BAR STAR NOTES
these Notes in any form or any means, electronic or mechanical, including
TAXATION
VER. 2010.06.12
copyrighted 2010
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.).
Lawyer-CPA-Customs Broker, Management Consultant, Professor of Law
and Pre-Bar Reviewer)
How to use the BAR STAR NOTES. The BAR STAR
NOTES in the form of questions and answers as well as textual
discussion were specially prepared by Prof. Domondon for the
exclusive use of Bar Reviewees who attended his 2010 Lectures on
TAXATION held at the University of the Philippines. Included in the
presentation are doctrines contained in Supreme Court decisions up to
April 2010.
The purpose of the BAR STAR NOTES is to provide the Bar
Reviewee with a handy review material which serves as memory-joggers
for the September 12, 2010 Bar Examinations in Taxation. The author
tries to second guess what would be included in the Bar Exams using
statistical analysis. The actual Bar questions may not be formulated in the
same manner as the BAR STAR NOTES. However, the doctrines tested
in the Bar would in all probability be included in these Notes.
If pressed for time, the author suggests that the reader should
focus his attention on the following:
Nice to know
Should know
Must know and master
It is further suggested that the reader should merely browse those
without stars.
WARNING:
These materials are copyrighted and/or based on the writers books
on Taxation and future revisions. It is prohibited to reproduce any part of
photocopying without the written permission of the author. Unauthorized
users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW
OF KARMA SUCH THAT THEY WILL NEVER PASS THE BAR OR
WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of
the author.
THE BEST OF LUCK AND
ADVANCE CONGRATULATIONS
TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
1. State briefly and concisely the nature of taxation.
Alternatively, define taxation.
SUGGESTED ANSWER: The inherent power of the sovereign
exercised through the legislature to impose burdens upon subjects and
objects within its jurisdiction for the purpose of raising revenues to carry
out the legitimate objects of government.
2. What is the nature of the States power to tax ?
Explain briefly.
SUGGESTED ANSWER: The nature of the states power to tax is
two-fold. It is both an inherent power and a legislative power.
It is inherent in nature being an attribute of sovereignty. This is so,
because without the taxes, the states existence would be imperiled.
There is thus, no need for a constitutional grant for the state to exercise
this power.
It is a legislative power because it involves the promulgation of
rules. Taxation is a set of rules, how much is the tax to be paid, who pays
the tax, to whom it should be paid, and when the tax should be paid.
3. What is the underlying theory of taxation ? Explain
briefly.
SUGGESTED ANSWER: Taxes are the lifeblood of the nation.
Without revenue raised from taxation, the government will not
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survive, resulting in detriment to society. Without taxes, the government c. Amount: In taxation, no limit as to amount while license fee
would be paralyzed for lack of motive power to activate and operate it. limited to cost of the license and the expenses of police surveillance and
(Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17) regulation.
d. Time of payment: Taxes normally paid after
4. Marshall said that, the power to tax involves the commencement of business while license fee before.
power to destroy. On the other hand, Holmes stated that e. Effect of payment: Failure to pay a tax does not make the
the power to tax is not the power to destroy while the business illegal while failure to pay license fee makes business illegal.
court sits. f. Surrender: Taxes, being the lifeblood of the state, cannot be
Reconcile the statements. surrendered except for lawful consideration while a license fee may be
In the alternative, what are the implications that flow surrendered with or without consideration. (Cooley on Taxation, pp. 1137-
1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)
from the above statements ?
SUGGESTED ANSWERS: Marshalls view refers to a valid tax 8. How may the power to tax be utilized to carry out
while the Holmes view refers to an invalid tax. the social justice program of our government ?
a. The imposition of a valid tax could not be judicially SUGGESTED ANSWER: The compensatory purpose of taxation is
restrained merely because it would prejudice taxpayers property. to implement the social justice provisions of the constitution through the
b. An illegal tax could be judicially declared invalid and progressive system of taxation, which would result to equal distribution of
should not work to prejudice a taxpayers property. wealth, etc.
Progressive income taxes alleviate the margin between rich and
5. Discuss briefly the basis/bases, or rationale of
poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association
taxation. of the Philippines, et al., G. R. No. 158540, August 3, 2005)
SUGGESTED ANSWER: a. Reciprocal duties of protection and In recent years, the increasing social challenges of the times
support between the state and its citizens and residents. Also called expanded the scope of the state activity, and taxation has become a tool
symbiotic relation between the state and its citizens. to realize social justice and the equitable distribution of wealth, economic
b. Jurisdiction by the state over persons and property progress and the protection of local industries as well as public welfare
within its territory. and similar objectives. (Batangas Power Corporation v. Batangas City, et
6. Discuss briefly but comprehensively the objectives al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power
or purposes of taxation. Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
SUGGESTED ANSWER: The purposes or objectives of taxation
are the following: 9. Explain the sumptuary purpose of taxation.
a. The primary purpose: SUGGESTED ANSWER: The sumptuary purpose of taxation is to
1) Revenue purpose. promote the general welfare and to protect the health, safety or morals of
b. The secondary purposes the inhabitants. It is in the joint exercise of the power of taxation and police
1) Sumptuary or regulatory purpose. power where regulatory taxes are collected.
2) Compensatory purpose. Taxation may be made the implement of the states police power.
3) To implement the power of eminent domain. The motivation behind many taxation measures is the implementation of
police power goals. [Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3,
7. Distinguish a tax from a license fee. 2005) The reader should note that the August 3, 2005 Southern Cross case
SUGGESTED ANSWER: The following are the distinctions: is the decision on the motion for reconsideration of the July 8, 2004
a. Purpose: Tax imposed for revenue while license fee for Southern Cross decision.
regulation. Tax for general public purposes while license fee for The so-called sin taxes on alcohol and tobacco manufacturers help
regulatory purposes only. dissuade the consumers from excessive intake of these potentially harmful
b. Basis: Tax imposed under power of taxation while license products. (Southern Cross Cement Corporation v. Cement Manufacturers
fee under police power. Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
 3
13. What are the elements or characteristics of a tax ?
10. Taxation distinguished from police power. Taxation is SUGGESTED ANSWER:
distinguishable from police power as to the means employed to implement a. Enforced contribution.
these public goals. Those doctrines that are unique to taxation arose from b. Generally payable in money.
peculiar considerations such as those especially punitive effects (Southern c. Proportionate in character.
Cross Cement Corporation v. Cement Manufacturers Association of the d. Levied on persons, property or exercise of a right or
Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax privilege.
involves the power to destroy and the belief that taxes are lifeblood of the e. Levied by the state having jurisdiction.
state. (Ibid.) taxes being the lifeblood of the government, their prompt and f. Levied by the legislature.
certain availability is of the essence. g. Levied for a public purpose.
These considerations necessitated the evolution of taxation as a h. Paid at regular periods or intervals.
distinct legal concept from police power. (Ibid.)
14. State the requisites of a valid tax.
11. How the power of taxation may be used to
SUGGESTED ANSWER:
implement power of eminent domain. Tax measures are but a. A valid tax should be within the jurisdiction of the taxing
enforced contributions exacted on pain of penal sanctions and clearly authority.
imposed for public purpose. In most recent years, the power to tax has b. That the assessment and collection of certain kinds (The
indeed become a most effective tool to realize social justice, public welfare, same as the inherent limitations of the power of taxation) should be for a
and the equitable distribution of wealth. (Commissioner of Internal Revenue v. public purpose.
Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)
c. The rule of taxation should be uniform.
Establishments granting the 20% senior citizens discount may
d. That either the person or property of taxes guarantees
claim the discounts granted to senior citizens as tax deduction based on
against injustice to individuals, especially by way or notice and opportunity
the net cost of the goods sold or services rendered: Provided, That the
for hearing be provided.
cost of the discount shall be allowed as deduction from gross income for
e. The tax must not impinge on the inherent and Constitutional
the same taxable year that the discount is granted. Provided, further, That
limitations on the power of taxation.
the total amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax purposes
and shall be subject to proper documentation and to the provisions of the 15. What are the classes or kinds of taxes according to
National Internal Revenue Code, as amended. [M.E. Holding Corporation v. the subject matter or object ?
Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior SUGGESTED ANSWER:
Citizens Act of 2003, Sec. 4 (a)] a. Personal, poll or capitalization imposed on all residents,
whether citizen or not. Example Community Tax.
12. What are the three basic principles of a sound tax b. Property - Imposed on property. Example Real property
system? Explain each briefly. tax.
SUGGESTED ANSWER: The canons of a sound tax system, also c. Excise imposed upon the performance of an act, the
known as the characteristics or, principles of a sound tax system, are enjoyment of a privilege or the engaging in an occupation. Example
used as a criteria in order to determine whether a tax system is able to income tax, estate tax.
meet the purposes or objectives of taxation. They are:
a. Fiscal adequacy. 16. What are the kinds of taxes classified as to who
b. Administrative feasibility. bears the burden ? Explain each briefly.
c. Theoretical justice. SUGGESTED ANSWER: Based on the possibility of shifting the
incidence of taxation, or as to who shall bear the burden of taxation, taxes
may be classified into:
 4
a. Direct taxes. Those that are extracted from the very person
who, it is intended or desired, should pay them (Commissioner of Internal
Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230,
December 15, 2005); they are impositions for which a taxpayer is directly
liable on the transaction or business he is engaged in, (Commissioner of
Internal Revenue v. Philippine Long Distance Telephone Company, supra)
which liability cannot be shifted or transferred to another. Example
income tax, estate tax, donors tax, etc.
b. Indirect taxes are those that are demanded in the first
instance, from, or are paid by, one person in the expectation and intention
that he can shift the burden to (Commissioner of Internal Revenue v.
Philippine Long Distance Telephone Company, supra) to someone else not as
a tax but as part of the purchase price. (Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G.
R. No. 152609, June 29, 2005 citing various cases and authorities)
Example value added tax (VAT), documentary stamp tax, excise tax,
percentage tax, etc.
17. Silkair (Singapore) PTE, Ltd., an international
carrier, purchased aviation gas from Petron Corporation,
which it uses for its operations. It now claims for refund or tax
credit for the excise taxes it paid claiming that it is exempt from
the payment of excise taxes under the provisions of Sec. 135 of
the NIRC of 1997 which provides that petroleum products are
exempt from excise taxes when sold to Exempt entities or agencies
covered by tax treaties, conventions, and other international agreements for their
use and consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from similar taxes
petroleum products sold to Philippine carriers, entities or agencies
Silkair further anchors its claim on Article 4(2) of the Air
Transport Agreement between the Government of the Republic
of the Philippines and the Government of the Republic of
Singapore (Air Transport Agreement between RP and
Singapore) which reads: Fuel, lubricants, spare parts, regular equipment
and aircraft stores introduced into, or taken on board aircraft in the territory of one
Contracting party by, or on behalf of, a designated airline of the other Contracting
Party and intended solely for use in the operation of the agreed services shall, with
the exception of charges corresponding to the service performed, be exempt from
the same customs duties, inspection fees and other duties or taxes imposed in the
territories of the first Contracting Party , even when these supplies are to be used
on the parts of the journey performed over the territory of the Contracting Party in
which they are introduced into or taken on board. The materials referred to above
may be required to be kept under customs supervision and control.
Silkair likewise argues that it is exempt from indirect
taxes because the Air Transport Agreement between RP and
Singapore grants exemption from the same customs duties,
inspection fees and other duties or taxes imposed in the
territory of the first Contracting Party. It invokes Maceda v.
Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA
771.which upheld the claim for tax credit or refund by the
National Power Corporation (NPC) on the ground that the NPC
is exempt even from the payment of indirect taxes.
Is Silkair entitled to the tax refund or credit it seeks ?
Reason out your answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or
credit for the following reasons:
a. The excise tax on aviation fuel is an indirect tax. The proper
party to question, or seek a refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the
same even if he shifts the burden thereof to another. (Philippine Geothermal,
Inc. v. Commissioner of Internal Revenue, G.R. No. 154028, July 29, 2005, 465
SCRA 308, 317-318) The NIRC provides that the excise tax should be
paid by the manufacturer or producer before removal of domestic products
from place of production. Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135
of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement
between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the
tax, the additional amount billed to Silkair for jet fuel is not a tax but part of
the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co.,
Inc. v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]
b. Silkair could not seek refuge under Maceda v. Macaraig, Jr.,
G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for
tax credit or refund by the National Power Corporation (NPC) on the
ground that the NPC is exempt even from the payment of indirect taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, G.R. No. 140230, December 15, 2005, 478 SCRA
61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It
may be so that in Maceda vs. Macaraig, Jr., the Court held that an
exemption from all taxes granted to the National Power Corporation
(NPC) under its charter includes both direct and indirect taxes.
An exemption from all taxes excludes indirect taxes, unless the
exempting statute, like NPCs charter, is so couched as to include indirect
tax from the exemption. The amendment under Republic Act No. 6395
enumerated the details covered by NPCs exemption. Subsequently, P.D.
380, made even more specific the details of the exemption of NPC to
 5
cover, among others, both direct and indirect taxes on all petroleum
products used in its operation. Presidential Decree No. 938 [NPCs
amended charter] amended the tax exemption by simplifying the same law
in general terms. It succinctly exempts NPC from all forms of taxes,
duties, fees The use of the phrase all forms of taxes demonstrates the
intention of the law to give NPC all the tax exemptions it has been enjoying
before.
The exemption granted under Section 135 (b) of the NIRC of 1997
and Article 4(2) of the Air Transport Agreement between RP and
Singapore cannot, without a clear showing of legislative intent, be
construed as including indirect taxes. Statutes granting tax exemptions
must be construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority, and if an exemption is found to exist, it must
not be enlarged by construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner
of Internal Revenue, G.R. No. 173594, February 6, 2008)
18. What are the different kinds of taxes classified
as to purpose ?
SUGGESTED ANSWER:
a. General, fiscal or revenue imposed for the purpose of
raising public funds for the service of the government.
b. Special or regulatory imposed primarily for the regulation of
useful or non-useful occupation or enterprises and secondarily only for the
raising of public funds.
LIMITATIONS OR RESTRICTIONS ON THE POWER
1. Purpose for the limitations on the power of taxation.
The inherent and constitutional limitations to the power of taxation are
safeguards which would prevent abuse in the exercise of this otherwise
unlimited and plenary power.
