income has been
subjected to final withholding tax pursuant to
Section 57(A) of this Code; and
(d) A minimum wage earner as defined in section
22 (HH) of this Code or an individual who is exempt
from income tax pursuant to the provisions of this
Code and other laws, general or special.
(3) The foregoing notwithstanding, any individual
not required to file an income tax return may
nevertheless be required to file an information
return pursuant to rules and regulations prescribed
by the Secretary of Finance, upon recommendation
of the Commissioner.
(4) The income tax return shall be filed in duplicate
by the following persons:
(a) A resident citizen - on his income from all
sources;
(b) A nonresident citizen - on his income derived
from sources within the Philippines;
(c) A resident alien - on his income derived from
sources within the Philippines; and
(d) A nonresident alien engaged in trade or
business in the Philippines - on his income derived
from sources within the Philippines.
Taxation Law
(B) Where to File. - Except in cases where the
Commissioner otherwise permits, the return shall
be filed with an authorized agent bank, Revenue
District Officer, Collection Agent or duly authorized
Treasurer of the city or municipality in which such
person has his legal residence or principal place of
business in the Philippines, or if there be no legal
residence or place of business in the Philippines,
with the Office of the Commissioner.
(C) When to File. -
(1) The return of any individual specified above
shall be filed on or before the fifteenth (15th) day of
April of each year covering income for the
preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock
not traded thru a local stock exchange as
prescribed under Section 24(C)shall file a return
within thirty (30) days after each transaction and a
final consolidated return on or before April 15 of
each year covering all stock transactions of the
preceding taxable year; and
(b) From the sale or disposition of real property
under Section 24(D) shall file a return within thirty
(30) days following each sale or other disposition.
(D) Husband and Wife. - Married individuals,
whether citizens, resident or nonresident aliens,
who do not derive income purely from
compensation, shall file a return for the taxable
year to include the income of both spouses, but
where it is impracticable for the spouses to file one
return, each spouse may file a separate return of
income but the returns so filed shall be
consolidated by the Bureau for purposes of
verification for the taxable year.
(E) Return of Parent to Include Income of
Children. - The income of unmarried minors
derived from properly received from a living parent
shall be included in the return of the parent, except
(1) when the donor's tax has been paid on such
property, or (2) when the transfer of such property
is exempt from donor's tax.
(F) Persons Under Disability. - If the taxpayer is
unable to make his own return, the return may be
made by his duly authorized agent or
representative or by the guardian or other person
charged with the care of his person or 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.
Alyssa Africa Page 99
(G) Signature Presumed Correct. - The fact that
an individual's name is signed to a filed return shall
be prima facie evidence for all purposes that the
return was actually signed by him.
ii. Section 56
SEC. 56. Payment and Assessment of Income
Tax for Individuals and Corporations. -
(A) Payment of Tax. -
(1) In General. - The total amount of tax imposed
by this Title shall be paid by the person subject
thereto at the time the return is filed. In the case of
tramp vessels, the shipping agents and/or the
husbanding agents, and in their absence, the
captains thereof are required to file the return
herein provided and pay the tax due thereon before
their departure. Upon failure of the said agents or
captains to file the return and pay the tax, the
Bureau of Customs is hereby authorized to hold the
vessel and prevent its departure until proof of
payment of the tax is presented or a sufficient bond
is filed to answer for the tax due.
(2) Installment of Payment. - When the tax due is
in excess of P2,000, the taxpayer other than a
corporation may elect to pay the tax in two (2)
equal installments in which case, the first
installment shall be paid at the time the return is
filed and the second installment, on or before July
15 following the close of the calendar year. If any
installment is not paid on or before the date fixed
for its payment, the whole amount of the tax unpaid
becomes due and payable, together with the
delinquency penalties.
(3) Payment of Capital Gains Tax. - The total
amount of tax imposed and prescribed under
Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return
prescribed therefor is filed by the person liable
thereto: Provided, That if the seller submits proof of
his intention to avail himself of the benefit of
exemption of capital gains under existing special
laws, no such payments shall be required:
Provided, further, That in case of failure to qualify
for exemption under such special laws and
implementing rules and regulations, the tax due on
the gains realized from the original transaction shall
immediately become due and payable, subject to
the penalties prescribed under applicable
provisions of this Code: Provided, finally, That if the
seller, having paid the tax, submits such proof of
intent within six (6) months from the registration of
the document transferring the real property, he shall
be entitled to a refund of such tax upon verification
Taxation Law
of his compliance with the requirements for such
exemption.
In case the taxpayer elects and is qualified to report
the gain by installments under Section 49 of this
Code, the tax due from each installment payment
shall be paid within (30) days from the receipt of
such payments.
No registration of any document transferring real
property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized
representative has certified that such transfer has
been reported, and the tax herein imposed, if any,
has been paid.
(B) Assessment and Payment of Deficiency
Tax. - After the return is filed, the Commissioner
shall examine it and assess the correct amount of
the tax. The tax or deficiency income tax so
discovered shall be paid upon notice and demand
from the Commissioner.
As used in this Chapter, in respect of a tax imposed
by this Title, the term 'deficiency' means:
(1) The amount by which the tax imposed by this
Title exceeds the amount shown as the tax by the
taxpayer upon his return; but the amount so shown
on the return shall be increased by the amounts
previously assessed (or collected without
assessment) as a deficiency, and decreased by the
amount previously abated, credited, returned or
otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the
taxpayer upon this return, or if no return is made by
the taxpayer, then the amount by which the tax
exceeds the amounts previously assessed (or
collected without assessment) as a deficiency; but
such amounts previously assessed or collected
without assessment shall first be decreased by the
amounts previously abated, credited returned or
otherwise repaid in respect of such tax.
iii. Section 74
Section. 74. Declaration of Income Tax for
Individuals. -
(A) In General. - Except as otherwise provided in
this Section, every individual subject to income tax
under Sections 24 and 25(A) of this Title, who is
receiving self-employment income, whether it
constitutes the sole source of his income or in
combination with salaries, wages and other fixed or
determinable income, shall make and file a
declaration of his estimated income for the current
taxable year on or before April 15 of the same
taxable year. In general, 'self-employment
income' consists of the earnings derived by the
individual from the practice of profession or conduct
Alyssa Africa Page 100
of trade or business carried on by him as a sole
proprietor or by a partnership of which he is a
member. Nonresident Filipino citizens, with respect
to income from without the Philippines, and
nonresident aliens not engaged in trade or
business in the Philippines, are not required to
render a declaration of estimated income tax. The
declaration shall contain such pertinent information
as the Secretary of Finance, upon recommendation
of the Commissioner, may, by rules and regulations
prescribe. An individual may make amendments of
a declaration filed during the taxable year under the
rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner.
(B) Return and Payment of Estimated Income
Tax by Individuals. - The amount of estimated
income as defined in Subsection (C) with respect to
which a declaration is required under Subsection
(A) shall be paid in four (4) installments. The first
installment shall be paid at the time of the
declaration and the second and third shall be paid
on August 15 and November 15 of the current year,
respectively. The fourth installment shall be paid on
or before April 15 of the following calendar year
when the final adjusted income tax return is due to
be filed.
(C) Definition of Estimated Tax. - In the case of
an individual, the term 'estimated tax' means the
amount which the individual declared as income tax
in his final adjusted and annual income tax return
for the preceding taxable year minus the sum of the
credits allowed under this Title against the said tax.
If, during the current taxable year, the taxpayer
reasonable expects to pay a bigger income tax, he
shall file an amended declaration during any
interval of installment payment dates.
iv. Substituted Filing
1. RR No. 03-02 dated March 22, 2002, as
amended
2. Corporate Tax Returns
i. Section 52
Section 52. Corporation Returns.
(A) Requirements. Every corporation subject to
the tax herein imposed, except foreign corporations
not engaged in trade or business in the Philippines,
shall render, in duplicate, a true and accurate
quarterly income tax return and final or adjustment
return in accordance with the provisions of Chapter
XII of this Title. The return shall be filed by the
president, vice-president or other principal officer,
Taxation Law
and shall be sworn to by such officer and by the
treasurer or assistant treasurer.
(B) Taxable Year of Corporation. A corporation
may employ either calendar year or fiscal year as a
basis for filing its annual income tax return:
Provided, That the corporation shall not change the
accounting period employed without prior approval
from the Commissioner in accordance with the
provisions of Section 47 of this Code.
(C) Return of Corporation Contemplating
Dissolution or Reorganization. Every corporation
shall, within 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, render a correct return to the
Commissioner, verified under oath, setting forth the
terms of such resolution or plan and such other
information as the Secretary of Finance, upon
recommendation of the Commissioner, shall, by the
rules and regulations, prescribe.
The dissolving or reorganizing corporation shall,
prior to the issuance by the Securities and
Exchange Commission of the Certificate of
Dissolution or Reorganization, as may be defined
by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner, secure a certificate of tax clearance
from the Bureau of Internal Revenue which
certificate shall be submitted to the Securities and
Exchange Commission.
(D) Return on Capital Gains Realized from Sale of
Shares of Stock not Traded in the Local Stock
Exchange.
- Every corporation deriving capital gains from the
sale or exchange of shares of stock not traded thru
a local stock exchange as prescribed under
Sections 24(C), 25(A)(3), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c), shall file a return within 30 days after
each transaction and a final consolidated return of
all transactions during the taxable year on or before
the 15th day of the 4th month following the close of
the taxable year.
ii. Section 53
Section 53. Extension of Time to File Returns.
The Commissioner may, in meritorious cases, grant
a reasonable extension of time for filing returns of
income (or final and adjustment returns in case of
corporations), subject to the provisions of Section
56 of this Code.
Alyssa Africa Page 101
iii. Section 56
Section 56. Payment and Assessment of Income
Tax for Individuals and Corporations. -
(A) Payment of Tax. -
(1) In General. - The total amount of tax imposed
by this Title shall be paid by the person subject
thereto at the time the return is filed. In the case of
tramp vessels, the shipping agents and/or the
husbanding agents, and in their absence, the
captains thereof are required to file the return
herein provided and pay the tax due thereon before
their departure. Upon failure of the said agents or
captains to file the return and pay the tax, the
Bureau of Customs is hereby authorized to hold the
vessel and prevent its departure until proof of
payment of the tax is presented or a sufficient bond
is filed to answer for the tax due.
(2) Installment of Payment. - When the tax due is in
excess of Two thousand pesos (P2,000), the
taxpayer other than a corporation may elect to pay
the tax in two (2) equal installments in which case,
the first installment shall be paid at the time the
return is filed and the second installment, on or
before July 15 following the close of the calendar
year. If any installment is not paid on or before the
date fixed for its payment, the whole amount of the
tax unpaid becomes due and payable, together with
the delinquency penalties.
(3) Payment of Capital Gains Tax. - The total
amount of tax imposed and prescribed under
Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return
prescribed therefor is filed by the person liable
thereto: Provided, That if the seller submits proof of
his intention to avail himself of the benefit of
exemption of capital gains under existing special
laws, no such payments shall be required:
Provided, further, That in case of failure to qualify
for exemption under such special laws and
implementing rules and regulations, the tax due on
the gains realized from the original transaction shall
immediately become due and payable, subject to
the penalties prescribed under applicable
provisions of this Code: Provided, finally, That if the
seller, having paid the tax, submits such proof of
intent within six (6) months from the registration of
the document transferring the real property, he shall
be entitled to a refund of such tax upon verification
of his compliance with the requirements for such
exemption.
In case the taxpayer elects and is qualified to report
the gain by installments under Section 49 of this
Code, the tax due from each installment payment
Taxation Law
shall be paid within (30) days from the receipt of
such payments.
No registration of any document transferring real
property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized
representative has certified that such transfer has
been reported, and the tax herein imposed, if any,
has been paid.
(B) Assessment and Payment of Deficiency
Tax. - After the return is filed, the Commissioner
shall examine it and assess the correct amount of
the tax. The tax or deficiency income tax so
discovered shall be paid upon notice and demand
from the Commissioner.
As used in this Chapter, in respect of a tax imposed
by this Title, the term 'deficiency' means:
(1) The amount by which the tax imposed by this
Title exceeds the amount shown as the tax by the
taxpayer upon his return; but the amount so shown
on the return shall be increased by the amounts
previously assessed (or collected without
assessment) as a deficiency, and decreased by the
amount previously abated, credited, returned or
otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the
taxpayer upon this return, or if no return is made by
the taxpayer, then the amount by which the tax
exceeds the amounts previously assessed (or
collected without assessment) as a deficiency; but
such amounts previously assessed or collected
without assessment shall first be decreased by the
amounts previously abated, credited returned or
otherwise repaid in respect of such tax.
iv. Section 75
Section 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 60 days
from the close of each of the first 3 quarters of the
taxable year, whether calendar or fiscal year.
v. Section 76
Section 76. Fiscal Adjustment Return. Every
corporation liable to tax under Section 27 shall file a
final adjustment return covering the total taxable
income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during
Alyssa Africa Page 102
the said taxable year is not equal to the total tax
due on the entire taxable income of that year, the
corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount
paid, as the case may be.
In case the corporation is entitled to a tax credit or
refund of the excess estimated quarterly income
taxes paid, the excess amount shown on its final
adjustment return may be carried over and credited
against the estimated quarterly income tax liabilities
for the taxable quarters of the succeeding taxable
years. Once the option to carry-over and apply the
excess quarterly income tax against income tax
due for the taxable quarters of the succeeding
taxable years has been made, such option shall be
considered irrevocable for that taxable period and
no application for cash refund or issuance of a tax
credit certificate shall be allowed therefor.
vi. Section 77
Section 77. Place and Time of Filing and Payment
of Quarterly Corporate Income Tax.
(A) Place of Filing. Except as the Commissioner
otherwise permits, the quarterly income tax
declaration required in Section 75 and the final
adjustment return required in Section 76 shall be
filed with the authorized agent banks or Revenue
District Officer or Collection Agent or duly
authorized Treasurer of the city or municipality
having jurisdiction over the location of the principal
office of the corporation filing the return or palce
where its main books of accounts and other date
from which the return is prepared are kept.
(B) Time of Filing the Income Tax Return. The
corporate quarterly declaration shall be filed within
60 days following the close of each of the first 3
quarters of the taxable year. The final adjustment
return shall be filed on or before the 15 th day of
April, or on or before the 15th day of the 4th month
following the close of the fiscal year, as the case
may be.
(C) Time of Payment of the Income Tax. The
income tax due on the corporate quarterly returns
and the final adjustment income tax returns
computed in accordance with Section 75 and 76
shall be paid at the time of the declaration or return
is filed in a manner prescribed by the
Commissioner.
vii. Section 52(C)
Section 52. Corporation Returns.
Taxation Law
(C) Return of Corporation Contemplating
Dissolution or Reorganization. Every corporation
shall, within 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, render a correct return to the
Commissioner, verified under oath, setting forth the
terms of such resolution or plan and such other
information as the Secretary of Finance, upon
recommendation of the Commissioner, shall, by the
rules and regulations, prescribe.
The dissolving or reorganizing corporation shall,
prior to the issuance by the Securities and
Exchange Commission of the Certificate of
Dissolution or Reorganization, as may be defined
by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner, secure a certificate of tax clearance
from the Bureau of Internal Revenue which
certificate shall be submitted to the Securities and
Exchange Commission.
3. Creditable Withholding Tax vs. Final
Withholding Tax
i. Section 57 of the NIRC
Section 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. -
Subject to rules and regulations the Secretary of
Finance may promulgate, upon the
recommendation of the Commissioner, requiring
the filing of income tax return by certain income
payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)
(3), 25(B), 25(C), 25(D), 25(E), 27(D)(1), 27(D)(2),
27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)
(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c);
33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation
and/or person and paid in the same manner and
subject to the same conditions as provided in
Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. - The
Secretary of Finance may, upon the
recommendation of the Commissioner, require the
withholding of a tax on the items of income payable
to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one
percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the
Alyssa Africa Page 103
income tax liability of the taxpayer for the taxable
year.
(C) Tax-free Covenant Bonds. - In any case where
bonds, mortgages, deeds of trust or other similar
obligations of domestic or resident foreign
corporations, contain a contract or provisions by
which the obligor agrees to pay any portion of the
tax imposed in this Title upon the obligee or to
reimburse the obligee for any portion of the tax or
to pay the interest without deduction for any tax
which the obligor may be required or permitted to
pay thereon or to retain therefrom under any law of
the Philippines, or any state or country, the obligor
shall deduct bonds, mortgages, deeds of trust or
other obligations, whether the interest or other
payments are payable annually or at shorter or
longer periods, and whether the bonds, securities
or obligations had been or will be issued or
marketed, and the interest or other payment
thereon paid, within or without the Philippines, if the
interest or other payment is payable to a
nonresident alien or to a citizen or resident of the
Philippines.
ii. RR No. 2-98
Section 2.57 Withholding of Tax at Source
(A) Final Withholding Tax. Under the final
withholding tax system the amount of income tax
withheld by the withholding agent is constituted as
a full and final payment of the income tax due from
the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the
deficiency tax shall be collected from the
payor/withholding agent. The Payee is not required
to file an income tax return for the particular
income.
The finality of the withholding tax is limited only to
the payees income tax liability on the particular
income. It does not extend to the payees other tax
liability on said income, such as when the said
income is further subject to a percentage tax. For
ex., if a bank receives income subject to final
withholding tax, the same shall be subject to a
percentage tax.
(B) Creditable Withholding Tax. Under the
creditable withholding tax system, taxes withheld
on certain income payments are intended to equal
or at least approximate the tax due of the payee on
the said income. The income recipient is still
required to file an income tax return, as prescribed
in Section 51 and Section 52 of the NIRC, as
amended, to report the income and/or pay the
Taxation Law
difference between the tax withheld and the tax due
on the income. Taxes withheld on income payment full and final of the payee on said
covered by the expanded withholding tax and payment of the income.
compensation income are creditable in nature. income tax due
from the payee on
CREBA vs. Romulo (2010) the said income.
Facts: CREBA is an association of real estate
developers and builders in the Philippines.
Petitioner also seeks to nullify Sections 2.57.2(J)
b)The liability for b) Payee of income is
(as amended by RR 6-2001) and 2.58.2 of RR 2-
payment of the tax required to report the
98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all rests primarily on income and/or pay the
of which prescribe the rules and procedures for the the payor as a difference between the
collection of CWT on the sale of real properties withholding agent. tax withheld and the tax
categorized as ordinary assets. Petitioner contends due on the income. The
that these revenue regulations are contrary to law payee also has the right
for two reasons: first, they ignore the different to ask for a refund if the
treatment by RA 8424 of ordinary assets and tax withheld is more
capital assets and second, respondent Secretary of than the tax due.
Finance has no authority to collect CWT, much
less, to base the CWT on the gross selling price or
fair market value of the real properties classified as
ordinary assets. c) The payee is
not requiredc) The
to income recipient is still required
file an incometo file an income tax return, as
Issue: Whether or not the imposition of CWT on tax return
prescribed
for in Sec. 51 and Sec. 52 of the
income from sales of real properties classified as the particular NIRC, as amended.74
ordinary assets under RRs 2-98, 6-2001 and 7- income.73
2003, is unconstitutional.

Held: As previously stated, FWT is imposed on the sale

No Blurring of Distinctions Between
Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income
based on the GSP or FMV of the real property
categorized as ordinary assets. On the other
hand, Section 27(D)(5) of RA 8424 imposes a final
tax and flat rate of 6% on the gain presumed to
be realized from the sale of a capital asset based
on its GSP or FMV. This final tax is also withheld at
source.72
The differences between the two forms of
withholding tax, i.e., creditable and final, show
that ordinary assets are not treated in the same
manner as capital assets. Final withholding tax
(FWT) and CWT are distinguished as follows:
FWT CWT
a) The amount of a) Taxes withheld on
income tax certain income
withheld by the payments are intended
withholding agent to equal or at least
is constituted as a approximate the tax due
of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The
inherent and substantial differences between
FWT and CWT disprove petitioners contention
that ordinary assets are being lumped together
with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA
8424.
Petitioner insists that the levy, collection and
payment of CWT at the time of transaction are
contrary to the provisions of RA 8424 on the
manner and time of filing of the return, payment
and assessment of income tax involving ordinary
assets.75
The fact that the tax is withheld at source does
not automatically mean that it is treated exactly
the same way as capital gains. As
aforementioned, the mechanics of the FWT are
distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time
of the transaction by withholding the tax due
from the income payable is the essence of the
withholding tax method of tax collection.
Again, it is stressed that the CWT is
creditable against the tax due from the
seller of the property at the end of the

Alyssa Africa Page 104

Taxation Law
taxable year. The seller will be able to claim
a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is
not due so there is no confiscation of
property repugnant to the constitutional
guarantee of due process. More
importantly, the due process requirement
applies to the power to tax.79 The CWT does
not impose new taxes nor does it increase
taxes.80 It relates entirely to the method
and time of payment.
4. Withholding on Wages
i. Sections 78 to 82
SEC. 78. Definitions. - As used in this Chapter:
(A) Wages. - The term 'wages' means all
remuneration (other than fees paid to a public
official) for services performed by an employee for
his employer, including the cash value of all
remuneration paid in any medium other than cash,
except that such term shall not include
remuneration paid:
(1) For agricultural labor paid entirely in products of
the farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the
employer's trade or business, or
(4) For services by a citizen or resident of the
Philippines for a foreign government or an
international organization.
If the remuneration paid by an employer to an
employee for services performed during one-half
(1/2) or more of any payroll period of not more than
thirty-one (31) consecutive days constitutes wages,
all the remuneration paid by such employer to such
employee for such period shall be deemed to be
wages; but if the remuneration paid by an employer
to an employee for services performed during more
than one -half (1/2) of any such payroll period does
not constitute wages, then none of the
remuneration paid by such employer to such
employee for such period shall be deemed to be
wages.
(B) Payroll Period. - The term 'payroll
period'means a period for which payment of wages
is ordinarily made to the employee by his employer,
and the term 'miscellaneous payroll period'means a
payroll period other than, a daily, weekly, biweekly,
semi-monthly, monthly, quarterly, semi-annual, or
annual period.
(C) Employee. - The term 'employee' refers to
any individual who is the recipient of wages and
includes an officer, employee or elected official of
Alyssa Africa Page 105
the Government of the Philippines or any political
subdivision, agency or instrumentality thereof. The
term 'employee' also includes an officer of a
corporation.
(D) Employer. - The term 'employer' means the
person for whom an individual performs or
performed any service, of whatever nature, as the
employee of such person, except that:
(1) If the person for whom the individual performs
or performed any service does not have control of
the payment of the wages for such services, the
term 'employer' (except for the purpose of
Subsection(A) means the person having control of
the payment of such wages; and
(2) In the case of a person paying wages on behalf
of a nonresident alien individual, foreign partnership
or foreign corporation not engaged in trade or
business within the Philippines, the term 'employer'
(except for the purpose of Subsection(A) means
such person.
SEC. 79. Income Tax Collected at Source. -
(A) Requirement of Withholding. - Except in the
case of a minimum wage earner as defined in
Section 22(HH) of this Code, every employer
making payment of wages shall deduct and
withhold upon such wages a tax determined in
accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(B) Tax Paid by Recipient. - If the employer, in
violation of the provisions of this Chapter, fails to
deduct and withhold the tax as required under this
Chapter, 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 this Subsection shall 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.
(C) Refunds or Credits. -
(1) Employer. - When there has been an
overpayment of tax under this Section, refund or
credit shall be made to the employer only to the
extent that the amount of such overpayment was
not deducted and withheld hereunder by the
employer.
(2) Employees. -The amount deducted and
withheld under this Chapter during any calendar
year shall be allowed as a credit to the recipient of
such income against the tax imposed under Section
Taxation Law
24(A) of this Title. Refunds and credits in cases of
excessive withholding shall be granted under rules
and regulations promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner.
Any excess of the taxes withheld over the tax due
from the taxpayer shall be returned or credited
within three (3) months from the fifteenth (15 th) day
of April. Refunds or credits made after such time
shall earn interest at the rate of six percent (6%)
per annum, starting after the lapse of the three-
month period to the date the refund of credit is
made.
Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized
representative without the necessity of counter-
signature by the Chairman, Commission on Audit or
the latter's duly authorized representative as an
exception to the requirement prescribed by Section
49, Chapter 8, Subtitle B, Title 1 of Book V of
Executive Order No. 292, otherwise known as the
Administrative Code of 1987.
(D) Personal Exemptions.-
(1) In General. - Unless otherwise provided by this
Chapter, the personal and additional exemptions
applicable under this Chapter shall be determined
in accordance with the main provisions of this Title.
(2) Exemption Certificate. -
(a) When to File. - On or before the date of
commencement of employment with an employer,
the employee shall furnish the employer with a
signed withholding exemption certificate relating to
the personal and additional exemptions to which he
is entitled.
(b) Change of Status. - In case of change of
status of an employee as a result of which he would
be entitled to a lesser or greater amount of
exemption, the employee shall, within ten (10) days
from such change, file with the employer a new
withholding exemption certificate reflecting the
change.
(c) Use of Certificates. - The certificates filed
hereunder shall be used by the employer in the
determination of the amount of taxes to be
withheld.
(d) Failure to Furnish Certificate. - Where an
employee, in violation of this Chapter, either fails or
refuses to file a withholding exemption certificate,
the employer shall withhold the taxes prescribed
Alyssa Africa Page 106
under the schedule for zero exemption of the
withholding tax table determined pursuant to
Subsection (A) hereof.
(E) Withholding on Basis of Average Wages.
- The Commissioner may, under rules and
regulations promulgated by the Secretary of
Finance, authorize employers to:
(1) Estimate the wages which will be paid to an
employee in any quarter of the calendar year;
(2) Determine the amount to be deducted and
withheld upon each payment of wages to such
employee during such quarter as if the appropriate
average of the wages so estimated constituted the
actual wages paid; and
(3) Deduct and withhold upon any payment of
wages to such employee during such quarter such
amount as may be required to be deducted and
withheld during such quarter without regard to this
Subsection.
(F) Husband and Wife. - When a husband and
wife each are recipients of wages, whether from the
same or from different employers, taxes to be
withheld shall be determined on the following
bases:
(1) The husband shall be deemed the head of the
family and proper claimant of the additional
exemption in respect to any dependent children,
unless he explicitly waives his right in favor of his
wife in the withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the
wife in accordance with the schedule for zero
exemption of the withholding tax table prescribed in
Subsection (D)(2)(d) hereof.
(G) Nonresident Aliens. - Wages paid to
nonresident alien individuals engaged in trade or
business in the Philippines shall be subject to the
provisions of this Chapter
.
(H) Year-end Adjustment. - On or before the end
of the calendar year but prior to the payment of the
compensation for the last payroll period, the
employer shall determine the tax due from each
employee on taxable compensation income for the
entire taxable year in accordance with Section
24(A). 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.
Taxation Law
SEC. 80. Liability for Tax. -
(A) Employer. - The employer shall be liable for
the withholding and remittance of the correct
amount of tax required to be deducted and withheld
under this Chapter. If the employer fails to withhold
and remit the correct amount of tax as required to
be withheld under the provision of this Chapter,
such tax shall be collected from the employer
together with the penalties or additions to the tax
otherwise applicable in respect to such
failure to withhold and remit.
(B) Employee. - Where an employee fails or
refuses to file the withholding exemption certificate
or wilfully supplies false or inaccurate information
thereunder, the tax otherwise required to be
withheld by the employer shall be collected from
him including penalties or additions to the tax from
the due date of remittance until the date of
payment. On the other hand, excess taxes withheld
made by the employer due to:
(1) Failure or refusal to file the withholding
exemption certificate; or
(2) False and inaccurate information shall not be
refunded to the employee but shall be forfeited in
favor of the Government.
SEC. 81. Filing of Return and Payment of Taxes
Withheld. - Except as the Commissioner otherwise
permits, taxes deducted and withheld by the
employer on wages of employees shall be covered
by a return and paid to an authorized agent bank;
Collection Agent, or the duly authorized Treasurer
of the city or municipality where the employer has
his legal residence or principal place of business, or
in case the employer is a corporation, where the
principal office is located.
The return shall be filed and the payment made
within twenty-five (25) days from the close of each
calendar quarter: Provided, however, That the
Commissioner may, with the approval of the
Secretary of Finance, require the employers to pay
or deposit the taxes deducted and withheld at more
frequent intervals, in cases where such requirement
is deemed necessary to protect the interest of the
Government.
The taxes deducted and withheld by employers
shall be held in a special fund in trust for the
Government until the same are paid to the said
collecting officers.
SEC. 82. Return and Payment in Case of
Government Employees. - If the employer is the
Government of the Philippines or any political
Alyssa Africa Page 107
subdivision, agency or instrumentality thereof, the
return of the amount deducted and withheld upon
any wage shall be made by the officer or employee
having control of the payment of such wage, or by
any officer or employee duly designated for the
purpose.
5. Time of Withholding
i. Section 2.57 of RR No. 2-98, as amended by
RR No. 12-001
ii. 3. Section 2.78 and 2.83 of RR No. 2-98
Section 2.78 Withholding Tax on Compensation
The withholding of tax on compensation income is
a method of collecting the income tax at source
upon receipt of the income. It applies to all
employed individuals whether citizens or aliens,
deriving income from compensation for services
rendered in the Philippines. The employer is
constituted as the withholding agent
ING Bank vs. CIR (2015)
Facts: ING Bank is a foreign banking corporation
incorporated in Netherlands and duly authorized by
BSP to operate as branch with full banking
authority in the Philippines. While a petition for
review by ING Bank was pending for deficiency
documentary stamp tax, deificency withholding tax
on accured bonuses and deficiency onshore tax
liabilities and immunities, ING filed a Manifestation
and Motion stating that it availed of the
governments tax amnesty program under RA 9480
with respect to the deficient documentary stamp tax
and deficiency onshore tax liabilities and
immunities and privileges.
Petitioner ING Bank claims that it is not liable for
withholding taxes on bonuses accruing to its
officers and employees during taxable years 1996
and 1997. It maintains its position that the liability
of the employer to withhold the tax does not arise
until such bonus is actually distributed. It cites
Section 72 of the 1977 National Internal Revenue
Code, which states that "[e]very employer making
payment of wages shall deduct and withhold upon
such wages a tax," and BIR Ruling No. 555-88
(November 23, 1988) declaring that "[t]he
withholding tax on the bonuses should be deducted
upon the distribution of the same to the officers and
employees[.]" Since the supposed bonuses were
not distributed to the officers and employees in
1996 and 1997 but were distributed in the
succeeding year when the amounts of the bonuses
were finally determined, petitioner ING Bank
Taxation Law
asserts that its duty as employer to withhold the tax Taxes imposed upon the privilege of passing
during these taxable years did not arise. ownership of property without any valuable
consideration.
Issue: Whether or not petitioner ING Bank may
validly avail itself of the tax amnesty granted by RA II. Estate Tax
9480 and whether it is liable for deficiency A. Nature of Estate Tax
withholding tax on accrued bonuses for the taxable 1. Definition
years 1996 to 1997. An excise tax on the right of transmitting property at
the time of death and on the privilege that a person
Held: Under the National Internal Revenue Code, is given in controlling to a certain extent the
every form of compensation for personal services is disposition of his property to take effect upon death.
subject to income tax and, consequently, to
withholding tax. The term "compensation" means 2. Tax Exempt Net Estate (Section 84)
all remunerations paid for services performed by an Section 84. Rates of Estate Tax. - There shall be
employee for his or her employer, whether paid in levied, assessed, collected and paid upon the
cash or in kind, unless specifically excluded under transfer of the net estate as determined in
Sections 32(B)83 and 78(A)84 of the 1997 National accordance with Sections 85 (Gross Estate) and 86
Internal Revenue Code.85 The name designated to (Computation of Net Estate) of every decedent,
the remuneration for services is immaterial. Thus, whether resident or nonresident of the Philippines,
"salaries, wages, emoluments and honoraria, a tax based on the value of such net estate, as
bonuses, allowances (such as transportation, computed
representation, entertainment, and the like),
[taxable] fringe benefits[,] pensions and retirement 3. Minimum and Maximum Rates (Section 84)
pay, and other income of a similar nature constitute
Over But Not Over The Tax Shall Be Plu
compensation income"86 that is taxable.
Hence, petitioner ING Bank is liable for the P 200,000 Exempt
withholding tax on the bonuses since it claimed the P 200,000 500,000 0 5%
same as expenses in the year they were accrued. 500,000 2,000,000 P15,000 8%
The tax on compensation income is withheld
at source under the creditable withholding tax 2,000,000 5,000,000 135,000 11
system wherein the tax withheld is intended 5,000,000 10,000,000 456,000 15
to equal or at least approximate the tax due
10,000,000 And Over 1,215,000 20
of the payee on the said income. It was
designed to enable (a) the individual taxpayer
to meet his or her income tax liability on 4. Accrual of Estate Tax vs. Liability for
compensation earned; and (b) the government Payment (Section 3 of RR No. 2-03)
to collect at source the appropriate taxes on
compensation.87 Taxes withheld are creditable Section 3. The Law that Governs the Imposition of
in nature.88Thus, the employee is still required Estate Tax. It is a well-settled rule that estate
to file an income tax return to report the taxation is governed by the statute in force at the
income and/or pay the difference between the time of the death of the decedent. The estate tax
tax withheld and the tax due on the accrues as of the death of the decedent,
income.89 For over withholding, the employee succession takes place and the right of the State to
is refunded.90Therefore, absolute or exact
tax the privilege to transmit the estate vests
accuracy in the determination of the amount
of the compensation income is not a instantly upon death.
prerequisite for the employers withholding The application of the rates herein prescribed and
obligation to arise. the procedures in determining the estate tax due
shall apply to estate taxes falling due or have
accrued beginning January 1, 1998, the effectivity
Taxation II
date of RA No. 8424, otherwise known as The Tax
Transfer Taxes
Reform Act of 1997.
(Sections 84 to 104 of the NIRC as implemented
by RR No. 2-03)
Accrual of Estate Tax Liability for Payment
I. Nature of Transfer Taxes Accrues upon the death Within 6 months upon
of the decedent the death of the
decedent
Alyssa Africa Page 108
Taxation Law
B. Composition of the Gross Estate (Section.
104)/ (Section 4 of RR No. 2-03)
Section 104. Definitions. - For purposes of this
Title, the terms 'gross estate' and 'gifts' include
real and personal property, whether tangible or
intangible, or mixed, wherever situated: Provided,
however, That where the decedent or donor was a
nonresident alien at the time of his death or
donation, as the case may be, his real and personal
property so transferred but which are situated
outside the Philippines shall not be included as part
of his 'gross estate' or 'gross gift': Provided,
further, That franchise which must be exercised in
the Philippines; shares, obligations or bonds issued
by any corporation or sociedad anonima organized
or constituted in the Philippines in accordance with
its laws; shares, obligations or bonds by any foreign
corporation eighty-five percent (85%) of the
business of which is located in the Philippines;
shares, obligations or bonds issued by any foreign
corporation if such shares, obligations or bonds
have acquired a business situs in the Philippines;
shares or rights in any partnership, business or
industry established in the Philippines, shall be
considered as situated in the Philippines: Provided,
still further, that no tax shall be collected under this
Title in respect of intangible personal property:
(a) if the decedent at the time of his death or the
donor at the time of the donation was a citizen and
resident of a foreign country which at the time of his
death or donation did not impose a transfer tax of
any character, in respect of intangible personal
property of citizens of the Philippines not residing in
that foreign country, or
(b) if the laws of the foreign country of which the
decedent or donor was a citizen and resident at the
time of his death or donation allows a similar
exemption from transfer or death taxes of every
character or description in respect of intangible
personal property owned by citizens of the
Philippines not residing in that foreign country.
The term 'deficiency' means:
(a) the amount by which tax imposed by this
Chapter exceeds the amount shown as the tax by
the donor upon his return; but the amount so shown
on the return shall first be increased by the amount
previously assessed (or Collected without
assessment) as a deficiency, and decreased by the
amounts previously abated, refunded or otherwise
repaid in respect of such tax, or
(b) if no amount is shown as the tax by the donor,
then the amount by which the tax exceeds the
amounts previously assessed, (or collected without
Alyssa Africa Page 109
assessment) as a deficiency, but such amounts
previously assessed, or collected without
assessment, shall first be decreased by the amount
previously abated, refunded or otherwise repaid in
respect of such tax.
RR 02-03 Section 4. Composition of the Gross
Estate. The gross estate of a decedent shall be
comprised of the following properties and interest
therein at the time of his death, including revocable
transfers and transfers for insufficient
consideration, etc.:
A) Residents and citizens all properties, real or
personal, tangible or intangible, wherever situated.
B) Non-resident aliens only properties situated in
the Philippines provided, that, with respect to
intangible personal property, its inclusions in the
gross estate is subject to the rule of reciprocity
provided for under Section 104 of the Code.
1. Residents and Citizens
All properties wherever situated.
2. Non-resident aliens
All properties situated in the Philippines provided
that intangible personal property will be subject to
the rule of reciprocity.
a. Rule on Reciprocity (Intangibe personal
property)
1. Not included in the Gross Estate if:
(a) No Law Taxing Citizens of the Philippines
not Residing therein - At the time of his death, the
laws of the foreign country to which he was a
resident citizen did not impose a transfer tax of any
character, in respect of intangible personal property
of citizens of the Philippines not residing in that
foreign country; or
(b) Exempted Citizens of the Philippines not
Residing therein - At the time of his death, the
laws of the foreign country to which he was a
resident citizen allows a similar exemption from
transfer or death taxes of every character or
description in respect of tangible personal property
owned by citizens of the Philippines not residing in
that foreign country.
2. Included No reciprocity
CIR vs. Campos Rueda (42 SCRA 23)
Facts: Antonio Campos Rueda is the administrator
of the estate of Estrella Soriano Vda. De Cerdeira.
The former was held liable for deficiency estate and
inheritance taxes for the transfer of intangible
Taxation Law
personal properties in the Philippines. The
decedent is a Spanish national and resident of
Tangier, Morocco up to the time of her death.
Campos Rueda sufficiently proved that at the
transfers by reason of death of movable properties,
corporeal or incorporeal were not subject on that
date and in said zone to the payment of death tax
whatever the nationality of the decedent might have
been. The CIR questioned whether the requisites of
statehood is necessary to qualify as a foreign
country within the exemption of Section 122 of the
NIRC.
Issue: Whether or not the Philippines should
recognize the tax exemption imposed by Tangier.
Held: Yes, the tax exemption must be recognized.
The controlling legal provision as noted is a proviso
in Section 122 of the National Internal Revenue
Code. It reads thus: "That no tax shall be collected
under this Title in respect of intangible personal
property (a) if the decedent at the time of his death
was a resident of a foreign country which at the
time of his death did not impose a transfer tax or
death tax of any character in respect of intangible
person property of the Philippines not residing in
that foreign country, or (b) if the laws of the foreign
country of which the decedent was a resident at the
time of his death allow a similar exemption from
transfer taxes or death taxes of every character in
respect of intangible personal property owned by
citizens of the Philippines not residing in that
foreign country." The only obstacle therefore to a
definitive ruling is whether or not as vigorously
insisted upon by petitioner the acquisition of
internal personality is a condition sine qua non to
Tangier being considered a "foreign country".
Deference to the De Lara ruling, as was made clear
in the opening paragraph of this opinion, calls for
an affirmance of the decision of the Court of Tax
Appeals.
It does not admit of doubt that if a foreign
country is to be identified with a state, it is required
in line with Pound's formulation that it be a
politically organized sovereign community
independent of outside control bound by penalties
of nationhood, legally supreme within its territory,
acting through a government functioning under a
regime of law. It is thus a sovereign person with the
people composing it viewed as an organized
corporate society under a government with the
legal competence to exact obedience to its
commands. It has been referred to as a body-
politic organized by common consent for mutual
Alyssa Africa Page 110
defense and mutual safety and to promote the
general welfare. Correctly has it been described by
Esmein as "the juridical personification of the
nation." This is to view it in the light of its historical
development. The stress is on its being a nation, its
people occupying a definite territory, politically
organized, exercising by means of its government
its sovereign will over the individuals within it and
maintaining its separate international personality.
Laski could speak of it then as a territorial society
divided into government and subjects, claiming
within its allotted area a supremacy over all other
institutions. McIver similarly would point to the
power entrusted to its government to maintain
within its territory the conditions of a legal order and
to enter into international relations. With the latter
requisite satisfied, international law do not exact
independence as a condition of statehood. So Hyde
did opine.
What is undeniable is that even prior to the De
Lara ruling, this Court did commit itself to the
doctrine that even a tiny principality, that of
Liechtenstein, hardly an international personality in
the sense, did fall under this exempt category. So it
appears in an opinion of the Court by the then
Acting Chief Justicem Bengson who thereafter
assumed that position in a permanent capacity,
in Kiene v. Collector of Internal Revenue. As was
therein noted: 'The Board found from the
documents submitted to it proof of the laws of
Liechtenstein that said country does not impose
estate, inheritance and gift taxes on intangible
property of Filipino citizens not residing in that
country. Wherefore, the Board declared that
pursuant to the exemption above established, no
estate or inheritance taxes were collectible, Ludwig
Kiene being a resident of Liechtestein when he
passed away." Then came this definitive ruling:
"The Collector hereafter named the respondent
cites decisions of the United States Supreme
Court and of this Court, holding that intangible
personal property in the Philippines belonging to a
non-resident foreigner, who died outside of this
country is subject to the estate tax, in disregard of
the principle 'mobilia sequuntur personam'. Such
property is admittedly taxable here. Without the
proviso above quoted, the shares of stock owned
here by the Ludwig Kiene would be concededly
subject to estate and inheritance taxes.
Nevertheless our Congress chose to make an
exemption where conditions are such that demand
reciprocity as in this case. And the exemption
must be honored."
Taxation Law
CIR vs. Fisher (1961)
Facts: Walter G. Stevenson was born of British
parents and married in Manila to Beatrice Mauricia
Stevenson. Walter died in San Francisco California
where he previously moved and established their
permanent residence. His will was probated in the
Superior Court of California with Beatrice as his
sole heiress. One of the properties assessed was
the 210,000 shares of stocks from Mindanao
Mother Lode Mines Inc.
California Tax laws only impose inheritance
taxes and their Federal laws impose estate taxes
with a rule that if the laws where the intangible
personal property states a reciprocal provision
exempting a non-resident from legacy, succession,
or death taxes if the territory of the state in which
the non-resident resided allowed similar exemption
in respect to intangible personal property of
residents of the Territory of State of the United
States or foreign state or country of residence of
the decedent.
The CIR questioned if the rule of reciprocity
would apply in this case.
Issue: Whether or not the estate can avail itself of
the reciprocity proviso embodied in Section 122 of
the National Internal Revenue Code granting
exemption from the payment of estate and
inheritance taxes on the 210,000 shares of stock in
the Mindanao Mother Lode Mines Inc.
Held: Section 122 of our National Internal Revenue
Code, in pertinent part, provides:
... And, provided, further, That no tax shall be
collected under this Title in respect of intangible
personal property (a) if the decedent at the time of
his death was a resident of a foreign country which
at the time of his death did not impose a transfer of
tax or death tax of any character in respect of
intangible personal property of citizens of the
Philippines not residing in that foreign country, or
(b) if the laws of the foreign country of which the
decedent was a resident at the time of his death
allow a similar exemption from transfer taxes or
death taxes of every character in respect of
intangible personal property owned by citizens of
the Philippines not residing in that foreign country."
(Emphasis supplied).
On the other hand, Section 13851 of the
California Inheritance Tax Law, insofar as pertinent,
reads:.
"SEC. 13851, Intangibles of nonresident:
Conditions. Intangible personal property is exempt
from the tax imposed by this part if the decedent at
Alyssa Africa Page 111
the time of his death was a resident of a territory or
another State of the United States or of a foreign
state or country which then imposed a legacy,
succession, or death tax in respect to intangible
personal property of its own residents, but either:.
(a) Did not impose a legacy, succession, or death
tax of any character in respect to intangible
personal property of residents of this State, or
(b) Had in its laws a reciprocal provision under
which intangible personal property of a non-
resident was exempt from legacy, succession, or
death taxes of every character if the Territory or
other State of the United States or foreign state or
country in which the nonresident resided allowed a
similar exemption in respect to intangible personal
property of residents of the Territory or State of the
United States or foreign state or country of
residence of the decedent." (Id.)
It is clear from both these quoted provisions
that the reciprocity must be total, that is, with
respect to transfer or death taxes of any and every
character, in the case of the Philippine law, and to
legacy, succession, or death taxes of any and every
character, in the case of the California law.
Therefore, if any of the two states collects or
imposes and does not exempt any transfer, death,
legacy, or succession tax of any character, the
reciprocity does not work. This is the underlying
principle of the reciprocity clauses in both laws.
In the Philippines, upon the death of any citizen
or resident, or non-resident with properties therein,
there are imposed upon his estate and its
settlement, both an estate and an inheritance tax.
Under the laws of California, only inheritance tax is
imposed. On the other hand, the Federal Internal
Revenue Code imposes an estate tax on non-
residents not citizens of the United States, but does
not provide for any exemption on the basis of
reciprocity. Applying these laws in the manner the
Court of Tax Appeals did in the instant case, we will
have a situation where a Californian, who is non-
resident in the Philippines but has intangible
personal properties here, will the subject to the
payment of an estate tax, although exempt from the
payment of the inheritance tax. This being the case,
will a Filipino, non-resident of California, but with
intangible personal properties there, be entitled to
the exemption clause of the California law, since
the Californian has not been exempted from every
character of legacy, succession, or death tax
because he is, under our law, under obligation to
pay an estate tax? Upon the other hand, if we
exempt the Californian from paying the estate tax,
we do not thereby entitle a Filipino to be exempt
Taxation Law
from a similar estate tax in California because
under the Federal Law, which is equally
enforceable in California he is bound to pay the
same, there being no reciprocity recognized in
respect thereto. In both instances, the Filipino
citizen is always at a disadvantage. We do not
believe that our legislature has intended such an
unfair situation to the detriment of our own
government and people. We, therefore, find and
declare that the lower court erred in exempting the
estate in question from payment of the inheritance
tax.
We are not unaware of our ruling in the case
of Collector of Internal Revenue vs. Lara (G.R. Nos.
L-9456 & L-9481, prom. January 6, 1958, 54 O.G.
2881) exempting the estate of the deceased Hugo
H. Miller from payment of the inheritance tax
imposed by the Collector of Internal Revenue. It will
be noted, however, that the issue of reciprocity
between the pertinent provisions of our tax law and
that of the State of California was not there
squarely raised, and the ruling therein cannot
control the determination of the case at bar. Be that
as it may, we now declare that in view of the
express provisions of both the Philippine and
California laws that the exemption would apply only
if the law of the other grants an exemption from
legacy, succession, or death taxes of every
character, there could not be partial reciprocity. It
would have to be total or none at all.
3. Gross Estate (Sections 85 and 104)
Section 85. Gross Estate. - the value of the gross
estate of the decedent shall be determined by
including the value at the time of his death of all
property, real or personal, tangible or intangible,
wherever situated: Provided, however, that in the
case of a nonresident decedent who at the time of
his death was not a citizen of the Philippines, only
that part of the entire gross estate which is situated
in the Philippines shall be included in his taxable
estate.
Section 104. Definitions. - For purposes of this
Title, the terms 'gross estate' and 'gifts' include
real and personal property, whether tangible or
intangible, or mixed, wherever situated: Provided,
however, That where the decedent or donor was a
nonresident alien at the time of his death or
donation, as the case may be, his real and personal
property so transferred but which are situated
outside the Philippines shall not be included as part
of his 'gross estate' or 'gross gift'.
Alyssa Africa Page 112
a. Valuation (Section 85 and 88) (Section 5 of
RR No. 2-03)
Section 85. Gross Estate
(A) Decedent's Interest. - To the extent of the
interest therein of the decedent at the time of his
death;
(B) Transfer in Contemplation of Death. - To the
extent of any interest therein of which the decedent
has at any time made a transfer, by trust or
otherwise, in contemplation of or intended to take
effect in possession or enjoyment at or after death,
or of which he has at any time made a transfer, by
trust or otherwise, under which he has retained for
his life or for any period which does not in fact end
before his death (1) the possession or enjoyment
of, or the right to the income from the property, or
(2) the right, either alone or in conjunction with any
person, to designate the person who shall possess
or enjoy the property or the income therefrom;
except in case of a bona fide sale for an adequate
and full consideration in money or money's worth.
(C) Revocable Transfer. -
(1) To the extent of any interest therein, of which
the decedent has at any time made a transfer
(except in case of a bona fide sale for an adequate
and full consideration in money or money's worth)
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 (in whatever
capacity exercisable) by the decedent alone or by
the decedent in conjunction with any other person
(without regard to when or from what source the
decedent acquired such power), to alter, amend,
revoke, or terminate, or where any such power is
relinquished in contemplation of the decedent's
death.
(2) For the purpose of this Subsection, the power
to alter, amend or revoke shall be considered to
exist on the date of the decedent's death even
though the exercise of the power is subject to a
precedent giving of notice or even though the
alteration, amendment or revocation takes effect
only on the expiration of a stated period after the
exercise of the power, whether or not on or before
the date of the decedent's death notice has been
given or the power has been exercised. In such
cases, proper adjustment shall be made
representing the interests which would have been
excluded from the power if the decedent had lived,
and for such purpose if the notice has not been
given or the power has not been exercised on or
before the date of his death, such notice shall be
considered to have been given, or the power
exercised, on the date of death.
Taxation Law
(D) Property Passing Under General Power of
Appointment. - To the extent of any property
passing under a general power of appointment
exercised by the decedent: (1) by will, or (2) by
deed executed in contemplation of, or intended to
take effect in possession or enjoyment at, or after
his death, or (3) by deed under which he has
retained for his life or any period not ascertainable
without reference to his death or for any period
which does not in fact end before his death (a) the
possession or enjoyment of, or the right to the
income from, the property, or (b) the right, either
alone or in conjunction with any person, to
designate the persons who shall possess or enjoy
the property or the income therefrom; except in
case of a bona fide sale for an adequate and full
consideration in money or money's worth.
(E) Proceeds of Life Insurance. - To the extent of
the amount receivable by the estate of the
deceased, his executor, or administrator, as
insurance under policies taken out by the decedent
upon his own life, irrespective of whether or not the
insured retained the power of revocation, or to the
extent of the amount receivable by any beneficiary
designated in the policy of insurance, except when
it is expressly stipulated that the designation of the
beneficiary is irrevocable.
(F) Prior Interests. - Except as otherwise
specifically provided therein, Subsections (B), (C)
and (E) of this Section shall apply to the transfers,
trusts, estates, interests, rights, powers and
relinquishment of powers, as severally enumerated
and described therein, whether made, created,
arising, existing, exercised or relinquished before or
after the effectivity of this Code.
(G) Transfers for Insufficient Consideration. - If any
one of the transfers, trusts, interests, rights or
powers enumerated and described in Subsections
(B), (C) and (D) of this Section is made, created,
exercised or relinquished for a consideration in
money or money's worth, but is not a bona fide sale
for an adequate and full consideration in money or
money's worth, there shall be included in the gross
estate only the excess of the fair market value, at
the time of death, of the property otherwise to be
included on account of such transaction, over the
value of the consideration received therefor by the
decedent.
(H) Capital of the Surviving Spouse. - The capital of
the surviving spouse of a decedent shall not, for the
purpose of this Chapter, be deemed a part of his or
her gross estate.
Alyssa Africa Page 113
Section 88. Determination of the Value of the
Estate. -
(A) Usufruct. - To determine the value of the right of
usufruct, use or habitation, as well as that of
annuity, there shall be taken into account the
probable life of the beneficiary in accordance with
the latest Basic Standard Mortality Table, to be
approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
(B) Properties. - The estate shall be appraised at its
fair market value as of the time of death. However,
the appraised value of real property as of the time
of death shall be, whichever is higher of -
(1) The fair market value as determined by the
Commissioner; or
(2) The fair market value as shown in the schedule
of values fixed by the Provincial and City
Assessors.
RR 02-03
Section 5. Valuation of the Gross Estate. - The
properties comprising the gross estate shall be
valued based on their fair market value as of the
time of death.
If the property is a real property, the fair market
value shall be the fair market value as determined
by the Commissioner or the fair market value as
shown in the schedule of values fixed by the
provincial or city assessors, whichever is higher.
For purposes of prescribing real property values,
the Commissioner is authorized to divide the
Philippines into different zones or areas and shall,
upon consultation with competent appraisers, bot h
from the private and public sectors, determine the
fair market value of real properties located in each
zone or area.
In the case of shares of stock, the fair market
value shall depend on whether the shares are listed
or unlisted in the stock exchanges. Unlisted
common shares are valued based on their book
value while unlisted preferred shares are valued at
par value. In determining the book value of
common shares, appraisal surplus shall not be
considered as well as the value assigned to
preferred shares, if there are any.
For shares which are listed in the stock
exchanges, the fair market value shall be the
arithmetic mean between the highest and lowest
quotation at a date nearest the date of death, if
none is available on the date of the death itself.
To determine the value of the right of usufruct,
use or habitation, as well as that of annuity, there
shall be taken into account the probable life of the
beneficiary in accordance with the latest basic
Taxation Law
standard mortality table, to be approved by the
Secretary of Finance, upon recommendation of the
Insurance Commissioner.
1. Real Property
Whichever is higher between the fair market value
a. as determined by the Commissioner; or
b. as shown in the schedule of values fixed by the
provincial and city assessors or
2. Personal Property (applicability of RR No. 6-
2013)
General Rule: Fair Market Value at the time of
Death
3. Shares of Stock
Sale, Barter or Exchange of Shares of Stock not
Traded Through a Local Stock Exchange
1. Not listed and traded in the local stock
exchanges Fair Market Value at the time of the
sale (RR 06-2013)
a. Unlisted common shares book value
b. Unlisted preferred shares par value (RR
02-03)
2. Listed and traded fair market value shall be the
arithmetic mean between the highest and lowest
quotation at a date nearest the date of death, if
none is available on the date of death itself. (RR
02-03)
4. Usufruct
To determine the value of the right to usufruct, use
or habitation, as well as that of annuity, there shall
be taken into account the probable life of the
beneficiary in accordance with the latest basic
standard mortality table, to be approved by the
Secretary of Finance, upon recommendation of the
insurance Commissioner. (RR 02-03)
b. Decedents Interest
Section 5. Gross Estate
(A) Decedents Interest To the extent of the
interest therein of the decedent at the time of his
death.
c. Transfer in Contemplation of Death
Section 5. Gross Estate
(B) Transfers in Contemplation of Death - To the
extent of any interest therein of which the decedent
has at any time made a transfer, by trust or
otherwise, in contemplation of or intended to take
effect in possession or enjoyment at or after death,
or of which he has at any time made a transfer, by
trust or otherwise, under which he has retained for
Alyssa Africa Page 114
his life or for any period which does not in fact end
before his death (1) the possession or enjoyment
of, or the right to the income from the property, or
(2) the right, either alone or in conjunction with any
person, to designate the person who shall possess
or enjoy the property or the income therefrom;
except in case of a bona fide sale for an adequate
and full consideration in money or money's worth.
Concept of Transfer in Contemplation of Death
Does not constitute any transfer in contemplation of
death but the retention of some type of control over
the property transferred.
General Rule: The transfer shall be considered as
transfer in contemplation of death if, during the
lifetime of the decedent he still retained in the
property the following:
1. Possession or enjoyment thereof;
2. Right to the income from the property; or
3. Right either alone or in conjunction with any
person, to designate a person who shall possess or
enjoy the said property or income therefrom.
Exception: Bona fide sale for an adequate and full
consideration in money or moneys worth.
d. Revocable Transfer
Section 85. Gross Estate
(C) Revocable Transfer. -
(1) To the extent of any interest therein, of which
the decedent has at any time made a transfer
(except in case of a bona fide sale for an adequate
and full consideration in money or money's worth)
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 (in whatever
capacity exercisable) by the decedent alone or by
the decedent in conjunction with any other person
(without regard to when or from what source the
decedent acquired such power), to alter, amend,
revoke, or terminate, or where any such power is
relinquished in contemplation of the decedent's
death.
(2) For the purpose of this Subsection, the power
to alter, amend or revoke shall be considered to
exist on the date of the decedent's death even
though the exercise of the power is subject to a
precedent giving of notice or even though the
alteration, amendment or revocation takes effect
only on the expiration of a stated period after the
exercise of the power, whether or not on or before
the date of the decedent's death notice has been
given or the power has been exercised. In such
Taxation Law
cases, proper adjustment shall be made
representing the interests which would have been
excluded from the power if the decedent had lived,
and for such purpose if the notice has not been
given or the power has not been exercised on or
before the date of his death, such notice shall be
considered to have been given, or the power
exercised, on the date of death.