The limitations also serve as a standard to measure the validity of a
tax law or the act of a taxing authority. A violation of the limitations serves to
invalidate a tax law or act in the exercise of the power to tax.
INHERENT LIMITATIONS
1. What are the inherent limitations on the power of
taxation ?
SUGGESTED ANSWERS:
a. Public purpose. The revenues collected from taxation should
be devoted to a public purpose.
b. No improper delegation of legislative authority to tax. Only the
legislature can exercise the power of taxes unless the same is delegated to
some other governmental body by the constitution or through a law which
does not violate any provision of the constitution.
c. Territoriality. The taxing power should be exercised only within
territorial boundaries of the taxing authority.
d. Recognition of government exemptions; and
e. Observance of the principle of comity. Comity is the respect
accorded by nations to each other because they are equals. On the other
hand taxation is an act of sovereign. Thus, the power should be imposed
upon equals out of respect.
Some authorities include no double taxation.
2. What are the principles to consider in the
determination of whether tax revenues are devoted for a
public purpose ?
SUGGESTED ANSWER:
a. The tax revenues are for a public purpose if utilized for the
benefit of the community in general. An alternative meaning is that tax
proceeds should be utilized only to attain the objectives of government.
b. Inequalities resulting from the singling out of one particular
class for taxation or exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax that the legislature is
free to select the subjects of taxation.
BASIS: The lifeblood theory.
c. An individual taxpayer need not derive direct benefits from
the tax.
REASON: The paramount consideration is the welfare of the
greater portion of the population.
d. A tax may be imposed, not so much for revenue purposes,
but under police power for the general welfare of the community. This
would still be for a public purpose.
e. Public purpose continually expanding. Areas formerly left to
private initiative now lose their boundaries and may be undertaken by the
government if it is to meet the increasing social challenges of the times.
f. Tax revenue must not be used for purely private purposes or
for the exclusive benefit of private persons.
g. Private persons may be benefited but such benefit should be
merely incidental as its main object is the benefit of the community in
general.
h. Determined at the time of enactment of tax law and not at the
time of implementation.
i. There is a presumption of public purpose even if the tax law
does not specifically provide for its purpose. (Santos & Co., v. Municipality of
Meycauayan, et al., 94 Phil. 1047)
 6
j. Public use is no longer confined to the traditional notion of use
by the public but held synonymous with public interest, public benefit,
public welfare, and public convenience. (Commissioner of Internal Revenue v.
Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)
3. A law was enacted imposing a tax on
manufacturers of coconut oil, the proceeds of which are to be
used exclusively for the protection and promotion of the
coconut industry, namely, to improve the working conditions
in coconut mills and to conduct research on the use of
coconut oil for motor fuel. Some of the manufacturers of
coconut oil challenge the validity of the law, contending that
the tax is to be used for a private purpose, and therefore, the
law violates the rule that public revenues shall not be
appropriated for anything but a public purpose. Decide with
reason.
SUGGESTED ANSWER: The levy is for a public purpose. It
cannot be denied that the coconut industry is one of the major industries
supporting the national economy. It is, therefore, the states concern to
make it a strong and secure source not only of the livelihood of the
significant segment of the population, but also of export earnings, the
sustained growth of which is one of the imperatives of economic growth.
(Philippine Coconut Producers Federation, Inc. (Cocofed v. Presidential
Commission on Good Government, 178 SCRA 236, 252)
4. Requisites for taxpayers, concerned citizens,
voters or legislators to have locus standi to sue.
a. In general, the case should involve constitutional issues.
(David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No.
171396, May 3, 2006)
b. For taxpayers, there must be a showing:
1) That tax money is being extracted and spent in
violation of specific constitutional protections against abuses of
legislative power. (Flast v. Cohen, 392 U.S. 83)
2) That public money is being deflected to any improper
purpose (Pascual v. Secretary of Public Works, 110 Phil. 33) or a
claim of illegal disbursement of public funds or that the tax
measure is unconstitutional. (David, supra)
3) A taxpayer is allowed to sue where there is a claim
that public funds are illegally disbursed, or that public money is being
deflected to any improper purpose, or that there is a wastage of
public funds through the enforcement of an invalid or
unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February
14, 2007; Garcia v. Enriquez, Jr. G.R. No. 112655 December 9,
1993, Minute Resolution)
A taxpayers suit is properly brought only when there is
an exercise of the spending or taxing power of Congress.
(Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo,
etc. ,et al., G. R. No. 157509, January 18, 2005 citing
Gonzales v. Narvasa, G. R. No. 140835, August 14, 2000, 337 SCRA
733, 741)
c. For voters, there must be a showing of obvious interest in the
validity of the election law in question.
d. For concerned citizens, there must be a showing that the
issues raised are of transcendental importance which must be settled
early.
e. For legislators, there must be a claim that the official action
complained of infringes upon their prerogatives as legislators. (David, et
al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396,
May 3, 2006)
5. Only those directly affected have locus standi to
impugn the alleged encroachment by the executive
department into the legislative domain of Congress.
a. Only those who shall be directly affected by such executive
encroachment, such as for example employees who would find
themselves subject to disciplinary powers that may be imposed under the
questioned Executive Order as they have a direct and specific interest in
raising the substantive issue therein (Automotive Industry Workers
Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509,
January 18, 2005) or employees who are going to be demoted,
transferred or otherwise affected by any personnel action subject o the
rule on exhaustion of administrative remedies.
b. Moreover, and if at all, only Congress, can claim any injury
from the alleged executive encroachment of the legislative function to
amend, modify and/or repeal laws. (Automotive Industry Workers Alliance
(AIWA),etc., et al., supra, citing Gonzales v. Narvasa, G. R. No. 140835,
August 14,2000, 337 SCRA 733, 741)
6. Locus standi being merely a matter of procedure,
have been waived in certain instances where a party who is not
personally injured may be allowed to bring suit. The following are
examples of instances where suits have been brought by parties who have
not have been personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who actually
sue in the public interest:
 7
a. Taxpayers suits to question contracts entered into by the
national government or government-owned or controlled corporations
allegedly in contravention of the law.
b. A taxpayer is allowed to sue where there is a claim that public
funds are illegally disbursed, or that public money is being deflected to any
improper purpose, or that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R.
No. 167919, February 14, 2007)
7. The VAT law provides 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 have 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 %).
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of
legislative power but only of the discretion as to the execution of the law.
This is constitutionally permissible.
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 the above case the Secretary of Finance becomes
merely the agent of the legislative department, to determine and declare the
even upon which its expressed will takes place. The President cannot set
aside the findings of the Secretary of Finance, who is not under the
conditions acting as the execute alter ego or subordinate. . [Abakada Guro
Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005
and companion cases citing various cases]]
8. Instances of proper delegation: When taxing power
could be delegated: Exceptions to the rule on non-
delegation:
a. Delegation of tariff powers by Congress to the President under
the flexible tariff clause, Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to the President under
Section 23 (2) of Article VI of the Constitution.
c. The delegation to the President of the Philippines to enter into
executive agreements, and to ratify treaties which may contain tax
exemption provisions subject to the concurrence by the Senate in the
ratification made by the President.
d. Delegation to the people at large.
e. Delegation to administrative bodies [Abakada Guro Party List
(Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1,
2005], which is referred to as subordinate legislation.