General: A transfer is a revocable transfer where:
a. There is a transfer by trust or otherwise;
b. The enjoyment thereof was subject at the date of
his death to any change through the exercise of a
power (in whatever capacity exercisable) by:
i. the decedent alone;
ii. 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
iii. where any such power is relinquished in
contemplation of the decedents death
Exception: Bona fide sale for an adequate and full
consideration of money or moneys worth
The power to alter, amend, or revoke is
considered to exist on the death of the
decedent:
1. Even though the exercise of the power is subject
to a predecent of giving notice; or
2. Even though the alteration, amendment, or
revocation takes effect only on the expiration of a
stated period after the exercise of the power.
e. Property Passing Under General Power of
Appointment
Section 85. Gross Estate
(D) Property Passing Under General Power of
Appointment. - To the extent of any property
passing under a general power of appointment
exercised by the decedent: (1) by will, or (2) by
deed executed in contemplation of, or intended to
take effect in possession or enjoyment at, or after
his death, or (3) by deed under which he has
retained for his life or any period not ascertainable
without reference to his death or for any period
which does not in fact end before his death (a) the
possession or enjoyment of, or the right to the
income from, the property, or (b) the right, either
alone or in conjunction with any person, to
designate the persons who shall possess or enjoy
the property or the income therefrom; except in
case of a bona fide sale for an adequate and full
consideration in money or money's worth.
Alyssa Africa Page 115
f. Proceeds of Life Insurance
Section 85. Gross Estate
g. Prior Interest
h. Transfers for Insufficient Consideration
i. Capital of Surviving Spouse
C. Deductions from the Gross Estate (Section
86) (Section 6 of RR No. 2-03)
Section. 86. Computation of Net Estate. - For the
purpose of the tax imposed in this Chapter, the
value of the net estate shall be determined:
(A) Deductions Allowed to the Estate of Citizen
or a Resident. - In the case of a citizen or resident
of the Philippines, by deducting from the value of
the gross estate -
(1) Expenses, Losses, Indebtedness, and
Taxes. - Such amounts -
(a) For actual funeral expenses or in an amount
equal to five percent (5%) of the gross estate,
whichever is lower, but in no case to exceed Two
hundred thousand pesos (P200,000);
(b) For judicial expenses of the testamentary or
intestate proceedings;
(c) For claims against the estate: Provided, That 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;
(d) For claims of the deceased against insolvent
persons where the value of decedent's interest
therein is included in the value of the gross estate;
and
(e) For unpaid mortgages upon, or any
indebtedness in respect to, property where the
value of decedent's interest therein, undiminished
by such mortgage or indebtedness, is included in
the value of the gross estate, but not including any
income tax upon income received after the death of
the decedent, or property taxes not accrued before
his death, or any estate tax. The deduction herein
allowed in the case of claims against the estate,
unpaid mortgages or any indebtedness shall, when
founded upon a promise or agreement, be limited
to the extent that they were contracted bona fide
and for an adequate and full consideration in
money or money's worth. There shall also be
deducted losses incurred during the settlement of
the estate arising from fires, storms, shipwreck, or
other casualties, or from robbery, theft or
embezzlement, when such losses are not
Taxation Law
compensated for by insurance or otherwise, and if
at the time of the filing of the return such losses
have not been claimed as a deduction for the
income tax purposes in an income tax return, and
provided that such losses were incurred not later
than the last day for the payment of the estate tax
as prescribed in Subsection (A) of Section 91.
(2) Property Previously Taxed. - An amount equal
to the value specified below of any property forming
a part of the gross estate situated in the Philippines
of any person who died within five (5) years prior to
the death of the decedent, or transferred to the
decedent by gift within five (5) years prior to his
death, where such property can be identified as
having been received by the decedent from the
donor by gift, or from such prior decedent by gift,
bequest, devise or inheritance, or which can be
identified as having been acquired in exchange for
property so received:
One hundred percent (100%) of the value, if the
prior decedent died within one (1) year prior to the
death of the decedent, or if the property was
transferred to him by gift within the same period
prior to his death;
Eighty percent (80%) of the value, if the prior
decedent died more than one (1) year but not more
than two (2) years prior to the death of the
decedent, or if the property was transferred to him
by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior
decedent died more than two (2) years but not
more than three (3) years prior to the death of the
decedent, or if the property was transferred to him
by gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior
decedent died more than three (3) years but not
more than four (4) years prior to the death of the
decedent, or if the property was transferred to him
by gift within the same period prior to his death;
Twenty percent (20%) of the value, if the prior
decedent died more than four (4) years but not
more than five (5) years prior to the death of the
decedent, or if the property was transferred to him
by gift within the same period prior to his death;
These deductions shall be allowed only where a
donor's tax or estate tax imposed under this Title
was finally determined and paid by or on behalf of
such donor, or the estate of such prior decedent, as
the case may be, and only in the amount finally
determined as the value of such property in
determining the value of the gift, or the gross estate
of such prior decedent, and only to the extent that
the value of such property is included in the
decedent's gross estate, and only if in determining
Alyssa Africa Page 116
the value of the estate of the prior decedent, no
deduction was allowable under paragraph (2) in
respect of the property or properties given in
exchange therefor. Where a deduction was allowed
of any mortgage or other lien in determining the
donor's tax, or the estate tax of the prior decedent,
which was paid in whole or in part prior to the
decedent's death, then the deduction allowable
under said Subsection shall be reduced by the
amount so paid. Such deduction allowable shall be
reduced by an amount which bears the same ratio
to the amounts allowed as deductions under
paragraphs (1) and (3) of this Subsection as the
amount otherwise deductible under said paragraph
(2) bears to the value of the decedent's estate.
Where the property referred to consists of two or
more items, the aggregate value of such items shall
be used for the purpose of computing the
deduction.
(3) Transfers for Public Use. - The amount of all
the bequests, legacies, devises or transfers to or
for the use of the Government of the Republic of
the Philippines, or any political subdivision thereof,
for exclusively public purposes.
(4) The Family Home. - An amount equivalent to
the current fair market value of the decedent's
family home: Provided, however, That if the said
current fair market value exceeds One million
pesos (P1, 000,000), the excess shall be subject to
estate tax. As a sine qua non condition for the
exemption or deduction, said family home must
have been the decedent's family home as certified
by the barangay captain of the locality.
(5) Standard Deduction. - An amount equivalent to
One million pesos (P1, 000,000).
(6) Medical Expenses. - Medical Expenses
incurred by the decedent within one (1) year prior to
his death which shall be duly substantiated with
receipts: Provided, That in no case shall the
deductible medical expenses exceed Five Hundred
Thousand Pesos (P500, 000).
(7) Amount Received by Heirs Under Republic
Act No. 4917. - Any amount received by the heirs
from the decedent - employee as a consequence of
the death of the decedent-employee in accordance
with Republic Act No. 4917: Provided, That such
amount is included in the gross estate of the
decedent.
(B) Deductions Allowed to Nonresident
Estates. - In the case of a nonresident not a citizen
of the Philippines, by deducting from the value of
that part of his gross estate which at the time of his
death is situated in the Philippines:
Taxation Law
(1) Expenses, Losses, Indebtedness and
Taxes. - That proportion of the deductions specified
in paragraph (1) of Subsection (A) of this Section
which the value of such part bears to the value of
his entire gross estate wherever situated;
(2) Property Previously Taxed. - An amount equal
to the value specified below of any property forming
part of the gross estate situated in the Philippines
of any person who died within five (5) years prior to
the death of the decedent, or transferred to the
decedent by gift within five (5) years prior to his
death, where such property can be identified as
having been received by the decedent from the
donor by gift, or from such prior decedent by gift,
bequest, devise or inheritance, or which can be
identified as having been acquired in exchange for
property so received:
One hundred percent (100%) of the value if the
prior decedent died within one (1) year prior to the
death of the decedent, or if the property was
transferred to him by gift, within the same period
prior to his death;
Eighty percent (80%) of the value, if the prior
decedent died more than one (1) year but not more
than two (2) years prior to the death of the
decedent, or if the property was transferred to him
by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior
decedent died more than two (2) years but not
more than three (3) years prior to the death of the
decedent, or if the property was transferred to him
by gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior
decedent died more than three (3) years but not
more than four (4) years prior to the death of the
decedent, or if the property was transferred to him
by gift within the same period prior to his death; and
Twenty percent (20%) of the value, if the prior
decedent died more than four (4) years but not
more than five (5) years prior to the death of the
decedent, or if the property was transferred to him
by gift within the same period prior to his death.
These deductions shall be allowed only where a
donor's tax, or estate tax imposed under this Title is
finally determined and paid by or on behalf of such
donor, or the estate of such prior decedent, as the
case may be, and only in the amount finally
determined as the value of such property in
determining the value of the gift, or the gross estate
of such prior decedent, and only to the extent that
the value of such property is included in that part of
the decedent's gross estate which at the time of his
death is situated in the Philippines; and only if, in
determining the value of the net estate of the prior
Alyssa Africa Page 117
decedent, no deduction is allowable under
paragraph (2) of Subsection (B) of this Section, in
respect of the property or properties given in
exchange therefore. Where a deduction was
allowed of any mortgage or other lien in
determining the donor's tax, or the estate tax of the
prior decedent, which was paid in whole or in part
prior to the decedent's death, then the deduction
allowable under said paragraph shall be reduced by
the amount so paid. Such deduction allowable shall
be reduced by an amount which bears the same
ratio to the amounts allowed as deductions under
paragraphs (1) and (3) of this Subsection as the
amount otherwise deductible under paragraph (2)
bears to the value of that part of the decedent's
gross estate which at the time of his death is
situated in the Philippines. Where the property
referred to consists of two (2) or more items, the
aggregate value of such items shall be used for the
purpose of computing the deduction.
(3) Transfers for Public Use. - The amount of all
bequests, legacies, devises or transfers to or for
the use of the Government of the Republic of the
Philippines or any political subdivision thereof, for
exclusively public purposes.
(C) Share in the Conjugal Property. - the net
share of the surviving spouse in the conjugal
partnership property as diminished by the
obligations properly chargeable to such property
shall, for the purpose of this Section, be deducted
from the net estate of the decedent.
(D) Miscellaneous Provisions. - No deduction
shall be allowed in the case of a nonresident not a
citizen of the Philippines, unless the executor,
administrator, or anyone of the heirs, as the case
may be, includes in the return required to be filed
under Section 90 the value at the time of his death
of that part of the gross estate of the nonresident
not situated in the Philippines.
(E) Tax Credit for Estate Taxes paid to a Foreign
Country. -
(1) In General. - The tax imposed by this Title shall
be credited with the amounts of any estate tax
imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the
credit taken under this Section shall be subject to
each of the following limitations:
(a) The amount of the credit in respect to the tax
paid to any country shall not exceed the same
proportion of the tax against which such credit is
taken, which the decedent's net estate situated
within such country taxable under this Title bears to
his entire net estate; and
Taxation Law
(b) The total amount of the credit shall not exceed
the same proportion of the tax against which such
credit is taken, which the decedent's net estate
situated outside the Philippines taxable under this
Title bears to his entire net estate.
SEC. 87 Exemption of Certain Acquisitions and
Transmissions. - The following shall not be taxed:
(A) The merger of usufruct in the owner of the
naked title;
(B) The transmission or delivery of the inheritance
or legacy by the fiduciary heir or legatee to the
fideicommissary;
(C) The transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the desire of the predecessor; and
(D) All bequests, devises, legacies or transfers to
social welfare, cultural and charitable institutions,
no part of the net income of which inures to the
benefit of any individual: Provided, however, That
not more than thirty percent (30%) of the said
bequests, devises, legacies or transfers shall be
used by such institutions for administration
purposes.
1. Allowed to Residents and Citizens
2. Allowed to Non-Resident Alien (See Also
Section 86 D)
(D) Miscellaneous Provisions. - No deduction
shall be allowed in the case of a nonresident not a
citizen of the Philippines, unless the executor,
administrator, or anyone of the heirs, as the case
may be, includes in the return required to be filed
under Section 90 the value at the time of his death
of that part of the gross estate of the nonresident
not situated in the Philippines.
a. Limitation (Section 7 RR No. 2-03)
Section 7. Computation of the Net Estate of A
Decedent Who is a Non-Resident Alien of the
Philippines. The value of the net estate of a
decedent who is a non-resident alien in the
Philippines shall be determined by deducting from
the value of that part of his gross estate which at
the time of his death is situated in the Philippines
the following items of deductions:
(1) Expenses, losses, indebtedness, and taxes
That proportion of the total expenses, losses,
indebtedness, and taxes which the value of such
part bears to the value of his entire gross estate
wherever situated. The allowable deduction under
Alyssa Africa Page 118
this subsection shall be computed using the
following formula:
Phil. Gross Estate x Expenses, Losses = Allowable
World Gross Estate Indebtedness and Taxes Deduction
(2) Property previously taxed -
(3) Transfers for Public Use -
(4) Net share of the surviving spouse in the
conjugal property or community property. -
No deduction shall be allowed in the case of a non-
resident decedent not a citizen of the Philippines,
unless the executor, administrator, or anyone of the
heirs, as the case may be, includes in the return
required to be filed under Section 90 of the Code
the value at the time of the decedents death of that
part of his gross estate not situated in the
Philippines.
3. Allowable Deductions
a. Ordinary Deductions (Expenses, Losses,
Indebtedness and Taxes)
1. Funeral Expenses
a. Limitation
b. Examples
c. Items not Deductible
d. Substantiation Requirement
e. How Computed
2. Judicial Expenses
a. Examples
b. Limitation
CIR vs. CA and Pajonar (2000)
Facts:
Issue: Whether or not notarial fees form part of
judicial expenses deductible from the gross estate.
Held: Yes, notarial fees are judicial expenses
deductible from the gross estate.
Judicial expenses are expenses of
administration. Administration expenses, as an
allowable deduction from the gross estate of the
decedent for purposes of arriving at the value of the
net estate, have been construed by the federal and
state courts of the United States to include all
expenses "essential to the collection of the assets,
payment of debts or the distribution of the property
to the persons entitled to it." In other words, the
expenses must be essential to the proper
settlement of the estate. Expenditures incurred for
the individual benefit of the heirs, devisees or
legatees are not deductible. This distinction has
been carried over to our jurisdiction. Thus,
in Lorenzo v. Posadas the Court construed the
phrase "judicial expenses of the testamentary or
Taxation Law
intestate proceedings" as not including the
compensation paid to a trustee of the decedent's
estate when it appeared that such trustee was
appointed for the purpose of managing the
decedent's real estate for the benefit of the
testamentary heir. In another case, the Court
disallowed the premiums paid on the bond filed by
the administrator as an expense of administration
since the giving of a bond is in the nature of a
qualification for the office, and not necessary in the
settlement of the estate. Neither may attorney's
fees incident to litigation incurred by the heirs in
asserting their respective rights be claimed as a
deduction from the gross estate.
Coming to the case at bar, the notarial fee paid
for the extrajudicial settlement is clearly a
deductible expense since such settlement effected
a distribution of Pedro Pajonar's estate to his lawful
heirs. Similarly, the attorney's fees paid to PNB for
acting as the guardian of Pedro Pajonar's property
during his lifetime should also be considered as a
deductible administration expense. PNB provided a
detailed accounting of decedent's property and
gave advice as to the proper settlement of the
latter's estate, acts which contributed towards the
collection of decedent's assets and the subsequent
settlement of the estate.
3. Claims Against the Estate
a. Requisites for Deductibility
i. Simple Loan
ii. Unpaid Obligation from Purchase of Goods
iii. Court Settlement
Dizon vs. CTA (2008)
Facts:
Issue:
Held: We express our agreement with the date-of-
death valuation rule, made pursuant to the ruling of
the U.S. Supreme Court in Ithaca Trust Co. v.
United States. First. There is no law, nor do we
discern any legislative intent in our tax laws, which
disregards the date-of-death valuation principle and
particularly provides that post-death developments
must be considered in determining the net value of
the estate. It bears emphasis that tax burdens are
not to be imposed, nor presumed to be imposed,
beyond what the statute expressly and clearly
imports, tax statutes being construed strictissimi
juris against the government. Any doubt on
whether a person, article or activity is taxable is
generally resolved against taxation.70 Second. Such
construction finds relevance and consistency in our
Rules on Special Proceedings wherein the term
Alyssa Africa Page 119
"claims" required to be presented against a
decedent's estate is generally construed to mean
debts or demands of a pecuniary nature which
could have been enforced against the deceased in
his lifetime, or liability contracted by the deceased
before his death. Therefore, the claims existing at
the time of death are significant to, and should be
made the basis of, the determination of allowable
deductions.
4. Claims Against Insolvent Persons
5. Unpaid Mortgages, Taxes, and Casualty
Losses
a. Rules
b. Special Deductions
1. Vanishing Deductions
a. Requisites for Deductibility
2. Transfers for Public Use
3. Family Home
4. Standard Deduction
5. Medical Expenses
a. Limitation
b. Substantiation Requirement
c. How Computed
6. Amount Received by Heirs Under Republic
Act No. 4917
D. Exclusion from Net Estate and Exemptions
(Sections 86 C and 87)
(C) Share in the Conjugal Property. - the net
share of the surviving spouse in the conjugal
partnership property as diminished by the
obligations properly chargeable to such property
shall, for the purpose of this Section, be deducted
from the net estate of the decedent.
Section 87 Exemption of Certain Acquisitions and
Transmissions. - The following shall not be taxed:
(A) The merger of usufruct in the owner of the
naked title;
(B) The transmission or delivery of the inheritance
or legacy by the fiduciary heir or legatee to the
fideicommissary;
(C) The transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the desire of the predecessor; and
(D) All bequests, devises, legacies or transfers to
social welfare, cultural and charitable institutions,
no part of the net income of which inures to the
benefit of any individual: Provided, however, That
not more than thirty percent (30%) of the said
bequests, devises, legacies or transfers shall be
Taxation Law
used by such institutions for administration
purposes.
E. Foreign Estate Tax Credit/s (Section 86 E)
(E) Tax Credit for Estate Taxes paid to a Foreign
Country. -
(1) In General. - The tax imposed by this Title shall
be credited with the amounts of any estate tax
imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit
taken under this Section shall be subject to each of
the following limitations:
(a) The amount of the credit in respect to the tax
paid to any country shall not exceed the same
proportion of the tax against which such credit is
taken, which the decedent's net estate situated
within such country taxable under this Title bears to
his entire net estate; and
(b) The total amount of the credit shall not exceed
the same proportion of the tax against which such
credit is taken, which the decedent's net estate
situated outside the Philippines taxable under this
Title bears to his entire net estate.
F. Notice of Death (Section 89)
SEC. 89. Notice of Death to be Filed. - In all
cases of transfers subject to tax, or where, though
exempt from tax, the gross value of the estate
exceeds Twenty thousand pesos (P20,000),the
executor, administrator or any of the legal heirs, as
the case may be, within two (2) months after the
decedent's death, or within a like period after
qualifying as such executor or administrator, shall
give a written notice thereof to the Commissioner.
G. Estate Tax Returns and Payment of Tax
(Sections 90 and 91)
Section. 90. Estate Tax Returns. -
(A) Requirements. - In all cases of transfers subject
to the tax imposed herein, or where, though exempt
from tax, the gross value of the estate exceeds Two
hundred thousand pesos (P200,000), or regardless
of the gross value of the estate, where the said
estate consists of registered or registrable property
such as real property, motor vehicle, shares of
stock or other similar property for which a clearance
from the Bureau of Internal Revenue is required as
a condition precedent for the transfer of ownership
thereof in the name of the transferee, the executor,
or the administrator, or any of the legal heirs, as the
case may be, shall file a return under oath in
duplicate, setting forth:
(1) The value of the gross estate of the decedent at
the time of his death, or in case of a nonresident,
Alyssa Africa Page 120
not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
(2) The deductions allowed from gross estate in
determining the estate as defined in Section 86;
and
(3) Such part of such information as may at the
time be ascertainable and such supplemental data
as may be necessary to establish the correct taxes.
Provided, however, That estate tax returns showing
a gross value exceeding Two million pesos (P2,
000,000) shall be supported with a statement duly
certified to by a Certified Public Accountant
containing the following:
(a) Itemized assets of the decedent with their
corresponding gross value at the time of his death,
or in the case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate situated
in the Philippines;
(b) Itemized deductions from gross estate allowed
in Section 86; and
(c) The amount of tax due whether paid or still due
and outstanding.
(B) Time for Filing. - For the purpose of determining
the estate tax provided for in Section 84 of this
Code, the estate tax return required under the
preceding Subsection (A) shall be filed within six (6)
months from the decedent's death.
A certified copy of the schedule of partition and the
order of the court approving the same shall be
furnished the Commissioner within thirty (30) days
after the promulgation of such order.
(C) Extension of Time. - The Commissioner shall
have authority to grant, in meritorious cases, a
reasonable extension not exceeding thirty (30) days
for filing the return.
(D) Place of Filing. - Except in cases where the
Commissioner otherwise permits, the return
required under Subsection (A) shall be filed with an
authorized agent bank, or Revenue District Officer,
Collection Officer, or duly authorized Treasurer of
the city or municipality in which the decedent was
domiciled at the time of his death or if there be no
legal residence in the Philippines, with the Office of
the Commissioner.
Section 91. Payment of Tax. -
(A) Time of Payment. - The estate tax imposed by
Section 84 shall be paid at the time the return is
filed by the executor, administrator or the heirs.
(B) Extension of Time. - When the Commissioner
finds that the payment on the due date of the estate
tax or of any part thereof would impose undue
hardship upon the estate or any of the heirs, he
may extend the time for payment of such tax or any
Taxation Law
part thereof not to exceed five (5) years, in case the
estate is settled through the courts, or two (2) years
in case the estate is settled extrajudicially.
In such case, the amount in respect of which the
extension is granted shall be paid on or before the
date of the expiration of the period of the extension,
and the running of the Statute of Limitations for
assessment as provided in Section 203 of this
Code shall be suspended for the period of any such
extension.
Where the taxes are assessed by reason of
negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no
extension will be granted by the Commissioner.
If an extension is granted, the Commissioner may
require the executor, or administrator, or
beneficiary, as the case may be, to furnish a bond
in such amount, not exceeding double the amount
of the tax and with such sureties as the
Commissioner deems necessary, conditioned upon
the payment of the said tax in accordance with the
terms of the extension.
(C) Liability for Payment. - The estate tax imposed
by Section 84 shall be paid by the executor or
administrator before delivery to any beneficiary of
his distributive share of the estate. Such beneficiary
shall to the extent of his distributive share of the
estate, be subsidiarily liable for the payment of
such portion of the estate tax as his distributive
share bears to the value of the total net estate.
For the purpose of this Chapter, the term 'executor'
or 'administrator' means the executor or
administrator of the decedent, or if there is no
executor or administrator appointed, qualified, and
acting within the Philippines, then any person in
actual or constructive possession of any property of
the decedent.
1. When Required and Contents
2. Time of Filing / Extension of Time to File
3. Place of Filing
4. Time of Payment/ Extension of Time to Pay
5. CPA Certification
H. Other Matters
1. Who is Liable to Pay (Section 91 C)
(C) Liability for Payment. - The estate tax imposed
by Section 84 shall be paid by the executor or
administrator before delivery to any beneficiary of
his distributive share of the estate. Such beneficiary
shall to the extent of his distributive share of the
estate, be subsidiarily liable for the payment of
such portion of the estate tax as his distributive
share bears to the value of the total net estate.
Alyssa Africa Page 121
For the purpose of this Chapter, the term 'executor'
or 'administrator' means the executor or
administrator of the decedent, or if there is no
executor or administrator appointed, qualified, and
acting within the Philippines, then any person in
actual or constructive possession of any property of
the decedent.
Estate of Vda. De Gabriel vs. CIR (2004)
a. Discharge of Executor or Administrator from
Personal Liability (Section 92)
SEC. 92. Discharge of Executor or
Administrator from Personal Liability. - If the
executor or administrator makes a written
application to the Commissioner for determination
of the amount of the estate tax and discharge from
personal liability therefore, the Commissioner (as
soon as possible, and in any event within one (1)
year after the making of such application, or if the
application is made before the return is filed, then
within one (1) year after the return is filed, but not
after the expiration of the period prescribed for the
assessment of the tax in Section 203 shall not
notify the executor or administrator of the amount of
the tax. The executor or administrator, upon
payment of the amount of which he is notified, shall
be discharged from personal liability for any
deficiency in the tax thereafter found to be due and
shall be entitled to a receipt or writing showing such
discharge.
b. Liability of Heirs
CIR vs. Pineda (21 SCRA 105)
2. Payment Before Delivery by Executor
(Section 94)
SEC. 94. 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.
Marcos II vs. CA 273 SCRA 47
3. Duties of Certain Officers (Section 95)
SEC. 95. Duties of Certain Officers and
Debtors. - Registers of Deeds shall not register in
the Registry of Property any document transferring
real property or real rights therein or any chattel
mortgage, by way of gifts inter vivos or mortis
causa, legacy or inheritance, unless a certification
from the Commissioner that the tax fixed in this
Title and actually due thereon had been paid is
Taxation Law
show, and they shall immediately notify the
Commissioner, Regional Director, Revenue District
Officer, or Revenue Collection Officer or Treasurer
of the city or municipality where their offices are
located, of the nonpayment 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.
4. Restitution of Tax Upon Satisfaction of
Outstanding Obligations (Section 96)
Section 96. 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.
5. Payment of Tax Antecedent to the Transfer of
Shares, Bonds or Rights (Section 97)
Section 97. Payment of Tax Antecedent to the
Transfer of Shares, Bonds or Rights. - There
shall not be transferred to any new owner in the
books of any corporation, sociedad anonima,
partnership, business, or industry organized or
established in the Philippines any share, obligation,
bond or right by way of gift inter vivos or mortis
causa, legacy or inheritance, unless a certification
from the Commissioner that the taxes fixed in this
Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person,
who maintained a bank deposit account alone, or
jointly with another, it shall not allow any withdrawal
from the said deposit account, unless the
Commissioner has certified that the taxes imposed
thereon by this Title have been paid: Provided,
however, That the administrator of the estate or any
Alyssa Africa Page 122
one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an
amount not exceeding Twenty thousand pesos
(P20,000) without the said certification. For this
purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors
are still living at the time of withdrawal by any one
of the joint depositors and such statement shall be
under oath by the said depositors.
PNB vs. Santos (2014)
III. Donors Tax
A. Nature of Donors Tax
Llandoc vs. CIR (14 SCRA 292)
Pirovano vs. CIR (14 SCRA 232)
1. Definition
2. Composition of Gross Gift (Section 98 and
104)
Section 91. Payment of Tax.
(A) Time of Payment. The estate tax imposed by
Section 84 shall be paid at the time the return is
filed by the executor, administrator of the heirs.
(B) Extension of Time. When the Commissioner
finds that the payment on the due date of the estate
tax or of any part thereof would impose undue
hardship upon the estate or any of the heirs, he
may extend the time for payment of such tax or any
part thereof not to exceed 5 years, in case the
estate is settled through the courts, or 2 years in
case the estate is settled extrajudicially.
In such case, the amount in respect of which the
extension is granted shall be paid on or before the
date of the expiration of the period of the
extension ,and the running of the Statute of
Limitations for assessment as provided in Section
203 of this Code shall be suspended for the period
of any such extension.
When the taxes are assessed by reason of
negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no
extension will be granted by the Commissioner.
If an extension is granted, the Commissioner may
require the executor, or administrator, or
beneficiary, as the case may be, to furnish a bond
in such amount, not exceeding double the amount
of the tax and with such sureties as the
Commissioner deems necessary, conditioned upon
Taxation Law
the payment of the said tax in accordance with the amounts previously assessed, (or collected without
terms of the extension. assessment) as a deficiency, but such amounts
previously assessed, or collected without
assessment, shall first be decreased by the amount
Section 104. Definitions. - For purposes of this previously abated, refunded or otherwise repaid in
Title, the terms 'gross estate' and 'gifts' include respect of such tax.
real and personal property, whether tangible or
intangible, or mixed, wherever situated: Provided,
however, That where the decedent or donor was a 3. Tax Exempt Net Gift (Section 99)
nonresident alien at the time of his death or Section 99. Rates of Tax Payable by Donor. -
donation, as the case may be, his real and personal (A) In General. - The tax for each calendar year
property so transferred but which are situated shall be computed on the basis of the total net gifts
outside the Philippines shall not be included as part made during the calendar year in accordance with
of his 'gross estate' or 'gross gift': Provided, the following schedule:
further, That franchise which must be exercised in If the net gift is:
the Philippines; shares, obligations or bonds issued
by any corporation or sociedad anonima organized
or constituted in the Philippines in accordance with
its laws; shares, obligations or bonds by any foreign
corporation eighty-five percent (85%) of the
business of which is located in the Philippines;
shares, obligations or bonds issued by any foreign
corporation if such shares, obligations or bonds
have acquired a business situs in the Philippines;
shares or rights in any partnership, business or
industry established in the Philippines, shall be
considered as situated in the Philippines: Provided,
still further, that no tax shall be collected under this (B) Tax Payable by Donor if Donee is a
Title in respect of intangible personal property: Stranger. - When the donee or beneficiary is
(a) if the decedent at the time of his death or the stranger, the tax payable by the donor shall be
donor at the time of the donation was a citizen and thirty percent (30%) of the net gifts. For the purpose
resident of a foreign country which at the time of his of this tax, a 'stranger', is a person who is not a:
death or donation did not impose a transfer tax of (1) Brother, sister (whether by whole or half-blood),
any character, in respect of intangible personal spouse, ancestor and lineal descendant; or
property of citizens of the Philippines not residing in (2) Relative by consanguinity in the collateral line
that foreign country, or within the fourth degree of relationship.
(b) if the laws of the foreign country of which the (C) Any contribution in cash or in kind to any
decedent or donor was a citizen and resident at the candidate, political party or coalition of parties for
time of his death or donation allows a similar campaign purposes shall be governed by the
exemption from transfer or death taxes of every Election Code, as amended.
character or description in respect of intangible
personal property owned by citizens of the 4. Minimum and Maximum Rates (Section 99)
Philippines not residing in that foreign country.
The term 'deficiency' means:
(a) the amount by which tax imposed by this
Chapter exceeds the amount shown as the tax by
the donor upon his return; but the amount so shown
on the return shall first be increased by the amount
previously assessed (or Collected without
assessment) as a deficiency, and decreased by the
amounts previously abated, refunded or otherwise
repaid in respect of such tax, or
(b) if no amount is shown as the tax by the donor,
then the amount by which the tax exceeds the
Alyssa Africa Page 123
Taxation Law
5. Who is a stranger and applicable tax rate
(Section 99)
(B) Tax Payable by Donor if Donee is a Stranger.
When the donee or beneficiary is a stranger, the
tax payable by the donor shall be 30% of the net
gifts. For the purposes of this tax, a stranger is a
person who is NOT a:
(1) Brother, sister (whether by whole or half-blood),
spouse, ancestor and lineal descendant; or
(2) Relative by consanguinity in the collateral line
within the fourth degree of relationship.
6. Gift Splitting
Gift Splitting This method is a form of tax
avoidance wherein the donor makes two or more
donations during different calendar years to lower
the tax to be paid.
B. Composition of the Gross Gifts (Section 104)
Section 104. Definitions. - For purposes of this
Title, the terms 'gross estate' and 'gifts' include
real and personal property, whether tangible or
intangible, or mixed, wherever situated: Provided,
however, That where the decedent or donor was a
nonresident alien at the time of his death or
donation, as the case may be, his real and personal
property so transferred but which are situated
outside the Philippines shall not be included as part
of his 'gross estate' or 'gross gift': Provided,
further, That franchise which must be exercised in
the Philippines; shares, obligations or bonds issued
by any corporation or sociedad anonima organized
or constituted in the Philippines in accordance with
its laws; shares, obligations or bonds by any foreign
corporation eighty-five percent (85%) of the
business of which is located in the Philippines;
shares, obligations or bonds issued by any foreign
corporation if such shares, obligations or bonds
have acquired a business situs in the Philippines;
shares or rights in any partnership, business or
industry established in the Philippines, shall be
considered as situated in the Philippines: Provided,
still further, that no tax shall be collected under this
Title in respect of intangible personal property:
(a) if the decedent at the time of his death or the
donor at the time of the donation was a citizen and
resident of a foreign country which at the time of his
death or donation did not impose a transfer tax of
any character, in respect of intangible personal
Alyssa Africa Page 124
property of citizens of the Philippines not residing in
that foreign country, or
(b) if the laws of the foreign country of which the
decedent or donor was a citizen and resident at the
time of his death or donation allows a similar
exemption from transfer or death taxes of every
character or description in respect of intangible
personal property owned by citizens of the
Philippines not residing in that foreign country.
The term 'deficiency' means:
(a) the amount by which tax imposed by this
Chapter exceeds the amount shown as the tax by
the donor upon his return; but the amount so shown
on the return shall first be increased by the amount
previously assessed (or Collected without
assessment) as a deficiency, and decreased by the
amounts previously abated, refunded or otherwise
repaid in respect of such tax, or
(b) if no amount is shown as the tax by the donor,
then the amount by which the tax exceeds the
amounts previously assessed, (or collected without
assessment) as a deficiency, but such amounts
previously assessed, or collected without
assessment, shall first be decreased by the amount
previously abated, refunded or otherwise repaid in
respect of such tax.
1. Residents and Citizens
2. Non-resident Alien
a. Rule on Reciprocity
3. Corporations
4. Valuation of Gifts made in Property (Section
102)
Section 102. Valuation of Gifts Made in
Property. If the gift is made in property, the fair
market value thereof at the time of the gift shall be
considered the amount of the gift. In case of real
property, the provisions of Section 88 (B) shall
apply to the valuation thereof.
Personal Property Fair Market Value
(Section 88B) Real Property: whichever is higher of
(1) Fair Market Value as determined by the
Commissioner; or
(2) Fair Market Value as shown in the schedule of
values fixed by the Provincial and City Assessors
5. Exemption of Certain Gifts (Section 101)
Taxation Law
Section. 101. Exemption of Certain Gifts. - The
following gifts or donations shall be exempt from
the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. -
(1) Dowries or gifts made on account of marriage
and before its celebration or within one year
thereafter by parents to each of their legitimate,
recognized natural, or adopted children to the
extent of the first Ten thousand pesos (P10,000):
(2) Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or to any
political subdivision of the said Government; and
(3) Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment
organization, trust or philanthropic organization or
research institution or organization: Provided,
however, That not more than thirty percent (30%) of
said gifts shall be used by such donee for
administration purposes. For the purpose of this
exemption, a 'non-profit educational and/or
charitable corporation, institution, accredited
nongovernment organization, trust or
philanthropic organization and/or research
institution or organization' is a school, college or
university and/or charitable corporation, accredited
nongovernment organization, trust or philanthropic
organization and/or research institution or
organization, incorporated as a non-stock entity,
paying no dividends, governed by trustees who
receive no compensation, and devoting all its
income, whether students' fees or gifts, donation,
subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation.
(B) In the Case of Gifts Made by a Nonresident
not a Citizen of the Philippines. -
(1) Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or to any
political subdivision of the said Government.
(2) Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or
philanthropic organization or research institution or
organization:Provided, however, That not more
than thirty percent (30%) of said gifts shall be used
by such donee for administration purposes.
(C)Tax Credit for Donor's Taxes Paid to a
Foreign Country. -
(1) In General. - The tax imposed by this Title
upon a donor who was a citizen or a resident at the
Alyssa Africa Page 125
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.
(2) Limitations on Credit. - The amount of the
credit taken under this Section shall be subject to
each of the following limitations:
(a) The amount of the credit in respect to the tax
paid to any country shall not exceed the same
proportion of the tax against which such credit is
taken, which the net gifts situated within such
country taxable under this Title bears to his entire
net gifts; and
(b) The total amount of the credit shall not exceed
the same proportion of the tax against which such
credit is taken, which the donor's net gifts situated
outside the Philippines taxable under this title bears
to his entire net gifts.
a. Residents and Citizens
b. Non-residents Aliens
c. Corporations
C. Other Matters
1. Rule on Political Contributions [99C]
Section 99. Rates of Tax Payable by Donor
(C) Any contribution in cash or in kind to any
candidate, political party or coalition of parties for
campaign purposes shall be governed by the
Election Code, as amended.
Secs. 13 and 14 RA No. 7166
RA No. 7166
Section 13. Authorized Expenses of Candidates
and Political Parties. The agreement amount
that a candidate or registered political party may
spend for election campaign shall be as follows:
1. For Candidates. P10.00 for President and
Vice-President; and for other candidates P3.00 for
every voter currently registered in the constituency
where he filed his certificate of candidacy:
Provided, That a candidate without any political
party and without support from any political party
may be allowed to spend P5.00 for every such
voter; and
2. For Political Parties. P5.00 for every voter
currently registered in the constituency or
constituencies where it has official candidates.
Any provision of law to the contrary
notwithstanding any contribution in cash or in kind
to any candidate or political party or coalition of
parties for campaign purposes, duly reported to the
Commission shall not be subject to the payment of
any gift tax.
Taxation Law
Section 14. Statement of Contributions and
Expenditures; Effect of Failure to File
Statement.
Every candidate and treasurer of the political party
shall, within 30 days after the day of the election,
file in duplicate with the offices of the Commission
the full, true and itemized statement of all
contributions and expenditures in connection with
the election.
No person elected to any public offices shall enter
upon the duties of his office until he has filed the
statement of contributions and expenditures herein
required.
The same prohibition shall apply if the political
party which nominated the winning candidate fails
to file the statement required herein within the
period prescribed by this Act.
Except candidates for elective barangay office,
failure to file the statements or reports in
connection with electoral contributions and
expenditures are required herein shall constitute
an administrative offense for which the offenders
shall be liable to pay an administrative fine ranging
from P1,000.00 to P30,000.00 in the discretion of
the Commission.
The fine shall be paid within 30 days from receipt
of notice of such failure; otherwise, it shall be
enforceable to a writ of execution issued by the
Commission against the properties of the offender.
It shall be the duty of every city or municipal
election registrar to advise in writing, by personal
delivery or registered mail, within 5 days from the
date of election all candidates residing in his
jurisdiction to comply with their obligation to file
their statements of contributions and expenditures.
For the commission of a second or subsequent
offense under this section, the administrative fine
shall be from P2,000.00 to P60,000.00 in the
discretion of the Commission. In addition, the
offender shall be subject to perpetual
disqualification to hold public office.
RR No. 7-2011 dated February 16, 2011
RMC 30-2016 dated March 14, 2016
Abello vs. CIR, GR No. 120721 dated February
23, 2005
2. Transfer for Less than adequate and full
consideration (Sec. 100) (RR No. 6-2008 on
shares of stock as amended by RR 6-2013)
Alyssa Africa Page 126
Section 100. Transfer for Less Than Adequate
and Full Consideration. Where property, other
than real property referred to in Section 24(D), is
transferred for less than an adequate and full
consideration in money or moneys worth, then the
amount by which the fair market value of the
property exceeded the value of the consideration
shall, for the purpose of the tax imposed by this
Chapter, be deemed as a gift, shall be included in
computing the amount of gifts made during the
calendar year.
Philamlife vs. SOF, GR No. 210987 dated
November 24, 2014
3. Manner of Computing the Donors Tax (Sec.
12 RR No. 2-03)
4. Tax Credit for Donors Taxes paid to a
Foreign Country [Sec. 101 (C)]
5. Renunciation of share in the conjugal
partnership or absolute community; and,
hereditary estate (Sec. 11 RR No. 2-03)
6. Capacity to Buy
Spouses Evono vs. DOF, CTA EB Case No. 705
dated June 4, 2011
D. Filing and Payment of Returns (Sec. 103) /
(Sec. 13 RR No. 2-03)
1. Requirements
Section 103. Filing of Return and Payment of
Tax.
(A) Requirements. any individual who makes any
transfer by gift (except those which, under Section
101, are exempt from the tax provided for in this
Chapter) shall, for the purpose of the said tax,
make a return under oath in duplicate. The return
shall set forth:
(1) Each gift made during the calendar year which
is to be included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same
calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by
rules and regulations made pursuant to law
2. Time and Place of Filing
Section 103. Filing of Return and Payment of
Tax.
(B) Time and Place of Filing and Payment. The
return of the donor required in this Section shall be
filed within 30 days after the date the gift is made
and the tax due thereon shall be paid at the time of
Taxation Law
filing. Except in case where the Commissioner
otherwise permits, the return shall be filed and the
tax paid to an authorized agent bank, the Revenue
District Officer, Revenue Collection Officer or duly
authorized Treasurer of the city or municipality
where the donor was domiciled at the time of the
transfer, or if there be no legal residence in the
Philippines, with the Office of the Commissioner. In
the case of the gifts made by a nonresident, the
return may be filed with the Philippine Embassy or
Consulate in the country where he is domiciled at
the time of the transfer, or directly with the Office of
the Commissioner.
Section 13 (RR No. 2-03)
For this purpose, the term OFFICE OF THE
COMMISSIONER shall refer to the Revenue
District Office (RDO) having jurisdiction over the
BIR-National Office Building which houses the
Office of the Commissioner, or presently, to the
Revenue District Office No. 39 South Quezon
City.
3. Notice of Donation Exemption from
Donors Tax (RR No. 2-03)
Section 13. Filing of Returns and Payment of
Donors Tax
(C) Notice of Donation by a Donor Engaged in
Business. In order to be exempt from donors tax
and to claim full deduction of the donation given to
qualified donee institutions duly accredited by the
Philippine Council for NGO Certification, Inc.
(PCNC), the donor engaged in business shall give
a notice of donation on every donation worth at
least P50,000.00 to the Revenue District Officer
which has jurisdiction over his place of business
within 30 days after receipt of the qualified donee
institutions duly issued Certificate of Donation,
which shall be attached to the said Notice of
Donation, stating that not more than 30% of the
said donation/gifts for the taxable year shall be
used by such accredited non-stock, non-profit
corporation/NGO institution (qualified-donee
institution) for administration purposes pursuant to
the provisions of Section 101(A)(3) and (B)(2) of
the Code.
Value-Added Tax
(Sections 105-115 of the NIRC, amended by RA
Nos. 9337 and 10378; Implemented by RR No.
16-05 as amended by RR Nos. 4-07 and RR No.
16-2011)
Alyssa Africa Page 127
I. Preliminary Matters
a. Nature and characteristic of VAT in general
Sec. 4.105.-2 of RR No. 16-05
Section 4.105-2. Nature and Characteristics of
VAT. VAT is a tax on consumption levied on the
sale, barter, exchange or lease of goods or
properties and services in the Philippines and on
importation of goods into the Philippines. The seller
is the one statutorily liable for the payment of the
tax but the amount of the tax may be shifted or
passed on to the buyer, transferee or lessee of the
goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease
of goods, properties or services at the time of the
effectivity of RA No. 9337. However, in the case of
importation, the importer is the one liable for the
VAT.
CIR vs. Magsaysay Lines (2006)
Facts: The National Development Corporation
decided to sell to private enterprise all of its shares
in its wholly-owned subsidiary the National Marine
Corporation (NMC). The NDC decided to sell in one
lot its NMC shares and 5 of its ships. The NMC
shares and the vessels were offered for public
bidding but under the condition that the highest
bidder will pay VAT of 10% on the value of the
vessels. Magsasay Lines offered and was awarded
the ships. Payment of VAT was then secured
through a Letter of Credit by the bidders.
Later on, bidders filed a formal request for a
ruling on whether or not the sale of the vessels was
subject to VAT with the BIR. The parties came to an
agreement that should no favorable ruling be
received from the BIR, NDC was authorized to
draw on the Letter of Credit upon written demand
the amount needed for the payment of VAT. BIR
ruled that the sale of the vessels was subject to
VAT.
Private respondents moved for the
reconsideration of the VAT Ruling but it was denied.
In the CTA, the CIR argued that the sale of the
vessels is among those transactions deemed
sale. The CTA ruled that the sale of a vessel was
an isolated transaction, not done in the ordinary
course of NDCs business, and was thus not
subject to VAT, which under Section 99 of the Tax
Code, was applied only to sales in the course of
trade or business. The CTA further held that the
sale of the vessels could not be deemed sale, and
thus subject to VAT, as the transaction did not fall
under the enumeration of transactions deemed sale
as listed either in Section 100(b) of the Tax Code,
or Section 4 of RR No. 5-87.
Taxation Law
Issue: Whether or not the sale of the vessels is
subject to VAT.
Held: No, it is not subject to VAT. VAT is ultimately
a tax on consumption, even though it is assessed
on many levels of transactions on the basis of a
fixed percentage. It is the end user of consumer
goods or services which ultimately shoulders the
tax, as the liability therefrom is passed on to the
end users by the providers of these goods or
services who in turn may credit their own VAT
liability (or input VAT) from the VAT payments they
receive from the final consumer (or output
VAT).17 The final purchase by the end consumer
represents the final link in a production chain that
itself involves several transactions and several acts
of consumption. The VAT system assures fiscal
adequacy through the collection of taxes on every
level of consumption, yet assuages the
manufacturers or providers of goods and services
by enabling them to pass on their respective VAT
liabilities to the next link of the chain until finally the
end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every
transactional level. Its assessment bears direct
relevance to the taxpayers role or link in the
production chain. Hence, as affirmed by Section 99
of the Tax Code and its subsequent
incarnations,19 the tax is levied only on the sale,
barter or exchange of goods or services by persons
who engage in such activities, in the course of
trade or business. These transactions outside the
course of trade or business may invariably
contribute to the production chain, but they do so
only as a matter of accident or incident. As the
sales of goods or services do not occur within the
course of trade or business, the providers of such
goods or services would hardly, if at all, have the
opportunity to appropriately credit any VAT liability
as against their own accumulated VAT collections
since the accumulation of output VAT arises in the
first place only through the ordinary course of trade
or business.
The conclusion that the sale was not in the
course of trade or business, which the CIR does
not dispute before this Court, should have
definitively settled the matter. Any sale, barter or
exchange of goods or services not in the course
of trade or business is not subject to VAT.
CIR vs. Seagate Technology (Phils) (2005)
Facts: Seagate Technology Philippines is a VAT
and PEZA registered entity and is operating from
Alyssa Africa Page 128
the Special Economic Zone in Naga, Cebu.
Business companies operating under the said zone
are exempt from all internal revenue taxes including
VAT. Seagate filed VAT returns for April 1, 1998 to
June 30, 1999. An administrative claim for refund of
VAT input taxes were filed by Seagate to which
Seagate received no final action.
The CTA granted the claim for refund and was
affirmed by the CA on the ground that neither
Section 109 of the Tax Code nor Secs,. 4.106-1
and 4.103-1 of RR 7-95 were applicable. Having
paid the input VAT on the capital goods it
purchased, respondent correctly filed the
administrative judicial claims for tis refund within
the 2 year prescriptive period.
Issue: Whether or not respondent is entitled to
refund or issuance of Tax Credit Certificate
representing unutilized input VAT paid on capital
goods purchased for the period April 1, 1998 to
June 30, 1999.
Held: Yes, it is entitled. Viewed broadly, the VAT is
a uniform tax ranging, at present, from 0 percent to
10 percent levied on every importation of goods,
whether or not in the course of trade or business, or
imposed on each sale, barter, exchange or lease of
goods or properties or on each rendition of services
in the course of trade or business 29 as they pass
along the production and distribution chain, the tax
being limited only to the value added 30 to such
goods, properties or services by the seller,
transferor or lessor.31 It is an indirect tax that may
be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. 32 As
such, it should be understood not in the context of
the person or entity that is primarily, directly and
legally liable for its payment, but in terms of its
nature as a tax on consumption.33 In either case,
though, the same conclusion is arrived at.
If at the end of a taxable quarter the output
taxes38 charged by a seller39 are equal to the input
taxes40 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. 41 If,
however, the input taxes exceed the output taxes,
the excess shall be carried over to the succeeding
quarter or quarters.42 Should the input taxes result
from zero-rated or effectively zero-rated
transactions or from the acquisition of capital
goods,43 any excess over the output taxes shall
instead be refunded44 to the taxpayer or
credited45 against other internal revenue taxes.
Taxation Law
Concurring Opinion of Justice Abad Fort
Bonifacio Development Corp. vs. CIR (2012)
A value added tax is a form of indirect sales tax
paid on products and services at each stage of
production or distribution, based on the value
added at that stage and included in the cost to the
ultimate consumer.
To illustrate how VAT works, take a lumber store
that sells a piece of lumber to a carpentry shop
for P 100.00. The lumber store must pay a 12%
VAT or P 12.00 on such sale but it may charge the
carpentry shop P 112.00 for the piece of lumber,
passing on to the latter the burden of paying
the P 12.00 VAT.
When the carpentry shop makes a wooden
stool out of that lumber and sells the stool to a
furniture retailer for P150.00 (which would now
consists of the P 100.00 cost of the lumber,
the P 50.00 cost of shaping the lumber into a stool,
and profit), the carpentry shop must pay a 12% VAT
of P 6.00 on the P 50.00 value it added to the piece
of lumber that it made into a stool. But it may
charge the furniture retailer the VAT of P 12.00
passed on to it by the lumber store as well as the
VAT of P 6.00 that the carpentry shop itself has to
pay. Its buyer, the furniture retailer, will
pay P 150.00, the price of the wooden stool,
and P 18.00 (P 12.00 + P 6.00), the passed-on VAT
due on the same.
When the furniture retailer sells the wooden
stool to a customer for P 200.00, it would have
added to its P 150.00 acquisition cost of the stool
its mark-up of P 50.00 to cover its overhead and
profit. The furniture retailer must, however, pay an
additional 12% VAT of P 6.00 on the P 50.00 add-
on value of the stool. But it could charge its
customer all the accumulated VAT payments:
the P 12.00 paid by the lumber store, the P 6.00
paid by the carpentry shop, and the other P 6.00
due from the furniture retailer, for a total of P 24.00.
The customer will pay P 200.00 for the stool
and P 24.00 in passed-on 12% VAT.
Now, would the furniture retailer pay to the BIR
the P 24.00 VAT that it passed on to its customer
and collected from him at the stores counter? Not
all of the P 24.00. The furniture retailer could claim
a credit for the P 12.00 and the P6.00 in input VAT
payments that the lumber store and the carpentry
shop passed on to it and that it paid for when it
bought the wooden stool. The furniture retailer
would just have to pay to the BIR the output VAT
of P 6.00 covering its P 50.00 mark-up. This
payment rounds out the 12% VAT due on the final
sale of the stool for P 200.00.
Alyssa Africa Page 129
When the VAT law first took effect, it would
have been unfair for a furniture retailer to pay all of
the 10% VAT (the old rate) on the wooden stools in
its inventory at that time and not be able to claim
deduction for any tax on sale that the lumber store
and the carpentry shop presumably passed on to it
when it bought those wooden stools. To remedy
this unfairness, Section 105 of the NIRC granted
those who must pay VAT for the first time a
transitional input tax credit of 8% of the value of the
inventory of goods they have or actual value-added
tax paid on such goods when the VAT law took
effect. The furniture retailer would thus have to pay
only a 2% VAT on the wooden stools in that
inventory, given the transitional input VAT tax credit
of 8% allowed it under the old 10% VAT rate.
b. VAT as an indirect Tax
Contex vs. CIR (2004)
Facts:
Issue: Whether or not the exemption from all local
and national internal revenue taxes provided in RA
No. 7227 covers the VAT paid by petitioner, a Subic
Bay Freeport Enterprise on its purchases of
supplies and materials.
Held: While it is true that the petitioner should not
have been liable for the VAT inadvertently passed
on to it by its supplier since such is a zero-rated
sale on the part of the supplier, the petitioner is not
the proper party to claim such VAT refund.
At this juncture, it must be stressed that the VAT is
an indirect tax. As such, the amount of tax paid on
the goods, properties or services bought,
transferred, or leased may be shifted or passed on
by the seller, transferor, or lessor to the buyer,
transferee or lessee.17 Unlike a direct tax, such as
the income tax, which primarily taxes an individuals
ability to pay based on his income or net wealth, an
indirect tax, such as the VAT, is a tax on
consumption of goods, services, or certain
transactions involving the same. The VAT, thus,
forms a substantial portion of consumer
expenditures.
Further, in indirect taxation, there is a need
to distinguish between the liability for the tax and
the burden of the tax. As earlier pointed out, the
amount of tax paid may be shifted or passed on by
the seller to the buyer. What is transferred in such
instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the
selling price, the seller remains the person primarily
and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and ultimately
Taxation Law
to the final purchaser is the burden of the
tax.18 Stated differently, a seller who is directly and
legally liable for payment of an indirect tax, such as
the VAT on goods or services is not necessarily the
person who ultimately bears the burden of the
same tax. It is the final purchaser or consumer of
such goods or services who, although not directly
and legally liable for the payment thereof, ultimately
bears the burden of the tax.
It may not be amiss to re-emphasize that
the petitioner is registered as a NON-VAT taxpayer
and thus, is exempt from VAT. As an exempt VAT
taxpayer, it is not allowed any tax credit on VAT
(input tax) previously paid. In fine, even if we are to
assume that exemption from the burden of VAT on
petitioners purchases did exist, petitioner is still not
entitled to any tax credit or refund on the input tax
previously paid as petitioner is an exempt VAT
taxpayer.
Rather, it is the petitioners suppliers who
are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT
erroneously passed on to the latter.
c. Persons Liable (Sec. 105)
Section 105. Persons Liable. Any person who, in
the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders
services, and any person who imports goods shall
be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties
or services. This rule shall likewise apply to existing
contracts of sale or lease of goods, properties or
services at the time of the effectivity of RA No.
7716.
The phrase in the course of trade and 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 nonstock, nonprofit, private organization
(irrespective of the disposition of its net income and
whether or not it sells exclusively to members of
their guests), or government entity.
The rule of regularity, to the contrary
notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign
persons shall be considered as being rendered in
the course of trade or business.
i. Persons liable in general
Alyssa Africa Page 130
CIR vs. CA and Commonwealth Management
Services (2000)
Facts:
Issue: Whether or not COMASERCO was engaged
in the sale of services, and thus liable to pay VAT
thereon.
Held: Yes, COMASERCO is liable to pay VAT.
Contrary to COMASERCO's contention
Section 105 of the Tax Code clarifies that even
a non-stock, non-profit, organization or government
entity, is liable to pay VAT on the sale of goods or
services. VAT is a tax on transactions, imposed at
every stage of the distribution process on the sale,
barter, exchange of goods or property, and on the
performance of services, even in the absence of
profit attributable thereto. The term "in the course of
trade or business" requires the regular conduct or
pursuit of a commercial or an economic activity
regardless of whether or not the entity is profit-
oriented.
The definition of the term "in the course of
trade or business" present law applies to all
transactions even to those made prior to its
enactment. Executive Order No. 273 stated that
any person who, in the course of trade or business,
sells, barters or exchanges goods and services,
was already liable to pay VAT. The present law
merely stresses that even a nonstock, nonprofit
organization or government entity is liable to pay
VAT for the sale of goods and services.
Sec. 108 of the National Internal Revenue Code of
1997 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a
fee, remuneration or consideration." It includes "the
supply of technical advice, assistance or services
rendered in connection with technical management
or administration of any scientific, industrial or
commercial undertaking or project." 11
On February 5, 1998, the Commissioner of Internal
Revenue issued BIR Ruling No. 010-
98 12 emphasizing that a domestic corporation that
provided technical, research, management and
technical assistance to its affiliated companies and
received payments on a reimbursement-of-cost
basis, without any intention of realizing profit, was
subject to VAT on services rendered. In fact, even if
such corporation was organized without any
intention realizing profit, any income or profit
generated by the entity in the conduct of its
activities was subject to income tax.
Hence, it is immaterial whether the primary purpose
of a corporation indicates that it receives payments
Taxation Law
for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing
profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides
service for a fee, remuneration or consideration,
then the service rendered is subject to VAT.
ii. Who are required to register for VAT (Sec. 236
G) (Sec. 9.236-1 of RR No. 16-05, consider
threshold under RR No. 16-2011)
Section 236. Registration Requirements
(G) Persons required to Register for Value-added
Tax.
(1) Any person who, in the course of trade or
business, sells, barters or exchanges goods or
properties, or engages in the sale or exchange of
services, shall be liable to register for value-added
tax if:
(a) His gross sales or receipts for the past 12
months, other than those that are exempt under
Section 109 (A) to (V), have exceeded
P1,500,000.00; or
(b) There are reasonable grounds to believe
that his gross sales or receipts for the next 12
months, other than those that are exempt under
Section 109(A) to (V), will exceed
P1,500,000.00.
(2) Every person who becomes liable to be
registered under paragraph 1 of this Subsection
shall register with the Revenue District Officer
which has jurisdiction over the head office or
branch of that person, and shall pay the annual
registration fee prescribed in Subsection (B) hereof.
If he fails to register, he shall be liable to pay the
tax under Title IV as if he were a VAT-registered
person, but without the benefit of input tax credits
for the period in which he was not properly
registered.
RR No. 16-05
Section 9.236-1 Registration of VAT Taxpayers.
(a) In general. Any person who, in the course of
trade or business, sells, barters, exchanges goods
or properties, or engaged in the sale of services
subject to VAT imposed in Secs. 106 and 108 of the
Tax Code shall register with the appropriate RDO
using the appropriate BIR forms and pay an annual
registration fee in the amount of P500 using BIR
Form No. 0605 for every separate or distinct
establishment or place of business (save a
warehouse without sale transactions) before the
start of such business and every year thereafter on
or before the 31st day of January.