In this instance, there is a requirement that the law is complete in
all aspects so what is delegated is merely the implementation of the law or
there exists sufficiently determinate standards to guide the delegate and
prevent a total transference of the taxing power.
9. Paradigm shift from exclusive Congressional
power to direct grant of taxing power to local legislative bodies.
The power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other
charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas
Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case,
April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)
Local government legislation, is not regarded as a transfer of
general legislative power, but rather as the grant of authority to prescribe
local regulations, according to immemorial practice, subject, of course, to
the interposition of the superior in cases of necessity. (People v. Vera, 65
Phil. 56)
10. Taxing power of the local government is limited.
The taxing power of local governments is limited in the sense that
Congress can enact legislation granting tax exemptions.
While the system of local government taxation has changed with
the onset of the 1987 Constitution, the power of local government units to
tax is still limited.
While the power to tax by local governments may be exercised by
local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of
the Constitution, the basic doctrine on local taxation remains essentially
the same, the power to tax is [still] primarily vested in the Congress.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in
turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No.
120082, September 11, 1996, 261 SCRA 667, 680)
11. Further amplification by Bernas of the local
governments power to tax. What is the effect of Section 5 on the
fiscal position of municipal corporations? Section 5 does not change the
doctrine that municipal corporations do not possess inherent powers of
taxation. What it does is to confer municipal corporations a general power
 8
to levy taxes and otherwise create sources of revenue. They no longer
have to wait for a statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of local governments has
been reduced to the authority to impose limitations on municipal powers.
Moreover, these limitations must be consistent with the basic policy of
local autonomy. The important legal effect of Section 5 is thus to reverse
the principle that doubts are resolved against municipal corporations.
Henceforth, in interpreting statutory provisions on municipal fiscal powers,
doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for
a public purpose, uniform within a locality, must not be confiscatory, and
must be within the jurisdiction of the local unit to pass. (Quezon City, et al.,
v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing
City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R.
No. 162015, March 6, 2006, 484 SCRA 169)
12. Reconciliation of the local governments authority
to tax and the Congressional general taxing power. Congress
has the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of local governments, such as
provinces and cities for example Quezon City, to tax is prescribed by
Section 151 in relation to Section 137 of the LGC which expressly
provides that notwithstanding any exemption granted by any law or other
special law, the City or a province may impose a franchise tax. It must be
noted that Section 137 of the LGC does not prohibit grant of future
exemptions.
The Supreme Court in a series of cases has sustained the power of
Congress to grant tax exemptions over and above the power of the local
governments delegated power to tax. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No.
162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local government units under
the Constitution and the LGC does not affect the power of Congress to
grant exemptions to certain persons, pursuant to a declared national
policy. The legal effect of the constitutional grant to local governments
simply means that in interpreting statutory provisions on municipal taxing
powers, doubts must be resolved in favor of municipal corporations. [Ibid.,
referring to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of
Davao]
13. General principles of income taxation in
the Philippines or the source rule of income taxation as
provided in the NIRC of 1997.
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 abroad as an overseas contract worker is taxable only
on income from sources within the Philippines: Provided, That a seaman
who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas
contract worker;
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. (Sec. 23, NIRC of 1997, emphasis supplied)
14. Juliane a non-resident alien appointed as a
commission agent by a domestic corporation with a sales
commission of 10% all sales actually concluded and collected
through her efforts. The local company withheld the amount of
P107,000 from her sales commission and remitted the same to
the BIR.
She filed a claim for refund alleging that her sales
commission is not taxable because the same was a
compensation for her services rendered in Germany and
therefore considered as income from sources outside the
Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor 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 performed.
Since the activity of securing the sales were in Germany, then the
income did not originate from sources from within the Philippines.
(Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29,
2006)
 9
15. Ensite, Ltd.. is a Canadian corporation not
doing business in the Philippines. It holds 40% of the shares
of Philippine Stamping Plant, Inc.,., a Philippine company
while the 60% is owned by Fred Corporation, a Filipino-owned
Philippine corporation. Ensite Co. also owns 100% of the
shares of Susanto Co., an Indonesian company which has a
duly licensed Philippine branch. Due to worldwide
restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided
to sell all its shares in Philippine Stamping Plant, Inc. and
Susanto Co. The negotiations for the buy-out and the signing
of the Agreement of Sale were all done in the Philippines. The
Agreement provides that the purchase price will be paid to
Ensite Ltds bank account in the U.S. and that title to the
Philippine Stamping Plant, Inc. and Susanto Co. shall be
transferred to General Co., in Toronto Canada where stock
certificates will be delivered. General Co. seeks your advice
as to whether or not it will subject the payments of the
purchase price to withholding tax. Explain your advice.
SUGGESTED ANSWER: The payments of the purchase price will
be subject to withholding tax. Considering that all the activities (sales)
occurred within the Philippines, the income is considered as income from
within, subject to Philippine income taxation. Ensite, Ltd. being a foreign
corporation is to be taxed on its income derived from sources within the
Philippines.
16. Ensite, Ltd. is a Canadian corporation, which
has a duly licensed Philippine branch engage in trading
activities in the Philippines. Ensite, Ltd.. also invested
directly in 40% of the shares of stock of Philippine Stamping
Plant, Inc.., a Philippine corporation. These shares are
booked in the Head Office of Ensite, Ltd.. and are not reflected
as assets of the Philippine branch. In 2009, Philippine
Stamping Plant, Inc.. declared dividends to its stockholders.
Before remitting the dividends to Ensite Ltd.,., Philippine
Stamping Plant, Inc. Co. seeks your advice as to whether it
will subject the remittance to withholding tax. There is no
need to discuss WT rates, if applicable. Focus your
discussion on what is the issue.
SUGGESTED ANSWER: Philippine Stamping Plant, Inc.. should
subject the remittance to withholding tax.. Since Philippine Stamping
Plant. is a Philippine corporation, its shares of stock have obtained a
business situs in the Philippines, hence the dividends are considered as
income from within. Ensite. Ltd., being a foreign corporation, should be
subject to tax on its income from within.
17. Philippine Stamping Plant, Inc., a Philippine
corporation, has an executive Larry who is a Filipino citizen.
Philippine Stamping Plant, Inc,. has a subsidiary in Malaysia
(Kuala Lumpur Manufacturing, Inc.) and will assign Larry for
an indefinite period to work full time for Kuala Lumpur
Manufacturing, Inc.. Larry will bring his family to reside in
Malaysia and will lease out his residence in the Philippines.
The salary of Larry will be shouldered 50% by Philippine
Stamping Plant, Inc.. while the other 50% plus housing, cost
of living and educational allowances of Larrys dependents
will be shouldered by Kuala Lumpur Manufacturing, Inc..
Philippine Stamping Plant, Inc.. will credit the 50% of Larrys
salary to his Philippine bank account. Larry will sign the
contract of employment in the Philippines. He will also be
receiving rental income for the lease of his Philippine
residence.
Are these salaries, allowances and rentals subject to
Philippine income tax? Explain briefly.
SUGGESTED ANSWER: The salaries and allowances of Larry,
being derived from labor or personal services rendered outside of the
Philippines is considered as income from without. Since Larry is an OCW,
then he is to be taxed only on his income derived from within the
Philippines such as the rentals on his Philippine residence, and not on his
income from without.