Alyssa Africa Page 131
Separate or distinct establishment shall mean
any branch or facility where sale transactions occur.
Branch means a fixed establishment in a locality
which conducts sales operation of the business as
an extension of the principal office.
Principal place of business refers to the place
where the head or main office is located as
appearing in the corporations Articles of
Incorporation. In the case of an individual, the
principal place of business shall be the place where
the head or main office is located and where the
books of accounts are kept.
Warehouse means the place or premises where
the inventory of goods are withdrawn for delivery to
customers, dealers or persons acting in behalf of
the business.
Any person who maintains a head or main
office and branches in different places shall register
with the RDO which has jurisdiction over the place
wherein the main or head office or branch is
located. However, the registration fee shall be paid
to any accredited bank in the Revenue District
where the head office or branch is registered
provided that in areas where there are no
accredited banks, the same shall be paid to the
RDO, collection agent, or duly authorized treasurer
of the municipality where each place of business or
branch is situated.
Each VAT-registered person shall be assigned
only one TIN. The branch shall use the 9 digit TIN
of the Head Office plus a 3 digit Branch Code.
VAT Registered Person refers to any person
registered in accordance with this section.
VAT Registrable Person refers to any person
who is required to register under the provisions of
this section but failed to register.
(b) Mandatory:
Any person who, in the course of trade or
business, sells, barters or exchanges goods or
properties or engages in the sale or exchange of
services shall be liable to register if:
i. His gross sales or receipts for the past 12
months, other than those that are exempt under
Sec. 109(1)(A) to (U) of the Tax Code, have
exceeded P1,500,000.00; or
ii. There are reasonable grounds to believe that
his gross sales or receipts for the next 12
months, other than those that are exempt under
Sec. 109 (1)(A) to (U) of the Tax Code, will
exceed P1,500,000.00.
Every person who becomes liable to be
registered under paragraph (1) of this subsection
shall register with the RDO which has jurisdiction
over the head office or branch of that person, and
Taxation Law
shall pay the annual registration fee prescribed in
subsection 9.236-1(a) hereof. If he fails to register,
he shall be liable to pay the output tax under Secs.
106 and/or 108 of the Tax Code as if he were a
VAT-registered person, but without the benefit of
input tax credits for the period in which he was not
properly registered.
Threshold under RR No. 16-2011 for Sale of
Residential Lot, Sale of House and Lot, Lease of
Residential Unit and Sale or Lease of Goods or
Properties or Performance of Services covered
by Section 109 (P), (Q) and (V) of Tax Code of
1997
Section 1 Background. Sections 109(P), (Q) and
(V) of the Tax Code of 1997, as amended provides
that the amounts stated therein shall be adjusted to
their present values using the Consumer Price
Index as Published by the NSO.
Using the following formula/information:
Value (Current Year) = CPI (Current Year)
Value Base Year CPI (Base Year)
Value Base Year 2005
The adjusted threshold amounts, rounded off to the
nearest hundred are as follows:
paying the annual registration fee in Subsection (B)
hereof.
(2) Any person who elects to register under this
Subsection shall not be entitled to cancel his
registration under Subsection (F) (2) for the next
three (3) years.
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 a "VAT-registered
person" who shall be assigned only one Taxpayer
Identification Number (TIN).
(RR. No. 16-05 and Threshold Refer to Previous
Subsection)
d. Meaning of the phrase in the course of trade
of business (Sec. 105)
The phrase in the course of trade and 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 nonstock, nonprofit, private organization
(irrespective of the disposition of its net income and
whether or not it sells exclusively to members of
their guests), or government entity.

Section Amount in Adjusted Sec.4.105-3 of RR No. 16-05

Pesos (2005) threshold Section 4. 105-3. Meaning of In the Course of
amounts Trade or Business.
Section 109 1,500,000 1,919,500.00 The term in the course of trade or business
(P) means the regular conduct or pursuit of a
Section 109 2,500,000 3,199,200.00 commercial or economic activity, including
(P) transactions incidental thereto, by any person
Section 109 10,000 12,800.00 regardless of whether or not the person engaged
(Q) therein is a non-stock, non-profit private
Section 109 1,500,000 1,919,500.00 organization (irrespective of the disposition of its
(V) net income and whether or not it sells exclusively to
members or their guests), or government entity.
Non-resident persons who perform services
iii. Optional VAT Registration (Sec. 236 H) in the Philippines are deemed to be making sales.
(Sec.9.236-1 of RR No. 16-05, consider
threshold under RR No. 16-2011) CIR vs. Magsaysay Lines (2006)
Facts: The National Development Corporation
Section 236. Registration Requirements -
decided to sell to private enterprise all of its shares
(H) Optional Registration for Value-Added Tax in its wholly-owned subsidiary the National Marine
of Exempt Person. - Corporation (NMC). The NDC decided to sell in one
(1) Any person who is not required to register for lot its NMC shares and 5 of its ships. The NMC
value-added tax under Subsection (G) hereof may shares and the vessels were offered for public
elect to register for value-added tax by registering bidding but under the condition that the highest
with the Revenue District Office that has a bidder will pay VAT of 10% on the value of the
jurisdiction over the head office of that person, and vessels. Magsasay Lines offered and was awarded

Alyssa Africa Page 132

Taxation Law
the ships. Payment of VAT was then secured
through a Letter of Credit by the bidders.
Later on, bidders filed a formal request for a ruling
on whether or not the sale of the vessels was
subject to VAT with the BIR. The parties came to an
agreement that should no favorable ruling be
received from the BIR, NDC was authorized to
draw on the Letter of Credit upon written demand
the amount needed for the payment of VAT. BIR
ruled that the sale of the vessels was subject to
VAT.
Private respondents moved for the reconsideration
of the VAT Ruling but it was denied. In the CTA, the
CIR argued that the sale of the vessels is among
those transactions deemed sale. The CTA ruled
that the sale of a vessel was an isolated
transaction, not done in the ordinary course of
NDCs business, and was thus not subject to VAT,
which under Section 99 of the Tax Code, was
applied only to sales in the course of trade or
business. The CTA further held that the sale of the
vessels could not be deemed sale, and thus
subject to VAT, as the transaction did not fall under
the enumeration of transactions deemed sale as
listed either in Section 100(b) of the Tax Code, or
Section 4 of RR No. 5-87.
Issue: Whether or not the sale of the vessels is
subject to VAT.
Held: No, it is not subject to VAT. VAT is ultimately
a tax on consumption, even though it is assessed
on many levels of transactions on the basis of a
fixed percentage. It is the end user of consumer
goods or services which ultimately shoulders the
tax, as the liability therefrom is passed on to the
end users by the providers of these goods or
services who in turn may credit their own VAT
liability (or input VAT) from the VAT payments they
receive from the final consumer (or output
VAT).17 The final purchase by the end consumer
represents the final link in a production chain that
itself involves several transactions and several acts
of consumption. The VAT system assures fiscal
adequacy through the collection of taxes on every
level of consumption,18 yet assuages
manufacturers or providers of goods and services
by enabling them to pass on their respective VAT
liabilities to the next link of the chain until finally the
end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every
transactional level. Its assessment bears direct
relevance to the taxpayers role or link in the
production chain. Hence, as affirmed by Section 99
Alyssa Africa Page 133
of the Tax Code and its subsequent
incarnations,19 the tax is levied only on the sale,
barter or exchange of goods or services by persons
who engage in such activities, in the course of
trade or business. These transactions outside the
course of trade or business may invariably
contribute to the production chain, but they do so
only as a matter of accident or incident. As the
sales of goods or services do not occur within the
course of trade or business, the providers of such
goods or services would hardly, if at all, have the
opportunity to appropriately credit any VAT liability
as against their own accumulated VAT collections
since the accumulation of output VAT arises in the
first place only through the ordinary course of trade
or business.
The conclusion that the sale was not in the course
of trade or business, which the CIR does not
dispute before this Court, should have definitively
settled the matter. Any sale, barter or exchange of
goods or services not in the course of trade or
business is not subject to VAT.
Mindanao II Geothermal Partnership vs. CIR
(2013)
Facts:
Issue:
Held:
Mindanao IIs sale of the Nissan Patrol is said to be
an isolated transaction. However, it does not follow
that an isolated transaction cannot be an incidental
transaction for purposes of VAT liability. Indeed, a
reading of Section 105 of the 1997 Tax Code would
show that a transaction "in the course of trade or
business" includes "transactions incidental thereto."
Mindanao IIs business is to convert the steam
supplied to it by PNOC-EDC into electricity and to
deliver the electricity to NPC. In the course of its
business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior to the sale, the Nissan Patrol
was part of Mindanao IIs property, plant, and
equipment. Therefore, the sale of the Nissan Patrol
is an incidental transaction made in the course of
Mindanao IIs business which should be liable for
the VAT.
CIR vs. Sony Phils, Inc. (2010)
e. Exceptions to the Rule of Regularity
Section 105. ...The rule of regularity, to the
contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident
Taxation Law
foreign persons shall be considered as being
rendered in the course of trade or business.
1. Nonresident foreign corporations
2. Importation
f. Output Tax vs. Input Taxes
i. Sources of Input Tax (Sec. 110 A)
SEC. 110. Tax Credits. -
A. Creditable Input Tax. -
(1) Any input tax evidenced by a VAT invoice or
official receipt issued in accordance with Section
113 hereof on the following transactions shall be
creditable against the output tax:
(a) Purchase or importation of goods:
(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.
(b) Purchase of services on which a value-added
tax has been actually paid.
(2) The input tax on domestic purchase or
importation of goods or properties by a VAT-
registered person shall be creditable:
(a) To the purchaser upon consummation of sale
and on importation of goods or properties; and
(b) To the importer upon payment of the value-
added tax prior to the release of the goods from the
custody of the Bureau of Customs.
Provided, that the input tax on goods purchased or
imported in a calendar month for use in trade or
business for which deduction for depreciation is
allowed under this Code shall be spread evenly
over the a month of acquisition and the fifty-nine
(59) succeeding months if the aggregate acquisition
cost for such goods, excluding the VAT component
thereof, exceeds One million pesos (P 1, 000, 000):
Provided, however, That if the estimated useful life
of the capital good is less than five (5) years, as
used for depreciation purposes, then the input VAT
shall be spread over such a shorter period:
Provided, finally, that in the case of purchase of
services, lease or use of properties, the input tax
shall be creditable to the purchaser, lessee or
Alyssa Africa Page 134
license upon payment of the compensation, rental,
royalty or free.
(3) A VAT-registered person who is also engaged
in transactions not subject to the value-added tax
shall be allowed tax credit as follows:
(a) Total input tax which can be directly attributed to
transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot
be directly attributed to either activity.
The term "input tax" means the value-added tax
due from or paid by a VAT-registered person in the
course of his trade or business on importation of
goods or local purchase of goods or services,
including lease or use of property, from a VAT-
registered person. It shall also include the
transitional input tax determined in accordance with
Section 111 of this Code.
The term "output tax" means the value-added tax
due on the sale or lease of taxable goods or
properties or services by any person registered or
required to register under Section 236 of this Code.
ii. Excess Output or Input Tax (Sec. 110 B)
(B) Excess Output or Input Tax. - If at the end of
any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the Vat-
registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the
succeeding quarter or quarters. Provided, however,
That any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be
refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.
iii. Rule on Input Tax on Capital Goods
(Sec.110A) (Sec.4.110-3 of RR No. 16-05)
Section 110 A Provided, that the input tax on
goods purchased or imported in a calendar month
for use in trade or business for which deduction for
depreciation is allowed under this Code shall be
spread evenly over the a month of acquisition and
the fifty-nine (59) succeeding months if the
aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds
One million pesos (P 1, 000, 000): Provided,
however, That if the estimated useful life of the
capital good is less than five (5) years, as used for
depreciation purposes, then the input VAT shall be
spread over such a shorter period: Provided, finally,
that in the case of purchase of services, lease or
use of properties, the input tax shall be creditable to
the purchaser, lessee or license upon payment of
the compensation, rental, royalty or free.
Taxation Law
RR No. 16-05
Section 4.110-3 Claim for Input Tax on Depreciable
Goods.
Where a VAT-registered person purchases or
imports capital goods, which are depreciable assets
for income tax purposes, the aggregate acquisition
cost of which (exclusive of VAT) in a calendar
month exceeds P1,000,000.00 regardless of the
acquisition cost of each capital good, shall be
claimed as credit against output tax in the following
manner:
(a) If the estimated useful life of a capital good is 5
years or more The input tax shall be spread
evenly over a period of 60 months and the claim for
input tax credit will commence in the calendar
month when the capital good is acquired. The total
input taxes on purchases or importations of this
type of capital goods shall be divided by 60 and the
quotient will be the amount to be claimed monthly.
(b) If the estimated useful life of a capital good is
less than 5 years The input tax shall be spread
evenly on a monthly basis by dividing the input tax
by the actual number of months comprising the
estimated useful life of the capital good. The claim
for input tax credit shall commence in the calendar
month that the capital goods were acquired.
Where the aggregate acquisition cost
(exclusive of VAT) of the existing or finished
depreciable capital goods purchased or imported
during any calendar month does not exceed
P1,000,000, the total input taxes will be allowed as
credit against output tax in the month of acquisition;
Provided, however, that the total amount of input
taxes (input tax on depreciable capital goods plus
other allowable input taxes) allowed to be claimed
against the output tax in the quarterly VAT Returns
shall be subject to the limitation prescribed under
Sec. 4.110-7 of these Regulations.
The aggregate acquisition cost of a
depreciable asset in any calendar month refers to
the total price agreed upon for one or more assets
acquired and not in the payments actually made
during the calendar month. Thus, an asset acquired
in installment for an acquisition cost of more than
P1,000,000.00 will be subject to the amortization of
input tax despite the fact that the monthly
payments/installments may not exceed
P1,000,000.00.
iv. Substantiation of Input Tax Credits
(Sec.4.110-8 of RR No. 16-05)
Alyssa Africa Page 135
CIR vs. Sony Phils, Inc. (2010)
II. VAT on Goods and Services
a. Definition of Goods and Services (Sec. 106
and Sec. 108)
"Goods or Properties." The term "goods" or
"properties" shall mean all tangible and intangible
objects which are capable of pecuniary estimation
and shall include:
(a) Real properties held primarily for sale to
customers or held for lease in the ordinary course
of trade or business;
(b) The right or the privilege to use patent,
copyright, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other
like property or right;
(c) The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
(d) The right or the privilege to use motion picture
films, tapes and discs; and
(e) Radio, television, satellite transmission and
cable television time.
The term "gross selling price" means the total
amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the
goods or properties, excluding the value-added tax.
The excise tax, if any, on such goods or properties
shall form part of the gross selling price.
The phrase "sale or exchange of services"
means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or
consideration, including those performed or
rendered by construction and service contractors;
stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether
personal or real; warehousing services; lessors or
distributors of cinematographic films; persons
engaged in milling processing, manufacturing or
repacking goods for others; proprietors, operators
or keepers of hotels, motels, rest houses, pension
houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers
in securities; lending investors; transportation
contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes
for hire another domestic common carriers by land
relative to their transport of goods or cargoes;
common carriers by air and sea relative to their
transport of passengers, goods or cargoes from
one place in the Philippines to another place in the
Taxation Law
Philippines; sales of electricity by generation
companies, transmission, and distribution
companies; services of franchise grantees of
electric utilities. [50] telephone and telegraph, radio
and television broadcasting and all other franchise
grantees except those under section 119 of this
Code, and non-life insurance companies (except
their crop insurances), including surety, fidelity,
indemnity, and bonding companies; and similar
services regardless of whether or not the
performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase "sale or
exchange of services" shall likewise include:
(1) The lease or the use of or the right or privilege
to use any copyright, patent, design or model, plan
secret formula or process, goodwill, trademark,
trade brand or other like property or right;
(2) The lease of the use of, or the right to use of
any industrial, commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or
commercial knowledge or information;
(4) 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 subparagraph
(2) or any such knowledge or information as is
mentioned in subparagraph (3);
(5) 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.
(6) The supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme;
(7) The lease of motion picture films, films, tapes
and discs; and
(8) The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time.
Lease of properties shall be subject to the tax
herein imposed irrespective of the place where the
contract of lease or licensing agreement was
executed if the property is leased or used in the
Philippines.
The term "gross receipts" means the total amount
of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied
with the services and deposits and advanced
payments actually or constructively received during
Alyssa Africa Page 136
the taxable quarter for the services performed or to
be performed for another person, excluding value-
added tax.
b. VAT Base for Goods and Services (Sec. 106
and Sec. 108)
(A) Rate and Base of Tax. - There shall be levied,
assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax
equivalent to ten percent (10%) [44] of the gross
selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax
to be paid by the seller or transferor: Provided, That
the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent(12%), after any of the following conditions
has been satisfied:
(i) Value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National Government deficit as a percentage of
GDP of the previous year exceeds one and one-
half percent (1 1/2%). [45]
SEC. 108. Value-added Tax on Sale of Services
and Use or Lease of Properties. -
(A) Rate and Base of Tax. - There shall be levied,
assessed and collected, a value-added tax
equivalent to ten percent (10%) 10 of gross receipts
derived from the sale or exchange of services,
including the use or lease of properties: Provided,
That the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1,
2006,raise the value-added tax to twelve percent
(12%), after any of the following conditions has
been satisfied:
(i) Value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of
GDP of the previous year exceeds one and one-
half percent (1 1/2%).
c. Meaning of Gross Selling Price and Gross
Receipts (Sec. 106 and Sec. 108)
The term "gross selling price" means the total
amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the
goods or properties, excluding the value-added tax.
The excise tax, if any, on such goods or properties
shall form part of the gross selling price.
Taxation Law
The term "gross receipts" means the total amount
of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied
with the services and deposits and advanced
payments actually or constructively received during
the taxable quarter for the services performed or to
be performed for another person, excluding value-
added tax.
i. Sec. 11 of RR No. 4-07
d. Rules on Sales of Real Property
i. Rule on Sales on Installment (RR No.
Sec.4.106-3 of RR No. 16-05 as amended by
Sec. 3 of RR No. 4-07)
ii. See also Rule on Sale of Real Property Use in
Business (Sec. 14(I) of RR No. 4-07)
iii. Correlate with Sec. 109 on Exempt Sales of
Real Property
SEC. 109. Exempt Transactions. -
(1) Subject to the provisions of Subsection (2)
hereof, the following transactions shall be exempt
from the value-added tax.
(A) Sale or importation of agricultural and marine
food products in their original state, livestock and
poultry of or king generally used as, or yielding or
producing foods for human consumption; and
breeding stock and genetic materials therefor.
Products classified under this paragraph shall be
considered in their original state even if they have
undergone the simple processes of preparation or
preservation for the market, such as freezing,
drying, salting, broiling, roasting, smoking or
stripping. Polished and/or husked rice, corn grits,
raw cane sugar and molasses, ordinary salt and
copra shall be considered in their original state; [55]
(B) Sale or importation of fertilizers; seeds,
seedlings and fingerlings; fish, prawn, livestock and
poultry feeds, including ingredients, whether locally
produced or imported, used in the manufacture of
finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals
and other animals generally considered as pets);
(C) Importation of personal and household effects
belonging to the residents of the Philippines
returning from abroad and nonresident citizens
coming to resettle in the Philippines: Provided, That
such goods are exempt from customs duties under
the Tariff and Customs Code of the Philippines;
Alyssa Africa Page 137
(D) Importation of professional instruments and
implements, wearing apparel, domestic animals,
and personal household effects (except any
vehicle, vessel, aircraft, machinery other goods for
use in the manufacture and merchandise of any
kind in commercial quantity) belonging to persons
coming to settle in the Philippines, for their own use
and not for sale, barter or exchange, accompanying
such persons, or arriving within ninety (90) days
before or after their arrival, upon the production of
evidence satisfactory to the Commissioner, that
such persons are actually coming to settle in the
Philippines and that the change of residence is
bona fide;
(E) Services subject to percentage tax under Title
V;
(F) Services by agricultural contract growers and
milling for others of palay into rice, corn into grits
and sugar cane into raw sugar;
(G) Medical, dental, hospital and veterinary
services except those rendered by professionals.
(H) Educational services rendered by private
educational institutions, duly accredited by the
Department of Education(DepED), the Commission
on Higher Education (CHED), the Technical
Education and Skills Development Authority
(TESDA)and those rendered by government
educational institutions;
(I) Services rendered by individuals pursuant to an
employer-employee relationship;
(J) Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as supervisory,
communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-
Pacific Region and do not earn or derive income
from the Philippines;
(K) Transactions which are exempt under
international agreements to which the Philippines is
a signatory or under special laws, except those
under Presidential Decree No. 529;
(L) Sales by agricultural cooperatives duly
registered with the Cooperative Development
Authority to their members as well as sale of their
produce, whether in its original state or processed
form, to non-members; their importation of direct
farm inputs, machineries and equipment, including
spare parts thereof, to be used directly and
exclusively in the production and/or processing of
their produce;
(M) Gross receipts from lending activities by credit
or multi-purpose cooperatives duly registered with
the Cooperative Development Authority;
Taxation Law
(N) Sales by non-agricultural, non- electric and non-
credit cooperatives duly registered with the
Cooperative Development Authority: Provided, That
the share capital contribution of each member does
not exceed Fifteen thousand pesos (P15, 000) and
regardless of the aggregate capital and net surplus
ratably distributed among the members;
(O) Export sales by persons who are not VAT-
registered;
(P) Sale of real properties not primarily held for sale
to customers or held for lease in the ordinary
course of trade or business or real property utilized
for low-cost and socialized housing as defined by
Republic Act No. 7279, otherwise known as the
Urban Development and Housing Act of 1992, and
other related laws, residential lot valued at One
million pesos (P1,500,000) and below, house and
lot, and other residential dwellings valued at Two
million five hundred thousand pesos (P2, 500,
000) and below: Provided, That not later than
January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be
adjusted to their present values using the
Consumer Price Index, as published by the
National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental
not exceeding Ten thousand pesos (P10,
000): Provided, That not later than January 31,
2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to its
present value using the Consumer Price Index as
published by the National Statistics Office (NSO);
(R) Sale, importation, printing or publication of
books and any newspaper, magazine review or
bulletin which appears at regular intervals with fixed
prices for subscription and sale and which is not
devoted principally to the publication of paid
advertisements;
(S) Transport of passengers by international
carriers;
(T) Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or
international transport operations;
(U) Importation of fuel, goods and supplies by
persons engaged in international shipping or air
transport operations;
(V) Services of bank, non-bank financial
intermediaries performing quasi-banking functions,
and other non-bank financial intermediaries; an
(W) 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
Alyssa Africa Page 138
amount of One million five hundred thousand pesos
(P1,500,000): Provided, That not later than January
31, 2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to its
present With footnote in the book value using the
Consumer Price Index, as published by. the
National Statistics-Office (NSO);
(2) A VAT-registered person may elect that
Subsection (1) not apply to its sale of goods or
properties or services: Provided, that an election
made under this subsection shall be irrevocable for
a period of three (3) years from the quarter the
election was made.
e. VAT on Importations (Sec. 107)
SEC. 107. Value-Added Tax on Importation of
Goods. -
(A) In General. - There shall be levied, assessed
and collected on every importation of goods a
value-added tax equivalent to ten percent
(10%) [47] based on the total value used by the
Bureau of Customs in determining tariff and
customs duties plus customs duties, excise taxes, if
any, and other charges, such tax to be paid by the
importer prior to the release of such goods from
customs custody: Provided, That where the
customs duties are determined on the basis of the
quantity or volume of the goods, the value-added
tax shall be based on the landed cost plus excise
taxes, if any Provided, further, That the President,
upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the
rate of the value-added tax to twelve percent
(12%), after any of the following conditions has
been satisfied:
(i) Value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of
GDP of the previous year exceeds one and one-
half percent (1 %).
(B) Transfer of Goods by Tax-exempt Persons. -
In the case of tax-free importation of goods into the
Philippines by persons, entities or agencies exempt
from tax where such goods are subsequently sold,
transferred or exchanged in the Philippines to non-
exempt persons or entities, the purchasers,
transferees or recipients shall be considered the
importers thereof, who shall be liable for any
internal revenue tax on such 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
Taxation Law
i. Exempt Importations under Sec. 109
ii. Transfer of Goods by Tax-exempt Persons
(Sec. 107 B)
SEC. 107. Value-Added Tax on Importation of
Goods. - (B) Transfer of Goods by Tax-exempt
Persons. - In the case of tax-free importation of
goods into the Philippines by persons, entities or
agencies exempt from tax where such goods are
subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be
considered the importers thereof, who shall be
liable for any internal revenue tax on such
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.
f. Transactions Deemed Sale (Sec. 106 B)
SEC. 106. Value-Added Tax on Sale of Goods or
Properties.
(B) Transactions Deemed Sale. - The following
transactions shall be deemed sale:
(1) Transfer, use or consumption not in the course
of business of goods or properties originally
intended for sale or for use in the course of
business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits
of the VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made
within sixty (60) days following the date such goods
were consigned; and
(4) Retirement from or cessation of business, with
respect to inventories of taxable goods existing as
of such retirement or cessation.
i. Rationale of Imposition
ii. Enumeration Sec. 4.106-7 RR No. 16-05
iii. Tax Base of Transactions Deemed Sale
General Rule: Market Value of the Goods Deemed
Soled as of the Time of the Occurrence of the
Transactions.
Tax Base: Actual Market Value
If the Gross Selling Price is unreasonably lower
than the fair market value.
Retirement or Cessation of Business
Tax Base: Acquisition cost or the current market
price of the goods or properties, whichever is lower.
Alyssa Africa Page 139
g. Rules for Certain Services
i. Common Carriers
1. Secs. 108, 109S 116, 117 and 118
Section 108
(B) Subject to Zero Percent Rate:
(6) Transport of passengers and cargo by air or sea
vessels from the Philippines to a foreign country.
Section 109 Exempt Transactions
(S) Transport of passengers by international
carriers
SEC. 116. Tax on Persons Exempt from Value-
Added Tax (VAT). - Any person whose sales or
receipts are exempt under Section 109(V) of this
Code from the payment of value-added tax and
who is not a VAT-registered person shall pay a tax
equivalent to three percent (3%) of his gross
quarterly sales or receipts: Provided, That
cooperatives shall be exempt from the three
percent (3%) gross receipts tax herein imposed.
SEC. 117. Percentage Tax on Domestic Carriers
and Keepers of Garages. - Cars for rent or hire
driven by the lessee, transportation contractors,
including persons who transport passengers for
hire, and other domestic carriers by land, [81] for the
transport of passengers [except owners of bancas]
and owners of animal-drawn two wheeled vehicle),
and keepers of garages shall pay a tax equivalent
to three percent (3%) of their quarterly gross
receipts.
The gross receipts of common carriers derived from
their incoming and outgoing freight shall not be
subjected to the local taxes imposed under
Republic Act No. 7160, otherwise known as the
Local Government Code of 1991.
In computing the percentage tax provided in this
Section, the following shall be considered the
minimum quarterly gross receipts in each particular
case:
Jeepney for hire -
1. Manila and other P 2,400
Cities 1,200
2. Provincial
Public utility bus - P 3,600
Not exceeding 30 6,000
passengers 7,200
Exceeding 30 but not
exceeding 50 passengers P 3,600
Exceeding 50 passengers 2,400
Taxis - P 3,000
1. Manila and other Cities 1,800
2. Provincial
Taxation Law
Car for hire (with chauffer)
Car for hire (without
chauffer)
SEC. 118 Percentage Tax on International
Carriers. - [82]
(A) International air carriers doing; business in the
Philippines on their gross receipts derived from
transport of cargo from the Philippines to another
country shall pay a tax of three percent (3%) of
their quarterly gross receipts.
(B) International shipping carriers doing business
in the Philippines on their gross receipts derived
from transport of cargo from the Philippines to
another country shall pay a tax equivalent to three
percent (3%) of their quarterly gross receipts.
2. Sec. 4.108-2 Nos. 11 and 12 of RR no. 16-05
Section 4.108-2 Meaning of Sale or Exchange of
Services. The term sale or exchange of services Revenue Memorandum Circular No. 74-99
means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or
consideration, whether in kind or in cash, including
those performed or rendered by the following:
(11) transportation contractors on their transport of
goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic
common carriers by land relative to their transport
of goods or cargoes;
(12) common carriers by air and sea relative to their
transport of passenger, goods or cargoes from one
place in the Philippines to another place in the
Philippines;
3. Sec. 4.108-3 of RR No. 16-05
ii. Lease of Properties
1. Sec. 4.108-3 of RR No. 16-05
2. Lease of Residential Units (Sec. 4.109-1 (B)
(q) of RR No. 16-05_
3. Secs. 109q, 109w, 116, 236G and 236H
iii. Professional Services
iv. Medical Services
1. Sec. 4.109-1 (B)(g) of RR No. 16-05
Philippine Healthcare Providers vs. CIR (2007)
v. Cinema Operators/Proprietors
CIR vs. SM Prime Holdings, Inc. (2010)
vi. VAT on Toll Fees
Diaz vs. The Secretary of Finance and CIR
(2011)
vii. Franchise Grantees (PAGCOR)
PAGCOR vs. The BIR (2011)
Alyssa Africa Page 140
III. Zero Rated Sales of Goods and Services and
VAT Exempt Sales
a. Nature of Zero Rated Sales
b. Zero Rated Sale of Goods (Sec. 106)
c. Zero Rated Sale of Services (Sec. 108 B)
CIR vs. American Express (2005)
CIR vs. Burmeister and Wain (2007)
CIR vs. Acesite (2007)
d. Automatic zero-rate vs. Effectively zero-rate
CIR vs. Seagate Technology (Phils) (2005)
CIR vs. Toshiba Information Equipment (2005)
e. Destination Principle and Cross Border
Doctrine
CIR vs. American Express (2005)
CIR vs. Toshiba Information Equipment (2005)
f. Zero Rated Sales vs. Exempt Sales
CIR vs. Cebu Toyo Corp. (2005)
g. Enumeration of Exempt Transactions *Sec.
109) Sec. 4.109-1(B) of RR No. 16-05
h. Exempt Persons vs. Exempt Transactions
CIR vs. Seagate Technology (Phils) (2005)
IV. Transitional and Presumptive Input Tax
Sec. 111
Sec. 4.111-1 of RR No. 16-05
Fort Bonifacio Development vs. CIR (2009)
Fort Bonifacio Development vs. CIR (2014)
V. VAT Refund
a. Compare with Sec. 204 and 229
b. Grounds
c. Periods
RMC No. 54-2014
RMC No. 57-2013
Contex vs. CIR (2004)
Atlas Consolidated Mining vs. CIR (2007)
CIR vs. Mirant Pagbilao Corp. (2008)
CIR vs. Aichi Forging Company (2010)
Facts:
On September 30, 2004, respondent Aichi
Forging Company of Asia, Inc. filed a claim for
refund/credit of input VAT for the period of July 1,
2002 to September 30, 2002 with the petitioner
Commissioner of Internal Revenue. On the same
day, Aichi likewise filed a Petition for Review with
the CTA for the refund/credit of the same.
Taxation Law
In the Petition for Review, Aichi claims that it
generated zero-rated sales for the period July 1,
2002 to September 30, 2002 in the amount of
P131,791,399.00 which was paid pursuant to
Section 106(A)(2)(a)(1),(2) and (3) of the NIRC and
for that same period it incurred input VAT
amounting to P3,912,088.14 from purchases and
importation attributable to its zero-rated sales; and
that in its application for refund/credit, it only
claimed the amount of P3,891,123.82. The CTA
partially granted the petition of the respondent on
the ground that Section 112 (A) of the NIRC which
states that a VAT-registered person may, within 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; and that such
provision has been lawfully complied with by the
respondent except that some documents and
claims are not satisfactorily substantiated. CIR filed
a Motion for Reconsideration on the ground that the
claims were filed beyond the 2 year prescriptive
period which expired on September 29, 2004 by
reason that 2004 was a leap year and that when
the law speaks of a year; it is equivalent to 365
days. Such petition was denied, and the same was
affirmed by the CTA En Banc.
Issue: Whether or not the period for the filing of the
administrative and judicial claims has prescribed.
Held:
No, the period has not yet prescribed.
Section 112 (A) of the NIRC provides a 2 year
prescriptive period reckoned from the close of the
taxable quarter when the relevant sales or
transactions for the filing of a refund/credit of input
VAT. In connection with the counting of the period
we turn to the Administrative Code which provides
that a year is composed of 12 calendar months, as
opposed to that provided for in the Civil Code, the
former being the later law. Applying this law, it is
deemed to expire on September 30, 2004. Hence,
it was timely filed.
However, while there is timely filing of the
claim, there was a violation of Section 112(D) of the
NIRC which provides that the Commissioner shall
grant a refund or issue the tax credit certificate for
creditable input taxes within 120 days from the date
of submission of documents. 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 may, within
Alyssa Africa Page 141
30 days from the receipt of the decision denying the
claim, or after the expiration of the 120 day period,
appeal the decision or the unacted claim with the
Court of Tax Appeals. In this case both
administrative and judicial claims were
simultaneously filed on September 30, 2004.
Respondent clearly did not wait for the CIR
decision, or the lapse of the 120 day period. Hence,
the filing of the judicial claim with the CTA was
found to be premature. The 120 day period is
crucial in filing an appeal, which the petitioner failed
to observe. The petition in this case is granted.
CIR vs. San Roque Power (2013) and other
cases
Mindanao II Geothermal Partnership vs. CIR
(2013)
Pilipinas Total Gas, Inc. vs. CIR (2015)
Microsoft Phils., Inv. vs. CIR (2011)
VI. Other Matters
a. Invoicing Requirements (Sec. 113) (Sec. 4-
1113-1 of RR No. 16-05)
i. Authority to Print
Silicon Phils., Inc. vs. CIR (2011)
b. Information which must be contained (Sec.
113)
c. Consequences of Issuing Erroneous VAT
Invoice (Sec. 113) (RR No. 4.113-4 of RR No. 16-
05)
d. Filing of Monthly and Quarterly VAT Returns
and Payment of VAT (Sec. 114)
e. Withholding VAT (Sec. 114 C) (Sec. 4.114-2 of
RR No. 16-05 as amended by Sec. 22 of RR No.
4-07)
i. Government Payments
ii. Services Rendered by Non-residents
iii. Withholding VAT Returns/Time of Payment
f. Power of the Commissioner of Suspend
Business Operations (Sec. 5) (Sec. 4-115-1 of
RR No. 16-05)
g. VAT Exemption of Senior Citizens
i. RA No. 9994
h. VAT on Condominium Corporations and
Homeowners Associations
i. RMC Nos. 65-2012 and 9-2013
Taxation Law
REMEDIES UNDER THE NIRC
Assessment of Internal Revenue Taxes
A. Definition/Nature/effect/Basis
Sections 4-7, 203, 222, 223, 228, 232, 235, 266 of
the NIRC
Section 4. Power of the Commissioner to
Interpret Tax Laws and Decide Tax Cases. The
power to interpret the provisions of this Code and
other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
The power to decide disputed assessments,
refunds, of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or
other matters arising under this Code, or other laws
or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals.
Section 5. Power of the Commissioner to Obtain
Information and to Summon/Examine, and Take
Testimony of Persons. - - In ascertaining the
correctness of any return, or in making a return
when none has been made, or in determining the
liability of any person for any internal revenue tax,
or in collecting any such liability, or in evaluating tax
compliance, the Commissioner is authorized:
(A) To examine any book, paper, record, or other
data which may be relevant or material to such
inquiry;
(B) To obtain on a regular basis from any person
other than the person whose internal revenue tax
liability is subject to audit or investigation, or from
any office or officer of the national and local
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
Alyssa Africa Page 142
person, to appear before the Commissioner or his
duly authorized representative at a time and place
specified in the summons and to produce such
books, papers, records, or other data, and to give
testimony;
(D) To take such testimony of the person
concerned, under oath, as may be relevant or
material to such inquiry; and
(E) To cause revenue officers and employees to
make a canvass from time to time of any revenue
district or region and inquire after and concerning
all persons therein who may be liable to pay any
internal revenue tax, and all persons owning or
having the care, management or possession of any
object with respect to which a tax is imposed.
The provisions of the foregoing paragraphs
notwithstanding, nothing in this Section shall be
construed as granting the Commissioner the
authority to inquire into bank deposits other than as
provided for in Section 6(F) of this Code.
SEC. 6. Power of the Commissioner to Make
Assessments and Prescribe Additional
Requirements for Tax Administration and
Enforcement. -
(A) Examination of Return and Determination of
Tax Due. After a return has been filed as required
under the provisions of this Code, the
Commissioner or his duly authorized representative
may authorize the examination of any taxpayer and
the assessment of the correct amount of tax:
Provided, however, That failure to file a return shall
not prevent the Commissioner from authorizing the
examination of any taxpayer.
The tax or any deficiency tax so assessed shall be
paid upon notice and demand from the
Commissioner or from his duly authorized
representative.
Any return, statement of declaration filed in any
office authorized to receive the same shall not be
withdrawn: Provided, That within three (3) years
from the date of such filing, the same may be
modified, changed, or amended: Provided, further,
That no notice for audit or investigation of such
return, statement or declaration has in the
meantime been actually served upon the taxpayer.
(B) Failure to Submit Required Returns,
Statements, Reports and other Documents. -
When a report required by law as a basis for the
assessment of any national internal revenue tax
shall not be forthcoming within the time fixed by
laws or rules and regulations or when there is
reason to believe that any such report is false,
Taxation Law
incomplete or erroneous, the Commissioner shall
assess the proper tax on the best evidence
obtainable.
In case a person fails to file a required return or
other document at the time prescribed by law, or
willfully or otherwise files a false or fraudulent
return or other document, the Commissioner shall
make or amend the return from his own knowledge
and from such information as he can obtain through
testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.
(C) Authority to Conduct Inventory-taking,
Surveillance and to Prescribe Presumptive
Gross Sales and Receipts. - The Commissioner
may, at any time during the taxable year, order
inventory-taking of goods of any taxpayer as a
basis for determining his internal revenue tax
liabilities, or may place the business operations of
any person, natural or juridical, under observation
or surveillance if there is reason to believe that
such person is not declaring his correct income,
sales or receipts for internal revenue tax purposes.
The findings may be used as the basis for
assessing the taxes for the other months or
quarters of the same or different taxable years and
such assessment shall be deemed prima facie
correct.
When it is found that a person has failed to issue
receipts and invoices in violation of the
requirements of Sections 113 and 237 of this Code,
or when there is reason to believe that the books of
accounts or other records do not correctly reflect
the declarations made or to be made in a return
required to be filed under the provisions of this
Code, the Commissioner, after taking into account
the sales, receipts, income or other taxable base of
other persons engaged in similar businesses under
similar situations or circumstances or after
considering other relevant information may
prescribe a minimum amount of such gross
receipts, sales and taxable base, and such amount
so prescribed shall be prima facie correct for
purposes of determining the internal revenue tax
liabilities of such person.
(D) Authority to Terminate Taxable Period. -
When it shall come to the knowledge of the
Commissioner that a taxpayer is retiring from
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 is performing any
act tending to obstruct the proceedings for the
collection of the tax for the past or current quarter
or year or to render the same totally or partly
ineffective unless such proceedings are begun
Alyssa Africa Page 143
immediately, the Commissioner shall declare the
tax period of such taxpayer terminated at any time
and shall send the taxpayer a notice of such
decision, together with a request for the immediate
payment of the tax for the period so declared
terminated and the tax for the preceding year or
quarter, or such portion thereof as may be unpaid,
and said taxes shall be due and payable
immediately and shall be subject to all the penalties
hereafter prescribed, unless paid within the time
fixed in the demand made by the Commissioner.
(E) Authority of the Commissioner to Prescribe
Real Property Values. - The Commissioner is
hereby authorized to divide the Philippines into
different zones or areas and shall, upon
consultation with competent appraisers both from
the private and public sectors, determine the fair
market value of real properties located in each
zone or area. For purposes of computing any
internal revenue tax, the value of the property shall
be, whichever is the higher of:
(1) The fair market value as determined by the
Commissioner; or
(2) The fair market value as shown in the schedule
of values of the Provincial and City Assessors.
(F) Authority of the Commissioner to Inquire
into Bank Deposit Accounts and Other Related
information held by Financial Institutions. -
Notwithstanding any contrary provision of Republic
Act No. 1405, Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act of the
Philippines, and other general or special laws, the
Commissioner is hereby authorized to inquire into
the bank deposits and other related information
held by financial institutions 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 Section 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, Republic Act No. 6426, otherwise known
as the Foreign Currency Deposit Act of the
Philippines, 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.
Taxation Law
(3) A specific taxpayer or taxpayers subject of a
request for the supply of tax information from a
foreign tax authority pursuant to an international
convention or agreement on tax matters to which
the Philippines is a signatory or a party of:
Provided, That the information obtained from the
banks and other financial institutions may be used
by the Bureau of Internal Revenue for tax
assessment, verification, audit and enforcement
purposes.
In case of a request from a foreign tax authority for
tax information held by banks and financial
institutions, the exchange of information shall be
done in a secure manner to ensure confidentiality
thereof under such rules and regulations as may be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
The Commissioner shall provide the tax information
obtained from banks and financial institutions
pursuant to a convention or agreement upon
request of the foreign tax authority when such
requesting foreign tax authority has provided the
following information to demonstrate the
foreseeable relevance of the information to the
request:
(a) The identity of the person under examination or
investigation;
(b) A statement of the information being sought,
including its nature and the form in which the said
foreign tax authority prefers to receive the
information from the Commissioner;
(c) The tax purpose for which the information is
being sought;
(d) Grounds for believing that the information
requested is held in the Philippines or is in the
possession or control of a person within the
jurisdiction of the Philippines;
(e) To the extent known, the name and address of
any person believed to be in possession of the
requested information;
(f) A statement that the request is in conformity with
the law and administrative practices of the said
foreign tax authority, such that if the requested
information was within the jurisdiction of the said
foreign tax authority then it would be able to obtain
the information under its laws or in the normal
course of administrative practice and that it is in
conformity with a convention or international
agreement; and
(g) A statement that the requesting foreign tax
authority has exhausted all means available in its
own territory to obtain the information, except those
that would give rise to disproportionate difficulties.
Alyssa Africa Page 144
The Commissioner shall forward the information as
promptly as possible to the requesting foreign tax
authority. To ensure a prompt response, the
Commissioner shall confirm receipt of a request in
writing to the requesting tax authority and shall
notify the latter of deficiencies in the request, if any,
within sixty (60) days from receipt of the request.
If the Commissioner is unable to obtain and provide
the information within ninety (90) days from receipt
of the request, due to obstacles encountered in
furnishing the information or when the bank or
financial institution refuses to furnish the
information, he shall immediately inform the
requesting tax authority of the same, explaining the
nature of the obstacles encountered or the reasons
for refusal.
The term "foreign tax authority," as used herein,
shall refer to the tax authority or tax administration
of the requesting State under the tax treaty or
convention to which the Philippines is a signatory or
a party of.
(G) Authority to Accredit and Register Tax
Agents. - The Commissioner shall accredit and
register, based on their professional competence,
integrity and moral fitness, individuals and general
professional partnerships and their representatives
who prepare and file tax returns, statements,
reports, protests, and other papers with or who
appear before, the Bureau for taxpayers. Within
one hundred twenty (120) days from January 1,
1998, the Commissioner shall create national and
regional accreditation boards, the members of
which shall serve for three (3) years, and shall
designate from among the senior officials of the
Bureau, one (1) chairman and two (2) members for
each board, subject to such rules and regulations
as the Secretary of Finance shall promulgate upon
the recommendation of the Commissioner.
Individuals and general professional partnerships
and their representatives who are denied
accreditation by the Commissioner and/or the
national and regional accreditation boards may
appeal such denial to the Secretary of Finance,
who shall rule on the appeal within sixty (60) days
from receipt of such appeal. Failure of the
Secretary of Finance to rule on the Appeal within
the prescribed period shall be deemed as approval
of the application for accreditation of the appellant.
(H) Authority of the Commissioner to Prescribe
Additional Procedural or Documentary
Requirements. - The Commissioner may prescribe
the manner of compliance with any documentary or
procedural requirement in connection with the
Taxation Law
submission or preparation of financial statements
accompanying the tax returns.
Section. 7.Authority of the Commissioner to
Delegate Power. - The Commissioner may
delegate the powers vested in him under the
pertinent provisions of this Code to any or such
subordinate officials with the rank equivalent to a
division chief or higher, subject to such limitations
and restrictions as may be imposed under rules
and regulations to be promulgated by the Secretary
of Finance, upon recommendation of the
Commissioner: Provided, however, That the
following powers of the Commissioner shall not be
delegated:
(a) The power to recommend the promulgation of
rules and regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or
to reverse, revoke or modify any existing ruling of
the Bureau;
(c) The power to compromise or abate, under Sec.
204 (A) and (B) of this Code, any tax liability:
Provided, however, That assessments issued by
the regional offices involving basic deficiency taxes
of Five hundred thousand pesos (P500,000) or
less, and minor criminal violations, as may be
determined by rules and regulations to be
promulgated by the Secretary of finance, upon
recommendation of the Commissioner, discovered
by regional and district officials, may be
compromised by a regional evaluation board which
shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, the
heads of the Legal, Assessment and Collection
Divisions and the Revenue District Officer having
jurisdiction over the taxpayer, as members; and
(d) The power to assign or reassign internal
revenue officers to establishments where articles
subject to excise tax are produced or kept.
Revenue Regulations (RR) No. 12-99 dated
September 6, 1999, as amended by RR No. 18-
2013 dated November 28, 2013
http://www.bir.gov.ph/taxpayerrights/taxpayerrig
hts.htm
Republic Act No. 10021
1. Tax Audit Process
2. Letter of Authority/Audit Notice/Tax
Verification Notice
Revenue Audit Memorandum Order No. 1-00
Contact with Taxpayer
Alyssa Africa Page 145
Arranging for An appointment
- Revenue officer must make a telephone or
personal call to the taxpayer himself and NOT his
representative.
Serving of Letter of Authority
Must be served by the Revenue Officer assigned to
the case and no one else on the first opportunity
to have personal contact with the taxpayer.
What is served:
a. Letter of Authority
b. Taxpayers Bill of Rights
Letter of Authority
a. Authorizes or empowers a designated
Revenue Officer to examine, verify and
scrutinize a taxpayers books and records in
relation to his internal revenue tax liabilities for
a particular period.
b. Must be served or presented to the taxpayer
within 30 days from date of issue; otherwise, it
becomes null and void unless revalidated.
c. Taxpayers right to refuse its service if
presented beyond the 30 day period
depending on the policy set by top
management
d. How Revalidation Made by issuing a new
Letter of Authority or by just simply stamping
the words Revalidated on _ on the face of the
copy of the Letter of Authority issued.
Revenue Memorandum Order No. 44-2010 dated
May 12, 2010
(NOTE: Contains rules on electronic issuance of
letters of authority.)
Revenue Memorandum Order No. 69-2010 dated
August 11, 2010
(NOTE: Guidelines on the Issuance of Electronic
Letters of Authority, Tax Verification Notices, and
Memoranda of Assignment)
CIR vs. Sony Phils, Inc. G.R. No. 178697,
November 17, 2010
Facts: On November 24, 1998, the CIR issued a
letter of authority authorizing revenue officers to
examine the books of accounts of Sony for the
period 1997 and unverified prior years. On
December 6, 1999, a preliminary assessment for
1997 deficiency taxes and penalties was issued by
CIR. Sony protested and sought re-evaluation. The
CTA partially granted the appeal and ordered the
withdrawal and cancellation of deficiency
Taxation Law
assessment for value-added tax for 1997 for lack of
merit. Hence, the case was raised with the SC.
The CIR insists that the LOA, although it states
the period 1997 and unverified prior years, should
be understood to mean the fiscal year ending in
March 31, 1998.
Issue: Whether or not the Letter of Authority should
be understood to mean the fiscal year ending
March 31, 1998.
Held: No, the Court cannot agree. According to
RMO 43-90, a Letter of Authority should cover a
taxable period not exceeding 1 taxable year. The
practice issuing LOAs covering audit of unverified
prior years is hereby prohibited. If the audit of a tax
payer shall include more than one taxable period,
the other periods or years shall be specifically
indicated in the LOA.
The CIR went beyond the scope of their authority
because the deficiency VAT assessment they
arrived at was based on records from January to
March 1998 or using the fiscal year which ended in
March 31, 1998. If the CIR wanted or intended the
investigation to include the year 1998, it should
have been done so by including it in the LOA or
issuing another LOA.
The deficiency VAT assessment should have
been disallowed.
3. Preservation of Books of Accounts and tax
records
Section. 235. Preservation of Books and
Accounts and Other Accounting Records. - All
the books of accounts, including the subsidiary
books and other accounting records of
corporations, partnerships, or persons, shall be
preserved by them for a period beginning from the
last entry in each book until the last day prescribed
by Section 203 within which the Commissioner is
authorized to make an assessment. The said books
and records shall be subject to examination and
inspection by internal revenue officers: Provided,
That for income tax purposes, such examination
and inspection shall be made only once in a taxable
year, except in the following cases:
(a) Fraud, irregularity or mistakes, as determined
by the Commissioner;
(b) The taxpayer requests reinvestigation;
(c) Verification of compliance with withholding tax
laws and regulations;
(d) Verification of capital gains tax liabilities; and
(e) In the exercise of the Commissioner's power
under Section 5(B) to obtain information from other
Alyssa Africa Page 146
persons in which case, another or separate
examination and inspection may be made.
Examination and inspection of books of accounts
and other accounting records shall be done in the
taxpayer's office or place of business or in the office
of the Bureau of Internal Revenue. All corporations,
partnerships or persons that retire from business
shall, within ten (10) days from the date of
retirement or within such period of time as may be
allowed by the Commissioner in special cases,
submit their books of accounts, including the
subsidiary books and other accounting records to
the Commissioner or any of his deputies for
examination, after which they shall be returned.
Corporations and partnerships contemplating
dissolution must notify the Commissioner and shall
not be dissolved until cleared of any tax liability.
Any provision of existing general or special law to
the contrary notwithstanding, the books of accounts
and other pertinent records of tax-exempt
organizations or grantees of tax incentives shall be
subject to examination by the Bureau of Internal
Revenue for purposes of ascertaining compliance
with the conditions under which they have been
granted tax exemptions or tax incentives, and their
tax liability, if any.
RR No. 17-2013 dated September 27, 2013
RR No. 5-2014 dated July 30, 2014
4. Tax Assessment
CIR vs. Pascor Realty (GR No. 128315 dated
June 29, 1999)
Facts:
Issues: (1) Whether or not the criminal complaint
for tax evasion can be construed as an
assessment; and (2) Whether or not an
assessment is necessary before criminal charges
for tax evasion may be instituted;
Held: (1) No, it cannot be construed as an
assessment. Not all documents coming from the
BIR containing a computation of the tax liability can
be deemed assessments.
To start with, an assessment must be sent to and
received by a taxpayer, and must demand payment
of the taxes described therein within a specific
period. Thus, the NIRC imposes a 25 percent
penalty, in addition to the tax due, in case the
taxpayer fails to pay deficiency tax within the time
prescribed for its payment in the notice of
assessment. Likewise, an interest of 20 percent per
Taxation Law
annum, or such higher rates as may be prescribed
by rules and regulations, is to be collected form the
date prescribed for its payment until the full
payment. 12
The issuance of an assessment is vital in
determining, the period of limitation regarding its
proper issuance and the period within which to
protest it. Section 203 of the NIRC provides that
internal revenue taxes must be assessed within
three years from the last day within which to file the
return. Section 222, on the other hand, specifies a
period of ten years in case a fraudulent return with
intent to evade was submitted or in case of failure
to file a return. Also, Section 228 of the same law
states that said assessment may be protested only
within thirty days from receipt thereof. Necessarily,
the taxpayer must be certain that a specific
document constitutes an assessment. Otherwise,
confusion would arise regarding the period within
which to make an assessment or to protest the
same, or whether interest and penalty may accrue
thereon.
It should also be stressed that the said document is
a notice duly sent to the taxpayer. Indeed, an
assessment is deemed made only when the
collector of internal revenue releases, mails or
sends such notice to the taxpayer.
In the present case, the revenue officers' Affidavit
merely contained a computation of respondents' tax
liability. It did not state a demand or a period for
payment. Worse, it was addressed to the justice
secretary, not to the taxpayers.
(2) No, it is not necessary. The issuance of
an assessment must be distinguished from the
filing of a complaint. Before an assessment is
issued, there is, by practice, a pre-assessment
notice sent to the taxpayer. The taxpayer is then
given a chance to submit position papers and
documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an
assessment signed by him or her is then sent to the
taxpayer informing the latter specifically and clearly
that an assessment has been made against him or
her. In contrast, the criminal charge need not go
through all these. The criminal charge is filed
directly with the DOJ. Thereafter, the taxpayer is
notified that a criminal case had been filed against
him, not that the commissioner has issued an
assessment. It must be stressed that a criminal
complaint is instituted not to demand payment, but
to penalize the taxpayer for violation of the Tax
Code.
Alyssa Africa Page 147
5. Pre-assessment Notice (PAN)/when not
required
RR 18-2013
3.1.1 Preliminary Assessment Notice (PAN). If
after review and evaluation by the Commissioner or
his duly authorized representative, as the case may
be, it is determined that there exists sufficient basis
to assess the taxpayer for any deficiency tax or
taxes, the said Officer shall issue to the taxpayer, a
Preliminary Assessment Notice (PAN) for the
proposed assessment. It shall show in detail the
facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment
is based.
If the taxpayer fails to respond within 15 days
from the date of receipt of the PAN, he shall be
considered in default, in which case a Formal Letter
of Demand and Final Assessment Notice
(FLD/FAN) shall be issued calling for payment of
the taxpayers deficiency tax liability, inclusive of
the applicable penalties.
If the taxpayer, within 15 days from the date of
receipt of the PAN, responds that he/it disagrees
with the findings of deficiency tax or taxes, an
FLD/FAN shall be issued within 15 days from
filing/submission of the taxpayers response, calling
for payment of the taxpayers deficiency tax liability,
inclusive of the applicable penalties.
Requisites of a Valid PAN:
1. Must be issued by the CIR or his duly authorized
representative. The duly authorized representatives
are:
a. Revenue Regional Directors;
b. ACIR-LTS; and
c. ACIR- Enforcement and Advocacy
Service
2. Must be served to the taxpayer personally and if
not practicable, by substituted service or by mail;
3. Must be in writing and contain the facts and law
on which the proposed assessment is based.
4. The assessment was conducted within the scope
and authority given by a valid Letter of Authority.
3.1.2 Exceptions to Prior Notice of the
Assessment. Pursuant to Section 228 of the Tax
Code, as amended, a PAN shall not be required in
any of the following cases:
(i) When the finding for any deficiency tax is the
result of the mathematical error in the computation
of the tax appearing on the face of the tax return
filed by the taxpayer; or
Taxation Law
(ii) When a discrepancy has been determined
between the tax withheld and the amount actually
remitted by the withholding agent; or
(iii) When a taxpayer who opted to claim a refund or
tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over
and automatically applied the same amount
claimed against the estimated tax liabilities for the
taxable quarter or quarters of the succeeding
taxable year; or
(iv) When the excise tax due on excisable articles
has not been paid; or
(v) When an article locally purchased or imported
by an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and spare
parts, has been sold, traded or transferred to non-
exempt persons.
In the above-cited cases, a FLD/FAN shall be
issued outright.
(NOTE: METER Mathematical Error, Excise Tax,
Tax withheld, Exempt person, Refund or tax credit)
6. Notice of Assessment or Formal Assessment
Notice (FAN)
7. Deficiency vs. Delinquency
Delinquent Tax Deficiency Tax
Collection
Can be immediately Can be collected also
collected through administrative
administratively through and/or judicial remedies
the issuance of a but has to go through
warrant of distrain and the process of
levy, and/or judicial
action
8. Jeopardy Assessment
Sec. 3 (1)(a) of RR No. 30-02 dated December
16, 2002
Jeopardy assessment
Refers to a tax assessment which was assessed
without the benefit of complete or partial audit by an
authorized revenue officer, who has reason to
believe that the assessment and collection of a
deficiency tax will be jeopardized by delay because
of the taxpayers failure to comply with the audit
and investigation requirements to present his books
of accounts and/or pertinent records, or to
Alyssa Africa Page 148
substantiate all or any of the deductions,
exemptions, or credits claimed in his return.
9. Power of the Commissioner to assess
deficiency tax / best evidence obtainable
Revenue Memorandum Circular No. 23-00 dated
November 27, 2000
Bonifacia Sy Po vs. CTA (164 SCRA 524)
Fitness By Design, Inc. vs. CIR (GR No. 177982
dated October 17, 2008)
10. Rule on Amendment of Returns
11. Power to issue Subpoena Duces Tecum
Revenue Memorandum Order No. 045-10 dated
May 12, 2010
Revenue Memorandum Order No. 10-13 dated
April 17, 2013
Revenue Memorandum Order No. 08-14 dated
January 29, 2014
B. Period to assess deficiency tax
1. Prescription
a. Rationale/Construction/Interpretation
Republic vs. Ablaza (108 Phil 1105)
Facts:
Issue:
Held:
b. Ordinary 3 years from date of filing (Sec.