18. Obama Airlines, Inc., a foreign airline company
which does not maintain any flight to and from the Philippines
sold air tickets in the Philippines, through a general sales
agent, relating to the carriage of passengers and cargo
between two points, both outside the Philippines.
a. Is Obama, Inc., subject to income taxes on the sale
of the tickets ?
SUGGESTED ANSWER: Yes. The source of income which is
taxable is that activity which produced the income. The sale of tickets in
the Philippines is the activity that determines whether such income is taxable
in the Philippines.
 10
The tickets exchanged hands here and payments for fares were also GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. No.
made here in Philippine currency. The situs of the source of payments is 180356, February 16, 2010)
the Philippines. the flow of wealth proceeded from and occurred, within the
Philippine territory, enjoying the protection accorded by the Philippine 19. No improper delegation of legislative authority to
Government. In consideration of such protection, the flow of wealth should tax. The power to tax is inherent in the State, such power being
share the burden of supporting the government. [Commissioner of Internal inherently legislative, based on the principle that taxes are a grant of the
Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395] people who are taxed, and the grant must be made by the immediate
Off-line air carriers having general sales agents in the Philippines representatives of the people; and where the people have laid the power,
are engaged in or doing business in the Philippines and their income from there it must remain and be exercised. (Commissioner of Internal Revenue v.
sales of passage documents here is income from within the Philippines. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
Thus, the off-line air carrier liable for the 32% (now 30%) tax on its taxable
income. [South African Airways v. Commissioner of Internal Revenue, G.R. No. CONSTITUTIONAL LIMITATIONS
180356, February 16, 2010 citing Commissioner of Internal Revenue v. British
Overseas Airways Corporation (British Overseas Airways), No. L-65773-74, April
30, 1987, 149 SCRA 395] 1. Constitutional limitations on the power of taxation .
b. Supposing that Obama, Inc., sells tickets outside of The general or indirect constitutional limitations as well as the specific or
direct constitutional limitations.
the Philippines for passengers it carry from Gold City, South
Africa to the Philippines but returns to South Africa without any
2. The general or indirect constitutional limitations on
cargo or passengers. Would it then be subject to any
the power of taxation are:
Philippine tax on such sales ? a. Due process clause;
SUGGESTED ANSWER: It would not be subject to any tax. It is not b. Equal protection clause;
subject to any income tax because the activity which generated the income c. Freedom of the press;
(the sale of the tickets) was performed outside of the Philippines. d. Religious freedom;
It is not subject to the carriers tax based on gross Philippine billings e. No taking of private property without just compensation;
because there were no lifts that originated from the Philippines. Gross f. Non-impairment clause;
Philippine Billings refers to the amount of gross revenue derived from g. Law-making process:
carriage of persons, excess baggage, cargo and mail originating from the 1) Bill should embrace only one subject expressed in
Philippines in a continuous and uninterrupted flight, irrespective of the the title thereof;
place of sale or issue and the place of payment of the ticket or passage 2) Three (3) readings on three separate days;
document. [NIRC of 1997, Sec. 28(A)(3)(a)] 3) Printed copies in final form distributed three (3) days
c. Would your answer be the same if Obama, Inc. sold before passage.
tickets outside of the Philippines for travelers who are going to h. Presidential power to grant reprieves, commutations and
picked up by Obama, Inc., planes from the Diosdado Macapagal pardons and remittal of fines and forfeiture after conviction by final
Intl. Airport at Clark, Angeles, Pampanga, bound for Nairobi, judgment.
Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would 3. The specific or direct constitutional limitation.
be subject to the carriers tax based on Gross Philippine Billings. (GPB). a. No imprisonment for non-payment of a poll tax;
Gross Philippine Billings refers to the amount of gross revenue b. Taxation shall be uniform and equitable;
derived from carriage of persons, excess baggage, cargo and mail c. Congress shall evolve a progressive system of taxation;
originating from the Philippines in a continuous and uninterrupted flight, d. All appropriation, revenue or tariff bills shall originate
irrespective of the place of sale or issue and the place of payment of the exclusively in the House of Representatives, but the Senate may propose
ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)] and concur with amendments;
The place of sale is irrelevant; as long as the uplifts of
passengers and cargo occur from the Philippines, income is included in
 11
e. The President shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object;
f. Delegated power of the President to impose tariff rates, import
and export quotas, tonnage and wharfage dues:
1) Delegation by Congress
2) through a law
3) subject to Congressional limits and restrictions
4) within the framework of national development program.
g. Tax exemption of charitable institutions, churches, parsonages
and convents appurtenant thereto, mosques, and all lands, buildings and
improvements of all kinds actually, directly and exclusively used for religious,
charitable or educational purposes;
h. No tax exemption without the concurrence of majority vote of
all members of Congress;
i. No use of public money or property for religious purposes
except if priest is assigned to the armed forces, penal institutions,
government orphanage or leprosarium;
j. Money collected on tax levied for a special purpose to be used
only for such purpose, balance if any, to general funds;
k. The Supreme Court's power to review judgments or orders of
lower courts in all cases involving the legality of any tax, impose,
assessment or toll or the legality of any penalty imposed in relation to the
above;
l. Authority of local government units to create their own sources
of revenue, to levy taxes, fees and other charges subject to guidelines and
limitations imposed by Congress consistent with the basic policy of local
autonomy;
m. Automatic release of local government's just share in national
taxes;
n. Tax exemption of all revenues and assets of non-stock, non-
profit educational institutions used actually, directly and exclusively for
educational purposes;
o. Tax exemption of all revenues and assets of proprietary or
cooperative educational institutions subject to limitations provided by law
including restrictions on dividends and provisions for reinvestment of profits;
p. Tax exemption of grants, endowments, donations or
contributions used actually, directly and exclusively for educational purposes
subject to conditions prescribed by law.
5. Equal protection of the law clause is subject to
reasonable classification. If the groupings are characterized by
substantial distinctions that make real differences, one class may be treated
and regulated differently from another. The classification must also be
germane to the purpose of the law and must apply to all those belonging to
the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January
20, 1999)
6. Requisites for valid classification. All that is
required of a valid classification is that it be reasonable, which means that
a. the classification should be based on substantial distinctions
which make for real differences,
b. that it must be germane to the purpose of the law;
c. that it must not be limited to existing conditions only; and
d. that it must apply equally to each member of the class.
The standard is satisfied if the classification or distinction is based
on a reasonable foundation or rational basis and is not palpably arbitrary.
[ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715,
August 14, 2008]
7. Equal protection does not demand absolute
equality. It merely requires that all persons shall be treated alike, under
like circumstances and conditions, both as to the privileges conferred and
liabilities enforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
It is imperative to duly establish that the one invoking equal
protection and the person to which she is being compared were indeed
similarly situated, i.e., that they committed identical acts for which they
were charged with the violation of the same provisions of the NIRC; and
that they presented similar arguments and evidence in their defense - yet,
they were treated differently. (Santos, supra)
8. Tests to determine validity of classification. The
United States Supreme Court has established different tests to determine
the validity of a classification and compliance with the equal protection
clause. The recognized tests are:
a. The traditional (or rational basis) test.
b. The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class) test.
9. The traditional (or rational basis) test used in order
to determine the validity of classification. The classification is
valid if it is rationally related to a constitutionally permissible state interest.
The complainant must prove that the classification is invidous,
wholly arbitrary, or capricious, otherwise the classification is presumed
to be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61; McGowan v.