203, NIRC)
c. Extraordinary 10 years from discovery of
fraud, falsity, or omission(see also Sec. 248(B)
d. Counting of periods (Art. 13 of NCC vs. Sec.
31 of Revised Admin Code)
CIR vs. Primetown Property Group (GR No.
162155, August 28, 2007)
e. Rule if wrong returns/amended return
CIR vs. Ayala Securities (GR No. L-29485, dated
November 21, 1980)
Butuan Sawmill, Inc. vs. CTA (GR No. L-20601,
February 28, 1966)
CIR vs. Phoenix (GR No. L-19727, May 20, 1965)
CIR vs. Gonzales (18 SCRA 757)
2. Suspension of prescriptive periods/
exceptions
Secs. 203, 222 and 223 NIRC
Taxation Law
Revenue Memorandum Order No. 20-90, as
amended by Revenue Delegation Authority
Order No. 05-01 dated August 2, 2001
(Execution of waiver of statute of limitations)
RMO No. 14-2016 April 4, 2016
Cases on Sec. 222 and 223:
Republic vs. Ret (GR No. L-13754 dated March
31, 1962)
BPI vs. CIR (GR No. 139736, October 17, 2005)
Continental Micronesia, Inc. Phil. Branch vs.
CIR (CTA Case No. 6191, March 22, 2006)
Phil. Journalists, Inc. vs. CIR (GR No. 162852,
December 16, 2004)
Facts:
For the calendar year ended December 31,
1994, petitioner Philippine Journalists, Inc. filed an
Annual Income Tax and paid the tax due. On
August 10, 1995, a revenue officer of the BIR
issued a latter of authority to examine the books of
the petitioner and other accounting records for
internal revenue taxes for the period of January 1,
1994 to December 31, 1994. Upon examination,
the petitioner was told that there were tax
deficiencies that the latter must pay. In a letter
dated August 29, 1997, the petitioner was invited to
a formal conference on September 15, 1997 to
object and present evidence supporting its
objections to the assessment. On September 22,
1997, the petitioner executed a Waiver of Statute
of Limitation which waived the running of the
prescriptive period under Section 223 and 224 of
the NIRC and consented to the assessment and
collection of taxes which may be found even after
the lapse of the period of limitations until the
completion of the investigation.
On July 2, 1998, the revenue officer
submitted an audit report recommending the
issuance of the assessment which lowered the
original assessment. On March 16, 1990, a
preliminary collection letter was sent to the
petitioner to pay the assessment within 10 days
from receipt. A Final Notice Before Seizure was
then issued on November 10, 1990 again to the
petitioner, giving it another 10 days to pay the
amount. It was received on November 24, 1999. On
November 26, 1999, petitioner clarified on how the
CIR reached its computation of the tax liability, and
requested a 30 day extension but there was no
reply. A second follow-up letter was sent by the
petitioner but to no avail along with its contest on
the assessment. On March 28, 2000, a Warrant of
Distraint and/or Levy was issued by the BIR to the
Alyssa Africa Page 149
petitioner. Hence, the petitioner filed a petition for
review with the CTA which was granted by the CTA.
Upon motion for reconsideration by the
Commissioner, the CA reversed the CTA ruling. The
CA contends that the CTA should not have
entertained the petition at all on the ground that
there was no valid waiver executed by the
petitioner because (1) it does not indicate a definite
expiration date; (2) it does not state the date of
acceptance by the BIR; and (3) the petitioner was
not furnished a copy of the waiver. The judgment
was appealed by the petitioner with the SC.
Issue: Whether or not there was a valid waiver
which extended the three year period of
prescription to make an assessment under Section
222 of the Tax Code.
Held:
No, there is no valid waiver. In order for
there to be a valid waiver, RMO No. 20-90 provides
the following requisites: (1) the waiver must be in
the form identified; and (2) the Commissioner of
Internal Revenue or his duly authorized
representative must have signed the waiver
indicating that the Bureau has accepted and agreed
to the waiver with a date of acceptance; and (3) the
taxpayer must be furnished a copy of the
assessment.
As found by the CTA the waiver is not valid
and binding because it does not conform with RMO
No. 20-90. It did not state a definite agreed date,
violating Section 222(b) of the NIRC, and was also
not signed by the Commissioner or his duly
authorized representative, but by a revenue district
officer. Furthermore, the records show that the
petitioner was not furnished a copy of the waiver.
Waivers must be executed in triplicate under RMO
No. 20-90 with the second copy to be sent to the
taxpayer. Such requirement is necessary as it not
only furnishes the taxpayer with a copy but also
gives notice to the acceptance by the BIR and the
perfection of the agreement. Hence, the waiver,
being incomplete, did not toll nor extend the
running of the prescription period.
CIR vs. Kudos Metal (GR No. 178087, May 5,
2010)
Facts:
On April 15, 1999, respondent Kudos Metal
Corporation filed its Annual Income Tax Return for
the taxable year 1998. On September 7, 1999, the
BIR served 3 notices of presentation of records to
respondent but the latter failed to comply. BIR
Taxation Law
issued a Subpoena Duces Tecum dated September
21, 2006 which was acknowledged in a letter dated
October 20, 2000.
On December 10, 2001, the accountant of
the respondent executed a Waiver of the Defense
of Prescription which was notarized on January 22,
2002 and received by the BIR Enforcement Service
on January 31, 2002. On February 4, 2002, it was
accepted by the Assistant Commissioner of the
Enforcement Service. This was followed by a
Second Waiver of Defense of Prescription on
February 18, 2003 and was received by BIR on
February 28, 2003. On August 25, 2003, BIR
issued a Preliminary Assessment Notice for the
taxable year 1998 against the respondent followed
by a Formal Letter of Demand with Assessment
Notices for the taxable year 1998, dated September
26, 2003 but received on November 12, 2003.
Respondent challenged the assessment by
filing a protest on various tax assessments on
December 3, 2003. On June 22, 2004, BIR
rendered a final Decision for the immediate
payment of the tax liabilities. Believing that the
governments right to assess the taxes had
prescribed, the respondent filed on August 27, 2004
a petition for review with the CTA. The CTA
cancelled the assessment notices and declared
that the waiver of the statute of limitations is
incomplete and defective for failure to comply with
the provisions of Revenue Memorandum Order
(RMO) No. 20-90. The same was affirmed by the
CTA En Banc. Hence, the petition was elevated to
the SC.
Issue: Whether or not the governments right to
assess unpaid taxes of respondent prescribed.
Held:
Yes, the right to assess has prescribed.
Section 203 of the NIRC mandates the government
to assess internal revenue taxes within 3 years
from the last day prescribed by law for the filing of
the tax return or the actual date of filing of such
return, whichever comes later. Hence, an
assessment notice issued after the 3 year
prescriptive period is no longer valid and effective
except if there is a valid waiver executed under
Section 222 of the NIRC which extends the period
to assess and collect taxes.
In this case, while waivers were executed,
they fail to extend the assessment and collection
period. RMO 20-90 states that in order for there to
be a valid waiver, the following requisites must be
present: (1) the waiver must be in the proper form;
Alyssa Africa Page 150
(2) the waiver must be signed by the taxpayer
himself of his duly authorized representative; (3)
the waiver should be duly notarized; (4) the CIR or
the revenue official authorized by him must sign the
waiver indicating that the BIR has accepted and
agreed to the waiver; (5) both the date of execution
by the taxpayer and date of acceptance by the
Bureau should be before the expiration of the
period of prescription or before the lapse of the
period agreed upon in case a subsequent
agreement is executed; and (6) the waiver must be
executed in three copies, the first to be attached to
the docket of the case, the second for the taxpayer,
and the third for the office accepting the waiver.
The parties in this case failed to do three of these
requisites, namely, (1) notarization of the waiver;
(2) indication of date of acceptance; and (3) receipt
of the respondent of its file copy. Due to said
defects there can be no extension and the petition
is denied.
RCBC vs. CIR (GR No. 170257, September 7,
2011)
Aznar vs. CTA (58 SCRA 519)
Republic vs. Ker (18 SCRA 208)
CIR vs. Suyoc (104 Phil. 819)
CIR vs. Phil Global Communication (GR No.
167146, October 31, 2006)
CIR vs. United Salvage and Towage (Phils.), Inc.
(GR No. 197515 dated July 2, 2014)
CIR vs. BASF Coating + Inks Phils., Inc. (GR No.
198677 dated November 26, 2014)
CIR vs. Next Mobile, Inc. (GR No. 212825 dated
December 29, 2015)
C. Requisites of a valid assessment
Sec. 3 of RR No. 12-99, as amended by RR No.
18-2013
1. Due Process
Collector vs. Benipayo (4 SCRA 182)
CIR vs. Enron Subic (GR No. 166387 dated
January 19, 2009)
CIR vs. Azucena T. Reyes (GR No. 159694,
January 27, 2006)
A Brown Co., Inc. vs. CIR (CTA Case No. 6357,
June 7, 2004)
CIR vs. Menguito (GR No. 167550, September
17, 2008)
CIR vs. Metro Star Superama, Inc., G.R. No.
185371, December 8, 2010
2. Power of CIR to issue assessments
Meralco vs. Savellano (117 SCRA 804)
Taxation Law
Maceda vs. Macaraig (197 SCRA 771)
3. Modes of Service of Assessments
4. When Assessment made
Nava vs. CIR (GR No. L-19470, January 30,
1965)
Barcelon, Roxas Securities vs. CIR, (GR No.
157064, dated August 7, 2006)
II. Protesting an assessment/ Remedy BEFORE
payment
A. How to protest or dispute an assessment
administratively
Sec. 228, NIRC
Sec. 3.1.5, RR No. 12-99, as amended by RR No.
18-2013
1. When to file protest within 30 days from
receipt of the FAN
2. Where to file
3. Reinvestigation vs. Reconsideration
BPI vs. CIR (GR No. 139736, October 17, 2005)
4. Other requirements
a. Submission of relevant documents
b. Payment of protest not required under the
NIRC
5. Effects of filing of the protest
6. Effects of failure to file protest / failure to
submit relevant documents
Marcos II vs. CA (GR No. 120880 dated June 5,
1997)
Republic vs. Ker (18 SCRA 208)
Prulife of UK Insurance Corp vs. CIR(CTA Case
No. 6774 dated September 11, 2007)
ABN-AMRO Savings Bank Corp vs. CIR (CTA
Case No. 7089 dated September 10, 2008)
CIR vs. First Express Pawnshop (GR Nos.
172045-06 dated June 16, 2009)
B. Commissioner of Internal Revenue renders a
decision on the disputed assessment
Oceanic Wireless Network, Inc. vs. CIR (GR No.
14380, dated December 9, 2005)
C. Remedy of the taxpayer
Sec. 3.5.1, RR No. 12-99, as amended by RR No.
18-2013
Sec. 228 of the NIRC
RA No. 9282, as amended by RA No. 9503
Alyssa Africa Page 151
Revised Rules of the CTA, AM No. 05-11-07-CTA
dated November 22, 2005, as amended on
September 16, 2008
1. If protest is expressly denied
2. CIRs actions equivalent to denial of protest
3. CIR fails to act on the protest within 180 days
from submission of relevant documents
Lascona Land vs. CIR (GR No. 171251, March 5,
2012)
RCBC vs. CIR (GR No. 168498, April 24, 2007)
4. Remedy in case CIR files a case or issues a
warrant of distraint or levy
5. Effect of failure to protest/appeal on time
CIR vs. Concepcion (22 SCRA 1058)
Phil. Journalists, Inc. vs. CIR (GR No. 162852,
December 16, 2004)
6. Matter appealable to the CTA
7. Appeal to the CTA En Banc / Supreme Court
Fishwealth Canning Corp. vs. CIR (GR No.
179343 dated January 21, 2010)
Allied Banking Corporation vs. CIR (GR No.
175097 dated February 5, 2010)
Republic vs. Lim Tian Teng Sons (GR No. L-
21731 dated March 31, 1966)
ABN-AMRO Savings Bank Corp vs. CIR (CTA
Case No. 7089 dated September 10, 2008)
Advertising Associates vs. CA (133 SCRA 765)
CIR vs. Algue (158 SCRA 9)
Yabes vs. Flojo (GR No. L-46954, July 20, 1982)
CIR vs. Union Shipping (185 SCRA 547)
CIR vs. Isabela Cultural Corp. (GR No. 135210,
July 11, 2001)
CIR vs. Liquigaz Philippines Corporation, GR
No. 215534 dated April 18, 2016
D. Non-retroactivity of rulings (Sec. 246, NIRC)
1. BIR Rulings
RR No. 5-2012
2. Rulings of first impression (Sec. 7(B) NIRC)
3. Review/Appeal to Sec. Of Finance (Sec. 4,
NIRC)
CIR vs. Phil. Healthcare Providers (GR No.
168129, April 24, 2007)
CIR vs. Burmeister and Wain GR No. 153205
dated Jaunary22, 2007
Taxation Law
Phil. Bank of Communications vs. CIR (GR No.
112024, January 28, 1999)
CIR vs. CA (GR No. 117982, February 6, 1997)
[read also concurring opinion of Justice Vitug]
CIR vs. Filinvest Development Corporation (GR
Nos. 163653 and 167689, July 19, 2011)
CIR vs. San Roque Power (GR No. 187485 dated
February 12, 2013) and other cases
CIR vs. San Roque Power (GR No. 187485 dated
October8, 2013) and other cases
Philamlife vs. Secretary of Finance (GR No.
210987 dated November 24, 2014)
Banco De Oro vs. Republic (GR No. 198756,
January 13, 2015)
III. Remedies Available to the Government
A. Prescriptive period to collect
Sec. 222, NIRC
Republic vs. Hizon (GR No. 130430. December
13, 1997)
CIR vs. Hambrecht & Quist Philippines, Inc. (GR
No. 169225 November 17, 2010)
B. Administrative remedies / Summary
Remedies
Secs. 205-217
1. Distraint of personal property
Secs. 205-207, 217, 208-209, 210, 212, NIRC
Revenue Memorandum Circular No. 5-01 dated
February 19, 2001
2. Levy of Real Property
Secs. 205-207, 217, 208-209, 213-214, NIRC
3. Forfeiture
Sec. 215, NIRC
Castro vs. CIR (GR No. L-12174, April 26, 1962)
4. Tax lien
Sec. 219, NIRC
Republic vs. Enriquez (166 SCRA 608)
CIR vs. NLRC (238 SCRA 42)
Hong Kong Shanghai Bank vs. Rafferty (39
SCRA 145)
5. No injunction to restrain collection of taxes
Sec. 218, NIRC
Rule 10, Revised Rules of the CTA, AM No. 05-
11-07-CTA dated November 22, 2005, as
amended on September 16, 2008
Alyssa Africa Page 152
Revenue Memorandum Order No. 42-10 dated
May 4, 2010.
C. Judicial Remedies
Sec. 205
Secs. 220-221, NIRC
Republic vs. Hizon (GR No. 130430 December
13, 1997)
Mambulao Lumber vs. Republic (132 SCRA 1)
Fernandez Hermanos vs. CIR (GR No. L-21551,
September 30, 1969)
PNOC vs. CIR (GR No. 109976, April 26, 2005)
IV. Statutory Offenses and Penalties
A. Civil Penalties / Surcharge / Interest
Secs. 247-251, NIRC
RR No. 12-99, as amended by RR No. 18-2013
1. Applicable Interest Rate
2. How to compute interest
3. Rules on interest
BPI vs. CIR (GR No. 137002, July 27, 2006)
Republic Cement Corp. vs. CIR (CTA Case No.
7144, August 2, 2011 Amended Decision)
4. Deficiency vs. Delinquency Tax
5. Surcharge: 25% or 50%
Sec. 248, NIRC
Castro vs. CIR (GR No. L-12174, April 26, 1962)
Liquigaz Philippines Corporation vs. CIR, CTA
EB Case No. 1117 dated September 21, 2015
a. False vs. Fraudulent return
b. Fraud Assessment
c. Mandatory imposition of penalties
Phil. Refining Co. vs. CA (GR No. 118794 dated
May 8, 1996)
d. When penalties may be waived
Lhuillier Pawnshop vs. CIR (GR No. 166786
dated September 11, 2006)
e. Rule on prima facie fraud
Sec. 248(B), NIRC
Aznar vs.CIR (58 SCRA 519)
Javier vs. CIR (199 SCRA 824)
B. Crimes / Offenses / Penalties / Forfeitures
Taxation Law
Secs. 220-221, 224-226, NIRC
Secs. 253-281, NIRC
Revenue Memorandum Circular No. 101-90
dated November 26, 1990
1. Precondition before a criminal case may be
filed
Ungab vs. Cusi (97 SCRA 877)
CIR vs. CA (257 SCRA 200)
CIR vs. Pascor Realty (GR No. 128315 dated
June 29, 1999)
Adamson vs. CA (GR No. 120935, May 21, 2009)
2. Compromise Penalty
Nature and enforcement
Revenue Memorandum Order No. 7-15 dated
January22, 2015
CIR vs. Liangga Bay Logging (GR No. L-35266,
January 21, 1991)
3. Elements of tax evasion
CIR vs. The Estate of Benigno Toda, Jr. (GR No.
147188, September 14, 2004)
4. Persons liable in case taxpayer is a juridical
entity
5. Payment of tax in criminal cases
Sec. 253 (a), NIRC
Sec. 205 (b) last paragraph
Republic vs. Patanao (GR No. L-22356, July 21,
1967)
Castro vs. CIR (GR No. L-12174, April 26, 1962)
6. Probable Cause
BIR vs CA, GR No. 197590 dated November 25,
2015
7. Crimes under Secs. 254 and 255
8. Civil liability in criminal cases
People vs. Galero (CTA Criminal Case No.O-055.
September 30, 2009)
People vs. Mendez (CTA Criminal Case Nos. O-
013 &O-015, January 5, 2011)
People vs. Kintanar (CTA Criminal Case No. O-
030 dated August11, 2010)
People vs. Santos (CTA Criminal Case No. O-
012dated January16, 2013)
People vs. Spouses Castillo (CTA CTA Criminal
Case No. O-219 dated October 7, 2013)
9. Prescription of violations of the NIRC
Alyssa Africa Page 153
Lim vs. CA (190 SCRA 616)
V. Claims for refund and credit of taxes/Remedy
AFTER payment
A. Who may file claim for refund/tax credit
1. Basis of Tax Refunds
CIR vs. Acesite Phils. (GR No. 147295, February
16, 2007)
2. Taxpayer/withholding agent
CIR vs. Procter & Gamble (204 SCRA 377)
CIR vs. Smart Communications, Inc. (GR Nos.
179045-46, August 25, 2010)
Honda Cars Philippines, Inc. vs. Honda Cars
Technical Specialist and Supervisors Union
(GR No. 204142 dated November 19, 2014)
CIR vs. Philippine Associated Smelting and
Refining Corporation, GR No. 186223 dated
October 1, 2014
3. Requisites for a valid claim for refund /
Creditable Withholding Tax Cases
Koppel (Phils) vs. CIR (GR No. L-10550,
September 19, 1961)
CIR vs. Meralco, GR No. 181459 dated June 9,
2014
CIR vs. Far East Bank GR No. 173854 March 15,
2010
CIR vs. Concepcion (22 SCRA 1058)
CIR vs. CA (234 SCRA 348)
PNB vs. CIR (GR No. 206019 dated March 18,
2015
CIR vs. PNB, GR No. 180290 dated September
29, 2014
4. Refunds where written claim is not needed
Sec. 204 (3), NIRC
Sec. 229, NIRC
Vda de San Agustin vs. CIR, GR No. 138485,
September 10, 2001
5. Refunds of Corporate taxpayers/Irrevocability
Rule
Sec. 76, NIRC
ACCRA Investments vs. CA (204 SCRA 957)
CIR vs. TMX Sales (205 SCRA 184)
Systra Phils. Inc. vs. CIR (GR No. 176290,
September 21, 2007)
Sithe Phils. Holdings vs. CIR (CTA Case No.
6274, April 4, 2003)
Taxation Law
BPI-Family Savings Bank, Inc. vs. CA, CTA and
CIR (GR No. 122480, April 12, 2000)
Philam Asset Management, Inc. vs. CIR (GR
Nos. 156637/162004, December 14, 2005)
CIR vs. BPI (GR No. 178490, July 7, 2009)
Asia World Properties vs. CIR (GR No. 171766,
July 29, 2010)
IMPSA Construction Corporation vs. CIR (CTA
EB Case No. 685, May 24, 2011)
CIR vs. Rhombus Energy Incorporated (CTA EB
Case No. 803, October 11, 2012)
Winbrenner & Inigo Insurance Brokers, Inc. (GR
No. 206526 dated January 28, 2015)
Republic vs. Team (Phils.) Energy Corporation,
(GR No. 188016 dated January 14, 2015) read
also concurring opinion of CJ Sereno
6. Rule in case of Merger/Corporate taxpayers
contemplating dissolution
Sec. 52 (C), NIRC
BPI vs. CIR (GR No. 144653, August 28, 2001)
7. When 2 year period does not apply
CIR vs. PNB (GR No. 161997, October 25, 2005)
8. Remedy of the taxpayer
Sec. 229, NIRC
RA No. 9282, as amended by RA No. 9503
Revised Rules of the CTA, AM No. 05-11-07-CTA
dated November 22, 2005, as amended on
September 16, 2008
a. CIR renders a decision
b. CIR does not render a decision
c. Appeal to the CTA
9. Issuance of Tax Credit Certificate
Secs.203 (C), 230, NIRC
RR No. 05-00 dated July 19, 2000
RR No. 14-11 dated July 29, 2011
a. Tax Credit, Tax Credit Certificate, Tax Debit
Memo
b. Sources of Tax Credit
c. Uses of Tax Credit
d. Sale / Assignment of Tax Credit
e. Validity, Conversion and Validation
f. Forfeiture of Cash Refunds / Tax Credit
10. Erroneously Refunded Tax
Guagua Electric Light vs. CIR (GR No. L-23611,
April 24, 1967)
VI. Jurisdiction of the Court of Tax Appeals
Alyssa Africa Page 154
RA No. 9282, as amended by RA No. 9503
Revised Rules of the CTA, AM No. 05-11-07-CTA
dated November 22, 2005, as amended on
September 16, 2008
1. Why was the CTA created?
Philippine Refining Co. vs. CA (256 SCRA 661
2. Weight given to CTA decisions
3. Composition of the Court (No. of Divisions
and Justices, the CTA En Banc)
4. Reversal of Decisions of CTA Division
5. Jurisdiction of CTA Division
a. Constitutionality/Validity of Regulations/Tax
Laws
Asia International Auctioneers vs. Parayno GR
No. 163445, December 18, 2007.
British American Tobbaco vs. Camacho, GR No.
163583, August 20, 2008.
St. Paul College vs. of San Rafael, CTA EB Case
No. 874 dated May 27, 2013.
Philamlife vs. Secretary of Finance (GR No.
210987 dated November 24, 2014)
Banco De Oro vs. Republic (GR No. 198756,
January 13, 2015)
CIR vs. CTA and Petron Corporation, GR No.
207843 dated July 15, 2015
b. Civil/Criminal Cases
Adamson vs. CA (GR No. 120935, May 21, 2009)
CIR vs. Hambrecht & Quist Philippines,
Inc., G.R. No. 169225, November 17, 2010
City of Manila vs. Grecia-Cuerdo, GR No.
175723 dated February 4, 2014.
6. Jurisdiction of CTA EB
7. Suspension of Collection of Tax
8. Appeal to the SC
VII. Abatement of Tax / Tax Compromise
Secs. 7 and 204, NIRC
RR No. 13-01
RR No. 30-02
RR No. 8-04
RR No. 4-12
RR No. 9-13
A. Authority of CIR to abate taxes
1. Grounds for abating taxes and penalties
2. Conditions
Taxation Law
B. Power to compromise
1. Cases that can be compromised
2. Cases that cannot be compromised
3. Timing of payment of amount offered as
compromise
4. Basis for acceptance of compromise
settlement and rates
CIR vs. Azucena T. Reyes (GR No. 159694,
January 27, 2006)
LOCAL AND REAL PROPERTY TAXATION
Republic Act No. 7160, Local Government Code
(LGC) of 1991, as amended
Implementing Rules and Regulations of the
LGC
LOCAL TAXATION
I. PRELIMINARY MATTERS
a. Power to Tax of Local Government Units
i. Sec. 5 Art. X, 1987 Constitution (compare with
1935 and 1973 provisions)
ii. Sec. 129, LGC
Pepsi Cola Bottling vs. Municipality of Tanuan
69 SCRA 460
Mactan Cebu International Airport Authority vs.
Marcos GR No. 120082, Sept. 11, 1996
Manila Electric Company vs. Province of
Laguna GR No. 131359, May 5, 1999
NPC vs. City of Cabanatuan GR No. 149110,
April 9, 2003
City Government of Quezon City vs. Bayan
Telecommunications GR No. 162015, March 6,
2006
iii. Local Taxing Authority (Sec. 132)
1. Construction of Tax Ordinances (Sec. 5b)
Petron Corp. vs. Mayor Tobias Tiangco GR
No. 158881, April 16, 2008
iv. Procedure for Approval of and Effectivity of
Tax Ordinances (Sec. 187)
Hagonoy Market vs. Mun. of Hagonoy GR No.
137621, Feb. 6, 2002
v. Publication (Sec. 188)
b. Other Preliminary Matters
i. Residual Powers of LGUs -Power to Levy
Other Taxes, Fees or Charges (Sec. 186)
ii. Doctrine of Pre-emption or Exclusionary Rule
Alyssa Africa Page 155
Victorias Milling Co., Inc. vs. Municipality of
Victorias L-21183, September 27, 1968
II. GENERAL PROVISIONS
a. Scope of taxing powers (Sec. 128)
b. Fundamental Principles (Sec. 130)
c. Definitions (Sec. 131)
d. Common Limitations
i. Income Tax
1. Correlate with Sec. 143 (f)
ii. Documentary Stamp Tax
iii. Transfer Taxes
1. Correlate with Sec. 135
iv. Customs Duties
v. Taxes, Fees and Charges (TFC) on Goods
Passing Through the Territorial Jurisdiction of
LGUs
1. Correlate with Sec. 155
Panaligan vs. City of Tacloban GR No. L-9319,
September 27, 1957
Palma Development Corp vs. Municipality of
Malangas GR No. 152492, October 16, 2003
vi. TFC on products sold by marginal farmers of
fishermen
1. Definition of Marginalized Fishermen (Sec.
122)
City of Cebu vs. IAC 144 SCRA 710
vii. Taxes on BOI-registered enterprises
viii. Excise taxes under the NIRC/TFC on
Petroleum Products
Petron Corp. Vs. Mayor Tobias Tiangco GR
No. 158881, April 16, 2008
Province of Bulacan vs. CA GR No. 126232,
November 27, 1998
Batangas City vs. Pilipinas Shell Petroleum
Corporation GR No. 187631 dated July 8,
2015.
ix. Percentage taxes and VAT
Pepsi Cola Bottling vs. Municipality of Tanuan
69 SCRA 460
Matalin Coconut Co, Inc. vs. The Municipal
Council of Malabang, Lanao del Sur, GR No. L-
28138 August 13, 1986
Pelizloy Realty Corp., vs. Province of Benguet,
GR No. 183137, April 10, 2013
Taxation Law
x. Taxes on transportation contractors and
common carriers
First Philippine Industrial Corporation vs. CA
GR No. 125948, December 29, 1998
City of Manila vs. Colet, GR No. 120051,
December 10, 2014
xi.Taxes on premiums
xii. TFC for registration of motor vehicles and
issuance of licenses for driving
1. Correlate with Sec. 458 (3)(vi) of the LGV and
Art. 99(a)(3)(vi) of the IRR of the LGC
LTO vs. City of Butuan GR No. 131512,
January 20, 2000
xiii. Taxes, Fees, or Charges on Philippine
Products Actually Exported;
1. Correlate with Sec. 143 (c)
xiv. TFC on CBBEs under RA No. 6810 and RA
6983
xv. TFC on the National Government, its
agencies and instrumentalities and LGUs
Philippine Fisheries Devt Authority vs. CA GR
No. 169836, GR No. July 31, 2007
Mactan Cebu International Airport Authority vs.