Maryland, 366 U.S. 420; United States Railroad Retirement Board v. Fritz, 449
U.S. 166)
 12
10. The strict scrutiny (or compelling interest) test
used in order to determine the validity of the classification.
Government regulation that intentionally discriminates against a suspect
class such as racial or ethnic minorities, is subject to strict scrutiny and
considered to violate the equal protection clause unless found necessary
to promote a compelling state interest.
A classification is necessary when it is narrowly drawn so that no
alternative, less burdensome means is available to accomplish the state
interest.
Thus, it was held that denial of free public education to the children
of illegal aliens imposes an enormous and lasting burden based on a
status over which the children have no control is violative of equal
protection because there is no showing that such denial furthers a
substantial state goal. (Plyler v. Doe, 457 U.S. 202)
11. The intermediate level of scrutiny (or quasi-
suspect class) test used in order to determine the validity of
he classification. Classification based on gender or legitimacy are not
suspect, but neither are they judged by the traditional or rational basis
test.
Intentional discriminations against members of a quasi-suspect
class violate equal protection unless they are substantially related to
important government objectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows, but
not widowers, has been held valid for it furthers the state policy of
cushioning the financial impact of spousal loss upon the sex for whom that
loss usually imposes a heavier burden. (Kahn v. Shevin, 416 U.S. 351)
12. Equality and uniformity of taxation may mean the
same as equal protection. In such a case, the terms would mean that
all subjects and objects of taxation which are similarly situated shall be
subject to the same burdens and granted the same privileges without any
discrimination whatsoever.
13. It is inherent in the power to tax that the State be
free to select the subjects of taxation, and it has been repeatedly
held that, "inequalities which result from a singling out of one particular class
of taxation, or exemption, infringe no constitutional limitation."
(Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)
9. Benjie is a law-abiding citizen who pays his
real estate taxes promptly. Due to a series of typhoons and
adverse economic conditions, an ordinance is passed by
Soliman City granting a 50% discount for payment of unpaid
real estate taxes for the preceding year and the condonation
of all penalties on fines resulting from the late payment.
Arguing that the ordinance rewards delinquent tax
payers and discriminates against prompt ones, Benjie
demands that he be refunded an amount equivalent to one-
half of the real property taxes he paid. The municipal attorney
rendered an opinion that Benjie cannot be reimbursed
because the ordinance did not provide for such
reimbursement. Benjie files suit to declare the ordinance void
on the ground that it is a class legislation. Will his suit
prosper ? Explain your answer briefly.
SUGGESTED ANSWER: No. There is no class legislation
because there is no violation of the equal protection suit. There is a valid
classification between those who already paid their taxes and those who
have not. Furthermore, the taxing authority has the prerogative to select
the subjects and objects of taxation, including granting a 50% discount in
the payment of unpaid real estate taxes, and the condonation of all
penalties on fines resulting from late payment.
10. The rewards law to tax collectors does not violate
equal protection. The equal protection clause recognizes a valid
classification, that is, a classification that has a reasonable foundation or
rational basis and not arbitrary. With respect to RA 9335, its expressed
public policy is the optimization of the revenue-generation capability and
collection of the BIR and the BOC. Since the subject of the law is the
revenue- generation capability and collection of the BIR and the BOC, the
incentives and/or sanctions provided in the law should logically pertain to
the said agencies. Moreover, the law concerns only the BIR and the BOC
because they have the common distinct primary function of generating
revenues for the national government through the collection of taxes,
customs duties, fees and charges.
Indubitably, such substantial distinction is germane and intimately
related to the purpose of the law. Hence, the classification and treatment
accorded to the BIR and the BOC under RA 9335 fully satisfy the
demands of equal protection. (ABAKADA Guro Party List, etc., v. Purisima,
etc., et al., G. R. No. 166715, August 14, 2008)
11. The prosecution of one guilty person while others
equally guilty are not prosecuted, however, is not, by itself, a
denial of the equal protection of the laws. Where the official action
purports to be in conformity to the statutory classification, an erroneous or
 13
mistaken performance of the statutory duty, although a violation of the
statute, is not without more a denial of the equal protection of the laws.
The unlawful administration by officers of a statute fair on its face,
resulting in its unequal application to those who are entitled to be treated
alike, is not a denial of equal protection unless there is shown to be
present in it an element of intentional or purposeful discrimination. This
may appear on the face of the action taken with respect to a particular
class or person, or it may only be shown by extrinsic evidence showing a
discriminatory design over another not to be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12. Equal protection should not be used to protect
commission of crime. While all persons accused of crime are to be
treated on a basis of equality before the law, it does not follow that they
are to be protected in the commission of crime. It would be
unconscionable, for instance, to excuse a defendant guilty of murder
because others have murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal laws as
to some persons should be converted into a defense for others charged
with crime, the result would be that the trial of the district attorney for
nonfeasance would become an issue in the trial of many persons charged
with heinous crimes and the enforcement of law would suffer a complete
breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
13. Illustration of double taxation in local taxation.
there is indeed double taxation if Coca-Cola is subjected to the taxes
under both Sections 14 and 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 to city
revenues; (3) by the same taxing authority City of 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 City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc., G. R. No. 181845, August 4, 2009)
14. A lawful tax on a new subject, or an increased tax
on an old one, does not interfere with a contract or impairs its
obligation, within the meaning of the constitution. (Tolentino v.
Secretary of Finance, et al., and companion cases, 235 SCRA 630)
15. The withdrawal of a tax exemption should not be
construed as prohibiting future grants of exemption from all
taxes. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et
al., etc., G. R. No. 143867, August 22, 2001)
16. Tax exemptions in franchises are always subject to
withdrawal. A legislative franchise is granted with the express condition
that it is subject to amendment, alteration, or repeal. (1987 Constitution, Art.
XII, Sec. 11)
It is enough to say that the parties to a contract cannot, through the
exercise of prophetic discernment, fetter the exercise of the taxing power
of the State. For not only are existing laws read into contracts in order to
fix obligations as between parties, but the reservation of essential
attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against
impairment presupposes the maintenance of a government which retains
adequate authority to secure the peace and good order of society. (Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001
made the observation that since Smarts franchise was granted after the effectivity
of the Local Government Code that its tax exemption privilege was reinstated.
However, Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No.
155491, September 16, 2008 is explicit in its holding that Smart is not entitled to a
tax exemption.
17. When withdrawal of a tax exemption impairs
the obligation of contracts. The Contract Clause has never been
thought as a limitation on the exercise of the States power of taxation
save only where a tax exemption has been granted for a valid
consideration. (Smart Communications, Inc. v. The City of Davao, etc., et al., G.
R. No. 155491, September 16, 2008) citing Tolentino v. Secretary of Finance, G.
R. No. 115455, August 25, 1994, 235 SCRA 630, 685) The author opines that
since practically all franchises granted to telecommunications companies
are similarly worded that the above doctrine finds application to the others)
18. The primary reason for the withdrawal of tax
exemption privileges granted to government owned and
controlled corporations and all other units of government was that such
privilege resulted to serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, hence resulting in the need for
these entities to share in the requirements of development, fiscal or
otherwise, by paying the taxes and other charges due them. (Philippine Ports
Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)
 14
19. National Power Corporation (NPC) is of the
insistence that it is not subject to the payment of franchises
taxes imposed by the Province of Isabela because all of its
shares are owned by the Republic of the Philippines. It is thus,
an instrumentality of the National Government which is exempt
from local taxation. As such it is not a private corporation
engaged in business enjoying franchise
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
2001, upheld the authority of the City of Davao, a local government unit, to
impose and collect a local franchise tax because the Local Government
Code has withdrawn all tax exemptions previously enjoyed by all persons
and authorized local government units to impose a tax on business enjoying
a franchise tax notwithstanding the grant of tax exemption to them.