Marcos GR No. 120082, Sept. 11, 1996
MIAA vs. CA GR No. 155650, July 20, 2006
MIAA vs. City of Pasay GR No. 163072, April 2,
2009
City of Davao City vs. RTC GR No. 127383,
August 18, 2005
(To be discussed together with Secs.232 and
234 on Real Property Tax)
III. TAXING AND OTHER REVENUE RASING
POWERS OF LGUS
a. Provinces
i. Local Transfer Tax (Sec. 135)
ii. Business Tax on Printing and Publication
(Sec. 136)
iii. Franchise Tax (Sec. 137)
NPC vs. City of Cabanatuan GR No. 149110,
April 9, 2003
Quezon City vs. ABS-CBN GR No. 166408.
October 6, 2008
City of Iriga vs. Camarines Sur III Electric
Cooperative, Inc., GR No. 192945, September 5,
2012
Smart Communications vs. City of Davao GR
No. 155491, September 16, 2008 (Also read
Alyssa Africa Page 156
decision on Motion for Reconsideration dated
July 21, 2009)
iv. Tax on Sand, Gravel and Quarry Resources
(Sec. 138)
Municipality of San Fernando vs. Sta. Romana
L-GR No. 30159, Mar. 31, 1987
Province of Bulacan vs. CA GR No. 126232,
November 27, 1998
v. Professional Tax (Sec. 139)
Definition of Professionals (Sec. 238 (f) IRR of
the LGC)
Professional practices his profession in several
places (Sec. 228 (b) IRR of LGC)
vi. Amusement Tax (Sec. 140) as amended by
RA No. 9640 dated May 21, 2009
Pelizloy Realty Corp., vs. Province of Benguet,
GR No. 183137, April 10, 2013 (Compare with
old case of PBA vs. CA GR No. 119122, August
8, 2000)
Alta Vista Golf and Country Club vs. The City of
Cebu, GR No. 180235 dated January 20, 2016
vii. Annual Fixed Tax on Delivery Trucks / Vans
(Sec. 141)
b. Municipalities
i. Business Taxes (Sec. 143)
Ericsson Telecommunication vs. City of Pasig
GR No. 176667, November 22. 2007
Facts:
Ericsson Telecommunications, Inc. was
assessed a business tax deficiency for the years
1998 and 1999 and was issued an Assessment
Notice dated October 25, 2000. Petitioner Ericsson
filed protest dated December 21, 2000 claiming that
the computation erroneous as the local business
tax was based on gross receipts and not on gross
revenue on which he was taxed. Another Notice of
Assessment was issued to the petitioner by the
respondent City of Pasig on November 19, 2001,
this time based on business tax deficiencies for
2000 and 2001. A protest was again filed by the
petitioner on January 21, 2002. Respondent denied
the protest and gave it 30 days within which to
appeal the denial. The petitioner filed a petition for
review with the RTC for the annulment and
cancellation of his deficiency local business taxes.
The respondent claims that the RTC has no
jurisdiction over the case. This petition was denied.
The CA likewise denied the petition.
Taxation Law
Issue: Whether the local business tax on
contractors should be based on gross receipts or
gross revenue.
Held:
Section 143 (e) of the Local Government
Code provides that in cases of contractors and
other independent contractors, the gross receipts
for the preceding calendar year shall be used as
basis for the imposition of local taxation. The law is
clear. The respondent contends that gross
revenues and gross receipts are the same, but the
law also provides otherwise. Gross receipts include
money or its equivalent actually or constructively
received in consideration of services rendered or
articles sold, exchanged or leased, whether actual
or constructive as defined by Section 131 of the
Local Government Code, while gross revenue
covers money or its equivalent actually or
constructively received including the value of
services rendered or articles sold, exchanged or
leased, the payment of which is yet to be received
under the International Financial Reporting
Standards. Hence, the petitioner is correct when it
raised that the respondent committed an error in
assessing the petitioners local business tax. The
petition is granted.
Yamane vs. BA Lepanto GR No 154992,
October 25, 2005
City of Manila vs. Coca Cola Bottlers, GR No.
181845, August 4, 2009
Alabang Supermarket Corporation vs. City of
Muntinlupa, CTA EB Case No. 386
February 12, 2009 (read also case decided by
the CTA Division)
Cagayan Electric Power and Light Co., Inc., vs.
City of Cagayan de Oro, GR No. 191761,
November 14, 2012.
Facts:
On January 10, 2005, the Sangguniang
Panlungsod of Cagayan de Oro passed an
ordinance imposing tax on the lease or rental of
electric and/or telecommunication posts, poles or
towers by pole owners to other pole users at 10%
of the annual rental income derived from such
lease or rental. In a letter dated March 15, 2005,
informed petitioner Cagayan Electric Power and
Light Company, Inc. (CEPALCO) of the ordinance.
On September 30, 2005, CEPALCO filed a petition
for declaratory relief assailing the validity of the
ordinance before the RTC of Cagayan de Oro on
Alyssa Africa Page 157
the ground that the tax imposed by the disputed
ordinance is in reality a tax on income and is
therefore prohibited under Section 133 of the Local
Government Code. The RTC ruled in favor of the
respondent. CEPALCO raised the issue with the
appellate court but the latter affirmed the trial court
on the ground that the petitioner failed to file a
timely appeal to the Secretary of Justice and did
not exhaust administrative remedies. Hence,
CEPALCO filed a petition for review before the SC.
Issues: Whether or not CEPALCO failed to exhaust
administrative remedies in questioning the legality
of the ordinance; and
Whether or not the ordinance violates the
LGC.
Held:
1. Yes, CEPALCO failed to exhaust
administrative remedies. It is important to note that
the ordinance is a local revenue measure governed
by the Local Government Code. Section 187 of the
said Code, states that any question on the
constitutionality or legality of tax ordinances or
revenue measures may be raised on appeal within
30 days from the effectivity thereof to the Secretary
of Justice. Looking at the ordinance, it is said to
take effect 15 days following its publication in a
local newspaper of general circulation for at least 3
consecutive days. CEPALCO not only clearly filed
its petition beyond the 30 day period provided in
Section 187, it also did not file anything before the
Secretary of Justice. Following the periods required
by law is a pre-requisite before seeking relief in
court for the speedy discharge of judicial functions
and is therefore, mandatory for all persons seeking
relief on the basis of the ordinance. Failure to
appeal is fatal to its cause. Hence,
2. Yes, Section 137 of the LGC states that
tax allowed provinces shall not exceed 50% of the
1% of the gross annual receipts. The fact that the
ordinance in question imposes a rate of 10% of the
annual rental income derived therefrom is obviously
more than what the law allows. Therefore, the
respondent city made a violation.
1. Catch all provision Sec. 143 (h)
2. Rates of Tax within Metropolitan Manila (Sec.
144)
3. Retirement of Business (Sec. 145)
Mobil Phils. vs. City Treasurer of Makati GR No.
154092, July 14, 2005
Taxation Law
4. Payment of Business Taxes (Sec. 146)
5. Situs of Tax (Sec. 150) Where to pay
business tax?
Shell Co vs. Mun. Of Sipocot 105 Phil. 1263
Phil. Match vs. City of Cebu L-30745 Jan.
1888, 197778
Iloilo bottlers vs. City of Iloilo GR No. 52019
Aug. 18, 1988 (compare with current LGC
provisions and IRR provisions on rolling
stores)
a. With Branch or Sales Outlet
b. No Branch Sales or Outlet
c. With Factories, Project Offices, Plants and
Plantations
d. Plantation Located at a place other than the
place where factory is located
e. Two (2) or more factories, project offices,
plants or plantations in different localities
f. See also IRR for rules on rolling stores (See
Art. 243 of the IRR of the LGC)
6. Fees and Charges (Sec. 147)
7. Others (Sec. 148 and Sec. 149)
c. Cities (Sec. 151)
d. Barangay
i. Tax on retailers (Sec. 152 a)
ii. Service Fees or Charges (Sec. 152 b)
iii. Barangay Clearance (Sec. 152 c)
iv. Other Fees (Sec. 152 b)
e. Common Revenue Raising Powers
i. Service Fees and Charges (Sec. 154)
ii. Public Utility Charges (Sec. 155)
iii. Toll Fees or Charges (Sec. 156)
f. Other Matters
i. Public Hearings Necessary? (Art. 324 IRR of
the LGC vs. Sec. 187)
Figuerres vs. CA, GR No. 119172, March 25,
1999
ii. Authority to Adjust Tax Rates (Sec. 191)
Alabang Supermarket Corporation vs. City of
Muntinlupa, CTA EB Case No. 386
Alyssa Africa Page 158
February 12, 2009 (read also case decided by
the CTA Division)
iii. Authority to Grant Tax Exemptions (Sec. 192)
iv. Withdrawal of Tax Exemption Privileges (Sec.
193)
PLDT vs. City of Davao GR No. 143867, August
22, 2001
NPC vs. City of Cabanatuan GR No. 149110,
April 9, 2003
v. Community Tax
1. Who may impose(Sec. 156)
2. Individuals Liable to pay (Sec. 157)
3. Juridical Persons Liable to Community Tax
(Sec. 158)
4. Exemptions (Sec. 159)
5. Place of Payment (Sec. 160)
6. Time of Payment (Sec. 161)
7. Community Tax Certificate (Sec. 162)
8. Presentation of CTC on certain occasions
(Sec. 163)
IV. COLLECTION OF TAXES AND REMEDIES
a. Collection of Taxes
i. Tax Period and Manner of Payment (Sec. 165)
ii. Accrual of Tax (Sec. 166)
iii. Time of Payment (Sec. 167)
iv. Surcharges and Penalties (Sec. 168)
NPC vs. City of Cabanatuan, GR No. 177332
dated October 1, 2014
v. Interests on Other Unpaid Revenues (Sec.
169)
vi. Collection of Local Revenues by Treasurer
(Sec. 170)
vii.Examination of Books of Accounts and
Pertinent Records (Sec. 171)
b. Remedies of the Government
i. Local Governments Lien (Sec. 173)
ii. Civil Remedies (Sec. 174)
iii. Distraint (Sec. 175)
iv. Levy of Real Property (Sec. 176)
v. Advertisement and Sale (Sec. 178)
vi. Redemption of Property Sold (Sec. 179)
vii. Purchase of Property by LGU for want of
bidder (Sec. 181)
Taxation Law
viii. Resale of Real Estate Tax for TFC
ix. Judicial Action (Sec. 183)
x.Further Distraint and Levy (Sec. 184)
xi. Personal Property Exempt from Distraint or
Levy (Sec. 185)
C. Taxpayers Remedies
i. Question Constitutionality of Ordinance (Sec.
187)
Drilon vs. Lim GR No. 111249, August 4, 1994
Facts:
The Secretary of Justice had, on appeal to
him of four oil companies and a taxpayer, declared
Ordinance No. 7794, known as the Manila Revenue
Code null and void for non-compliance with the
prescribed procedure under Section 187 of the
Local Government Code. In a petition for certiorari
filed by the City of Manila, the RTC revoked the
resolution and sustained the ordinance. The RTC
likewise declared that Section 187 of the Local
Government Code is unconstitutional because it
vests in the Secretary of Justice of the power of
control over local governments in violation of the
policy of local autonomy mandated in the
Constitution and of the specific provision therein
conferring on the President of the Philippines only
the power of supervision over local governments.
Issue: Whether or not Section 187 of the Local
Government Code is unconstitutional.
Held:
No, Section 187 of the LGC is not
unconstitutional. While it is true that the said
section authorizes the Secretary of Justice to
review only the constitutionality or legality of the tax
ordinance, and if so, revoke it, it is not
unconstitutional because it does not permit the
Secretary of Justice to substitute his own judgment
or to enact his own measure. The judgment of
validity or invalidity is not on the basis of his
discretion as to whether or not it is a bad law but
rather, to review the measure and determine if the
petitioners were acting within the functions provided
for them in the law such as following the
procedures thereto. The judgment of the RTC is
reversed.
Cagayan Electric Power and Light Co., Inc., vs.
City of Cagayan de Oro, GR No. 191761,
November 14, 2012.
Alyssa Africa Page 159
Smart Communications, Inc. vs. Municipality of
Malvar, GR No. 204429, GR No. 204429 dated
February 18, 2014.
ii. Publication (Sec. 188)
Coca-Cola Bottlers vs. City of Manila - GR No.
156252, June 27, 2006
iii. Periods of Assessment and Collection (Sec.
194)
iv. Protest of Assessment (Sec. 195)
San Juan vs. Castro GR No. 174617,
December 27, 2007
PLDT vs. City of Balanga, CTA EB Case No. 413,
June 3, 2009
China Banking vs. City Treasurer of Manila, GR
No. 204117 dated July 1, 2015 (jurisdiction
issue)
v. Appeal to the CTA
vi. Claim for Refund (Sec. 196)
Alabang Supermarket Corporation vs. City of
Muntinlupa, CTA EB Case No. 386
February 12, 2009 (read also case decided by
the CTA Division)
Mindanao Shopping Destination Corp. Vs.
Davao City, CTA AC No. 6, May 31, 2011
vii. Is injunction available?
Angeles City vs. Angeles Electric Corporation,
GR No. 166134 dated June 29, 2010.
REAL PROPERTY TAXATION
I. PRELIMINARY MATTERS
a. Definition of Real Property Tax
Villanueva vs. City of Iloilo, L-26521, December
28, 1968
b. Who should pay the real property tax?
Baguio vs. Busuego, GR No. 29772, September
18, 1980
NPC vs. Province of Quezon, GR No. 171586,
July 15, 2009
NPC vs. Province of Quezon, GR No. 171586,
January 25, 2010 (Resolution)
GSIS vs. City Treasurer and Assessor of Manila,
GR No. 186242, December 23, 2009
c. Fundamental Principles (Sec. 198)
d. Important Definitions (Sec. 199)
Taxation Law
i. Real Property for RPT Purposes (415 NCC)
ii. Machineries
Mindanao Bus vs. City Assessor and Treasurer
L-17870, Sept. 29, 1962
Facts:
The City Assessor of Cagayan de Oro
assessed equipment belonging to Mindanao Bus
Company. The latter appealed to the Board of Tax
Appeals on the ground that the same are not realty
but the Board of Tax Appeals of the City sustained
the assessment. Hence, the petitioner filed a
petition for the review of the assessment with the
Court of Tax Appeals.
Mindanao Bus Company raised the
following contentions: (1) that it is a public utility
engaged in transporting passengers and cargoes;
(2) that the equipment and machineries assessed
are sitting on cement or wooden platforms; (3) that
it owns the land where it maintains and operates a
garage and repair shop on where these
machineries are placed and its TPU trucks are
made; and (4) that the subject machines and
equipment were never used as industrial equipment
to produce finished products for commercial
purposes. It concluded that for such reasons the
machineries must not be considered as realty
subject to tax. The CTA sustained the city
assessors ruling. Hence, a petition for review of
the CTA decision was raised with the SC.
Issue: Whether or not the subject machineries are
subject to real estate taxes.
Held:
No, the equipment and machineries are not
real estate properties. The respondent bases its
ground on par. 5, Art. 415 of the New Civil Code
which states that machineries and other
receptacles which directly tend to meet the needs
of the industry or works are to be considered
immovable properties. However, this is not the case
of the petitioner. It must be recalled that the main
business of the petitioner is the transportation of
passengers and cargoes, and that the repair shop
where such equipment and machineries are located
are merely incidental to the business. Hence,
regardless of the existence of the repair shop along
with its equipment and machineries, the business
will still exist. Therefore, it cannot be said to be
regarded as real or immovable property under the
aforementioned provision as it does not directly
tend to meet the needs of the business.
Hence, the equipment and machineries in
question are deemed not subject to real estate tax.
Alyssa Africa Page 160
Caltex Philippines, Inc. vs. CBAA GR No.
50466, May 31, 1982
Facts:
Caltex (Philippines) Inc. has machines and
equipment located in its gas stations which are
located on leased lands. Said machines and
equipment consists of underground tanks, elevated
tank, elevated water tanks, water tanks, gasoline
pumps, computing pumps, water pumps, car
washer, car hoists, truck hoists, air compressors
and tireflators; all of which were considered by the
city assessor as attached and affixed to the
tenement hence, subject to real estate tax. The
machines and equipment, however, were merely
loaned under a lease agreement, and the lessor of
the land does not become the owner of these
machines and equipment installed. Caltex appealed
with the City Board of Tax Appeals which ruled in its
favor. The assessor appealed with the Central
Board of Assessment Appeals which then reversed
the decision of the City Board of Tax Appeals.
Due to the circumstances, Caltex filed a
petition for review of the decision of the CBAA with
the SC.
Issue: Whether the pieces of gas station
equipment and machinery are subject to realty tax.
Held:
Yes, they are subject to realty tax. The
provisions of the Assessment Law and the Real
Property Tax Code affirmatively resolve this issue.
Section 2 of the Assessment Law provides that
realty tax is due on real property which includes
machinery and other improvements, while Section
38 of the Real Property Tax Code states that ad
valorem tax on real property may be imposed by
local government units. Section 3 of the latter Code
even defines machinery as those attached to real
estate, including physical facilities available for
production, as well as the installation and
appurtenant service facilities, together with all other
equipment designed for or essential to its
manufacturing industrial or agricultural purposes.
Based on the these express provisions of
the aforementioned laws, the court holds that
because the equipment and machinery are fixtures
which are necessary to the operation of the gas
station for without them the gas station would be
useless, and which have been attached or affixed
permanently to the gas station site or embedded
therein, they must be deemed as real property
Taxation Law
subject to the Assessment Law and the Real
Property Tax Code.
Hence, the decision of the CBAA is
affirmed.
Manila Electric Co. vs. CBAA L-47943, May 31,
1982
Manila Electric Company vs. The City of
Assessor and City Treasurer of Lucena City, GR
No. 166102 dated August 5, 2015.
Actual Use
Patalinghug vs. CA, GR No. 104786, January 27,
1994
Appraisal
Assessment
Assessed Value
Appraisal of Real Property (Sec. 201)
Sesbreno v. CBAA, 270 SCRA 263
Declaration of Real Property
By Owner or Administrator (Sec. 202)
In case improvements are made (Sec. 203)
By Assessor (Sec. 204)
Notification of Transfer of Real Property
Ownership (Sec. 208)
Assessment of Real Property
Preparation of Schedule of Fair Market Values
(Sec. 212)
Lopez vs. City of Manila, GR No. 127139
February 19, 1999
Classes of Real Property for Assessment (Sec.
215)
Special Classes of Real Property (Sec. 216)
City Assessor of Cebu City vs. Association de
Benevola de Cebu GR No. 152904, June 8,
2007
Actual Use as Basis for Assessment (Sec. 217)
Testate Estate of Concordia Lim vs. City of
Manila GR No. 90639, February 21, 1990)
Patalinghug vs. CA, GR No. 104786, January 27,
1994
LRTA vs. CBAA GR No. 127316, October 12,
2000
Allied Banking Corporation vs. Quezon City
Government GR No. 154126, October 11, 2005
Assessment Levels (Sec. 218)
General Revision of Assessments and Property
Classification (Sec. 219)
Valuation of Real Property (Sec. 220)
Alyssa Africa Page 161
Allied Bank vs. Quezon City Government GR
No. 154126, October 11, 2005
Date of Effectivity of Assessment or
Reassessment (Sec. 221)
Assessment of Property Subject to Back Taxes
(Sec. 222)
Sesbreno v. CBAA, 270 SCRA 263
Notification of New or Revised Assessment
(Sec. 223)
Manila Electric Company vs. The City of
Assessor and City Treasurer of Lucena City, GR
No. 166102 dated August 5, 2015.
Appraisal and Assessment of Machinery (Sec.
224)
Depreciation Allowance for Machinery (Sec.
225)
Condonation of RPT
Condonation and Reduction of RPT (Sec. 276)
Condonation or Reduction of RPT by President
(Sec. 277)
IMPOSITION OF REAL PROPERTY TAX
Power to Levy Real Property Tax (Sec. 232)
Rates of Levy (Sec. 233)
Allied Bank vs. Quezon City Government GR
No. 154126, October 11, 2005
Exemptions from RPT (Sec. 234)
Proof of Exemption from RPT (Sec. 206)
Provincial Assessor of Marinduque vs. CA GR
No. 170532, April 4, 2009
Facts:
The Provincial Assessor of Marinduque
issued an Assessment Notice dated March 28,
1994 for real property taxes due on Marcopper
Mining Corporations real properties including its
Siltation Dam and Decant System. Respondent
Marcopper paid the tax demanded but appealed
the assessment before the Local Board of
Assessment Appeals on the ground that the
property is machinery and equipment used for
pollution control and environmental protection
exempted from real property taxation under Section
234 (e) of the Local Government Code. The LBAA
on November 10, 1995, dismissed the respondents
appeal for being filed out of time and held that the
property is taxable as it is an improvement on the
principal real property. Respondent appealed to the
CBAA which was likewise denied. In the CA, the
decisions of the LBAA and CBAA were reversed in
favor of the respondent on the ground that the term
Taxation Law
machinery is broad enough to encompass
instruments apparatus and devices functioning
together for the actual and direct use for the mining
business in which the respondent is engaged in;
and that because it complies with the DENR
requirement it must be deemed as exempt under
Section 234(e) of the Local Government Code.
Hence, the petitioner appealed to the SC.
Issue: Whether or not the subject property was tax
exempt under Section 234(e) of the Local
Government Code.
Held:
No, the property is not exempt from real
property tax. Section 234 of the LGC grants
exemptions from real property taxation based on
ownership, character or usage. In this case, the
respondent yields a claim of exemption based on
usage but as held in a previous case, and defined
in Section 199 of the LGC actual use is the
purpose for which the property is principally or
predominantly utilized by the person in possession
thereof, and that before anyone can claim
exemption the claim must be supported by
evidence under Section 206 of the LGC. The
records show no allegation or evidence by the
respondent that it is actually, directly or exclusively
used for pollution control and environmental
protection.
While there is a DENR Certification that
classifies the structure as primarily used for
pollution control of silted materials, such
certification only strengthens the proof that it is not
machinery but a more or less permanent
attachment to real property which meets none of
the features of machinery used for pollution control
exempted from payment of tax. Hence, the petition
is granted.
Constitutional Provisions on RPT Exemption
Sec. 28, Art. VI
Lung Center of the Philippines vs. QC 433
SCRA 119
Sec. 4(3), Art. XIV
Fels Energy, Inc. vs. Province of Batangas GR
No. 168557, February 16, 2007
Philippine Fisheries Devt Authority vs. CA GR
No. 169836, GR No. July 31, 2007
Mactan Cebu International Airport Authority vs.
Marcos GR No. 120082, Sept. 11, 1996
MIAA vs. CA GR No. 155650, July 20, 2006
Alyssa Africa Page 162
Mactan-Cebu International Airport Authority vs.
City of Lapu-Lapu GR No. 181756 dated June
15, 2015
Provincial Assessor of Marinduque vs. CA GR
No. 170532, April 4, 2009
NPC vs. Province of Quezon, GR No. 171586,
July 15, 2009
NPC vs. Province of Quezon, GR No. 171586,
January 25, 2010 (Resolution)
GSIS vs. City Treasurer and Assessor of Manila,
GR No. 186242 December 23, 2009
City of Pasig vs. Republic, GR No. 185023 dated
August 24, 2011
Republic vs. City of Paranaque, GR No. 191109
dated July 28, 2012
Angeles University Foundation vs. City of
Angeles, GR No. 189999 June 27, 2012
City of Lapu-Lapu vs. PEZA, GR No. 184203
dated November 26, 2014
Additional Levy for SEF (Sec. 235)
RPT on Idle Lands (Sec. 236)
Coverage of Idle Lands (Sec. 237)
Idle Lands Exempt from Tax (Sec. 238)
Special Levies (Sec. 240)
Ordinance Imposing Special Levy (Sec. 241)
Publication and Public Hearing (Sec. 242)
Fixing Amount of Special Levy (Sec. 243)
Taxpayers Remedies (Sec. 244)
Accrual of Special Levy (Sec. 245)
IMPOSITION OF REAL PROPERTY TAX
Date of Accrual (Sec. 246)
Notice of Time of Collection (Sec. 249)
Payment of RPT in Installments(Sec. 250)
Tax Discount for Advanced Prompt Payment
(Sec. 251)
REMEDIES
Local Government Units Remedies
Date of Accrual of Tax (Sec. 246)
LGUs Lien (Sec. 257)
Interest on Unpaid RPT (Sec. 255)
Period to Collect (Sec. 270)
Suspension of Period to Collect
Levy on Real Property (Sec. 258)
Advertisement and Sale (Sec. 260)
Puzon vs. Abelera 169 SCRA 789
Spouses Tan vs. Bantequi GR No. 154027
October 24, 2005
Redemption of Property Sold (Sec. 261)
Purchase of Property by the Local Government
Units for Want of Bidder (Sec. 263)
Taxation Law
Court Action for Collection (Sec. 266)
Taxpayers Remedies
Action Assailing Validity of Tax Sale (Sec. 267)
Action Involving Ownership (Sec. 268)
Payment under Protest (Sec. 252)
Manila Electric Company vs. The City of
Assessor and City Treasurer of Lucena City, GR
No. 166102 dated August 5, 2015.
Ramie Textile vs. Mathay - 89 SCRA 586
Ty vs. Trampe GR No. 117577, December 1,
1995
Olivarez vs. Marquez - 438 SCRA 679
NPC vs. Province of Quezon, GR No. 171586,
July 15, 2009
NPC vs. Province of Quezon, GR No. 171586,
January 25, 2010 (Resolution)
Camp John Hay Development Corp. vs. CBAA,
GR No. 169234, October 2, 2013. (include
concurring opinion of Justice Carpio)
NPC vs. Municipal Government of Navotas, GR
No. 192300 dated November 24, 2014
City of Lapu-Lapu vs. PEZA, GR No. 184203
dated November 26, 2014
CE Casecnan Water and Energy Company, Inc.
vs. The Province of Nueva Ecija, GR No. 196278
dated June 17, 2015.
Refunds (Sec. 253)
Allied Banking vs. Quezon City Government
GR No. 154126, September 15, 2006 Motion for
Clarification of Decision
Assessment Appeals
Appeal with the LBAA (Sec. 226)
City Government of Quezon City vs. Bayan
Telecommunications GR No. 162015, March 6,
2006
Systems Plus Computer College of Caloocan
vs. Local Government of Caloocan, GR No.
146382. August 7, 2003
Fels Energy, Inc. vs. Province of Batangas GR
No. 168557, February 16, 2007
Facts:
On January 18, 1993, NAPOCOR entered
into a lease contract with Polar Energy over diesel
engine power barges. The contract was for a period
of 5 years with NAPOCOR shouldering all the
taxes, import, duties, fees, charges and other levies
imposed by the National Government of the
Republic of the Philippines. However, on August 7,
1995, Fels Energy, Inc. received an assessment of
real property taxes on the power barges from the
Provincial Assessor for 1994. Fels reminded
NAPOCOR to pay its obligations under the
Alyssa Africa Page 163
agreement. On September 7, 1995, NAPOCOR
sought reconsideration of the Provincial Assessor
but it was denied. NAPOCOR filed a petition with
the Local Board of Assessment Appeals for the
setting aside of the assessment and the declaration
of the barges as non-taxable items. The LBAA
denied the petition on August 24, 1996. Fels
appealed to the Central Board of Assessment
Appeals. On April 6, 2000 the CBAA exempt the
barges from real property tax on the ground that the
power barges belonged to NPC and was therefore
covered by exemptions but it was reversed after a
motion for reconsideration. The CA affirmed the
ruling of the CBAA. Hence, the petition was
elevated to the SC.
Issue: Whether or not the barges are exempt from
real property taxes; and Whether or not the appeal
before the LBAA was time-barred.
Held:
1. No, the barges are not exempt from
payment of real property tax. Section 234 of the
Local Government Code states that machineries
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 are exempt from real property tax. However,
upon review of the agreement of NAPOCOR and
Polar, it appears that the ownership and operation
of the barges remain with Polar. While it is true that
NAPOCOR has the responsibility to pay the fees
under agreement, because NAPOCOR is exempt
from payment, it cannot be compelled to pay, and
Fels cannot enjoy such exemption as this privilege
does not extend to third persons.
2. Yes, the appeal with the LBAA was time-
barred. Under Section 226 of the Local
Government Code, the owner or person having
legal interest in the property may within 60 days
from the date of receipt of written notice of
assessment appeal to the Board of Assessment
Appeals regarding the assessment of its property.
The notice was sent to Fels on August 7, 1995,
along with the reminder that within 60 days an
appeal must be made. However, NAPOCOR
appealed a few months later. LBAA was correct in
denying the petition.
Hence, the petition is denied.
Action by the LBAA (Sec. 229)
Appeal to the CBAA (Sec. 229)
Taxation Law
Appeal to the CTA En Banc
Effect of Appeal on Payment of RPT (Sec. 231)

Alyssa Africa Page 164