20. In lieu of all taxes in the franchise of ABS-CBN
does not exempt it from local franchise taxes. It does not
expressly provide what kind of taxes ABS-CBN is exempted from. It is not
clear whether the exemption would include both local, whether municipal,
city or provincial, and national tax. Whether the in lieu of all taxes
provision would include exemption from local tax is not unequivocal.
The right to exemption from local franchise tax must be clearly
established and cannot be made out of inference or implications but must
be laid beyond reasonable doubt. Verily, the uncertainty in the in lieu of
all taxes provision should be construed against ABS-CBN. ABS-CBN
has the burden to prove that it is in fact covered by the exemption so
claimed but has failed to do so. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an
earlier case involving another telecommunications company Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises
granted to telecommunications companies are similarly worded that the above
doctrine finds application to the others.)
21. In lieu of all taxes refers to national internal
revenue taxes and not to local taxes. The in lieu of all taxes
clause applies only to national internal revenue taxes and not to local
taxes. As appropriately pointed out in the separate opinion of Justice
Antonio T. Carpio in a similar case involving a demand for exemption from
local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to
taxes, other than income tax, imposed under the National Internal
Revenue Code. The "in lieu of all taxes" clause does not apply to local
taxes. The proviso in the first paragraph of Section 9 of Smart's franchise
states that the grantee shall "continue to be liable for income taxes
payable under Title II of the National Internal Revenue Code." Also, the
second paragraph of Section 9 speaks of tax returns filed and taxes paid
to the "Commissioner of Internal Revenue or his duly authorized
representative in accordance with the National Internal Revenue Code."
Moreover, the same paragraph declares that the tax returns "shall be
subject to audit by the Bureau of Internal Revenue." Nothing is mentioned
in Section 9 about local taxes. The clear intent is for the "in lieu of all
taxes" clause to apply only to taxes under the National Internal Revenue
Code and not to local taxes. Even with respect to national internal revenue
taxes, the "in lieu of all taxes" clause does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's
franchise to also apply to local taxes, Congress would have expressly
mentioned the exemption from municipal and provincial taxes. Congress
could have used the language in Section 9(b) of Clavecilla's old franchise,
as follows:
x x x in lieu of any and all taxes of any kind, nature or description
levied, established or collected by any authority whatsoever, municipal,
provincial or national, from which the grantee is hereby expressly
exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local
taxes. Congress used the "in lieu of all taxes" clause only in reference to
national internal revenue taxes. The only interpretation, under the rule on
strict construction of tax exemptions, is that the "in lieu of all taxes" clause
in Smart's franchise refers only to national and not to local taxes. [Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008 citing Philippine Long Distance Telephone Company, Inc. v.
City of Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: The author opines that the above finds
application to all telecommunications companies.
22. The in lieu of all taxes clause in the franchise of
ABS-CBN has become functus officio with the abolition of the
franchise tax on broadcasting companies with yearly gross
receipts exceeding Ten Million Pesos. The clause in lieu of all
taxes does not pertain to VAT or any other tax. It cannot apply when
what is paid is a tax other than a franchise tax. Since the franchise tax on
the broadcasting companies with yearly gross receipts exceeding ten
million pesos has been abolished, the in lieu of all taxes clause has now
become functus officio, rendered inoperative. (Quezon City, et al., v. ABS-
CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
 15
NOTES AND COMMENTS: This is practically the same holding in an
earlier case involving another telecommunications company. Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises
granted to telecommunications companies are similarly worded that the above
doctrine finds application to the others.)
23. Double taxation in its generic sense, this
means taxing the same subject or object twice during the same
taxable period. In its particular sense, it may mean direct duplicate
taxation, which is prohibited under the constitution because it violates the
concept of equal protection, uniformity and equitableness of taxation.
Indirect duplicate taxation is not anathematized by the above constitutional
limitations.
24. Elements of direct duplicate taxation:
a. Same
1) Subject or object is taxed twice
2) by the same taxing authority
3) for the same taxing purpose
4) during the same taxable period
b. Taxing all of the subjects or objects for the first time without
taxing all of them for the second time.
If any of the elements are absent then there is indirect duplicate
taxation which is not prohibited by the constitution.
NOTES AND COMMENTS:
nd
a. Presence of the 2 element violates the equal protection clause.
st
If only the 1 element is present, taxing the same subject or object twice, by the
same taxing authority, etc., there is no violation of the equal protection clause
because all subjects and objects that are similarly situated are subject to the same
burdens and granted the same privileges without any discrimination whatsoever,
nd
The presence of the 2 element, taxing all of the subjects and objects for
the first time, without taxing all for the second time, results to discrimination among
subjects and objects that are similarly situated, hence violative of the equal
protection clause.
25. Double taxation a valid defense against the legality of
a tax measure if the double taxation is direct duplicate taxation,
because it would violate the equal protection clause of the constitution.
26. When an item of income is taxed in the Philippines
and the same income is taxed in another country, this would be
known as international juridical double taxation which is the
imposition of comparable taxes in two or more states on the same taxpayer
in respect of the same subject matter and for identical grounds.
(Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No.
127105, June 25, 1999)
27. Methods for avoiding double taxation (indirect
duplicate taxation).
a. Tax treaties which exempts foreign nationals from local
taxation and local nationals from foreign taxation under the principle of
reciprocity.
b. Tax credits where foreign taxes are allowed as deductions
from local taxes that are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.
28. Tax credit generally refers to an amount that is subtracted
directly from ones total tax liability, an allowance against the tax itself, or a
deduction from what is owned.
A tax credit reduces the tax due, including whenever applicable
the income tax that is determined after applying the corresponding tax rates
to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G. R. No. 159647, April 15, 2005)
29. A tax deduction is defined as a subtraction fro income for
tax purposes, or an amount that is allowed by law to reduce income prior to
the application of the tax rate to compute the amount of tax which is due.
A tax deduction reduces the income that is subject to tax in order to
arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G. R. No. 159647, April 15, 2005)
30. The petitioners allege that the R-VAT law is
constitutional because the Bicameral Conference Committed
has exceeded its authority in including provisions which were
never included in the versions of both the House and Senate
such as inserting the stand-by authority to the President to
increase the VAT from 10% to 12%; deleting entirely the no
pass-on provisions found in both the House and Senate Bills;
inserting the provision imposing a 70% limit on the amount of
input tax to be credited against the output tax; and including
the amendments introduced only by Senate Bill No. 1950
regarding other kinds of taxes in addition to the value-added
tax. Thus, there was a violation of the constitutional mandate
that revenue bills shall originate exclusively from the House of
Representatives.
 16
Are the contentions of such weight as to constitute grave Failure to Pay may result in no imprisonment
abuse of discretion which may invalidate the law ? Explain imprisonment
briefly. Mode of generally payable in payable in money,
SUGGESTED ANSWER: No. There was no grave abuse of Payment money property or service
discretion because all the changes and modifications made by the
Bicameral Conference Committee were germane to subjects of the Assignability not assignable assignable
provisions referred to it for reconciliation. Payment unless it becomes a may be a subject
The Bicameral Conference Committee merely exercised the judicially debt is not subject to
recognized long-standing legislative practice of giving said conference compensation or set-
committee ample latitude for compromising differences between the Senate off
and the House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
168056, September 1, 2005 and companion cases] Interest does not draw interest draws interest if
unless delinquent stipulated or delayed
31. The VAT while regressive is NOT violative of the
Authority imposed by public can be imposed by
mandate to evolve a progressive system of taxation. Do you authority private individuals
agree ? The mandate to Congress is not to prescribe but to evolve a
progressive system of taxation. Otherwise, sales taxes which perhaps are Prescription Prescriptive periods debt under the Civil
the oldest form of indirect taxes, would have been prohibited with the for tax under NIRC Code
proclamation of the constitutional provision. Sales taxes are also
regressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. WARNING: Do not use the above arrangement in answering Bar
168056, September 1, 2005 and companion cases citing Tolentino v. Secretary of
questions.
Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]

32. All revenues and assets of non-stock, non-profit
educational institutions that are actually, directly and
exclusively used for educational purposes shall be exempt
from taxation.
2. Compensation takes place by operation of law, where the
local government and the taxpayer are in their own right reciprocally debtors
and creditors of each other, and that the debts are both due and
demandable, in consequence of Articles 1278 and 1279 of the Civil Code.
(Domingo v. Garlitos, 8 SCRA 443)

33. Revenues and assets of proprietary educational 3. May there be compensation or set-off between a
institutions, including those which are cooperatively owned, national tax and a debt ? Reason out your answer.
may be entitled to exemptions subject to limitations provided SUGGESTED ANSWER: As a general rule, there could be
by law including restrictions on dividends and provisions for no compensation or set-off between a tax and a debt for the following
reinvestments. There is no law at the present which grants exemptions, reasons:
a. Lifeblood theory.
other the exemptions granted to cooperatives.
b. Taxes are not contractual obligations but arise out of a duty
to, and are the positive acts of government, to the making and enforcing
OTHER CONCEPTS of which the personal consent of the individual taxpayer is not required.
(Republic v. Mambulao Lumber Co., 4 SCRA 622)
1. Distinguish tax from debt. c. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each
TAX DEBT other and a claim for taxes is not such a debt, demand, contract or
Basis based on law based on contract or judgment as is allowed to be set-off.
judgment
 17
Thus, it is correct to say that the offsetting of a taxpayers tax
refund with its alleged tax deficiency is unavailing under Art. 1279 of the
Civil Code. (South African Airways v. Commissioner of Internal Revenue, G.R.
No. 180356, February 16, 2010 reiterating Caltex Philippines, Inc. v.
Commission on Audit, which applied Francia v. Intermediate Appellate Court)
4. Exceptions: When set-off or compensation
allowed for local taxes.
a. Where both claims already become overdue and
demandable as well as fully liquidated. Compensation takes place by
operation of law under Art. 1200 in relation to Arts. 1279 and 1290 all of
the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
b. Compensation takes place by operation of law, where the
government and the taxpayer are in their own right reciprocally debtors
and creditors of each other, and that the debts are both due and
demandable. This is in consequence of Article 1278 and 1279 of the Civil
Code. (Domingo v. Garlitos, 8 SCRA 443)
c. ,The Supreme Court upheld the validity of a set-off between
the taxpayer and the government. In both cases, the claims of the
taxpayers therein were certain and liquidated. The claims were certain
since there were no doubts or disputes as to their refundability. In fact,
the government admitted the fact of over-payment. (Commissioner of
Internal Revenue v. Esso Standard Eastern, Inc., 172 SCRA 364)
d. In case of a tax overpayment, the BIRs obligation to refund
or off-set arises from the moment the tax was paid. REASON: Solutio
indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc 172
SCRA 364)
e. While judgment should be rendered in favor of Republic
for unpaid taxes, judgment ought at the same time to issue for
Sampaguita Pictures commanding payment to the latter by the Republic of
the value of the backpay certificates which the Republic received.
(Republic v. Ericta, 172 SCRA 623)
5. Gilbert obtained a judgment for a sum of
money against the municipality of Camiling. The judgment
has become final although execution has not issued. Upon
receiving an assessment for municipal sales taxes from the
Municipal Treasurer, Gilbert executed a partial assignment of
his judgment sufficient to cover the assessment in favor of
the Municipality. May the Municipal Treasurer validly accept
the assignment? Why?
SUGGESTED ANSWER: Yes. The parties in this case are
mutually debtors and creditors of each other, and since both of the claims
became overdue, demandable and fully liquidated, compensation takes
place by operation of law. Such was the holding in Domingo v. Garlitos, 8
SCRA 443, a case decided by the Supreme Court whose factual
antecedents are similar to the problem.
6. In case of doubt, tax laws must be construed strictly
against the State and liberally in favor of the taxpayer because
taxes, as burdens which must be endured by the taxpayer, should not be
presumed to go beyond what the law expressly and clearly declares.
(Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al.,
293 SCRA 92, 99)
7. Interpretation in the imposition of taxes, is not the
similar doctrine as that applied to tax exemptions. The rule in
the interpretation of tax laws is 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 implication. 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 imposed beyond what statutes
expressly and clearly import. [Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing CIR v. Court of
Appeals, 338 Phil. 322, 330-331 (1997)] As burdens, taxes should not be
unduly exacted nor assumed beyond the plain meaning of the tax laws.
(Ibid., citing CIR v. Philippine American Accident Insurance Company, Inc., G.R.
No. 141658, March 18, 2005, 453 SCRA 668)
8. Strict interpretation of tax exemption laws. Taxes
are what civilized people pay for civilized society. They are the lifeblood of
the nation. Thus, statutes granting tax exemptions are construed
stricissimi juris against the taxpayer and liberally in favor of the taxing
authority. A claim of tax exemption must be clearly shown and based on
language in law too plain to be mistaken. Otherwise stated, taxation is the
rule, exemption is the exception. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing Mactan
Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11,
1996, 261 SCRA 667, 680) The burden of proof rests upon the party
claiming the exemption to prove that it is in fact covered by the exemption
so claimed. (Quezon City, supra citing Agpalo, R.E., Statutory Construction,
2003 ed., p. 301)
 18
9. Rationale for strict interpretation of tax exemption
laws. The basis for the rule on strict construction to statutory provisions
granting tax exemptions or deductions is to minimize differential treatment
and foster impartiality, fairness and equality of treatment among
taxpayers. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R.
No. 166408, October 6, 2008) He who claims an exemption from his share
of common burden must justify his claim that the legislature intended to
exempt him by unmistakable terms. For exemptions from taxation are not
favored in law, nor are they presumed. They must be expressed in the
clearest and most unambiguous language and not left to mere
implications. It has been held that exemptions are never presumed the
burden is on the claimant to establish clearly his right to exemption and
cannot be made out of inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule and
exemption the exception, the intention to make an exemption ought to be
expressed in clear and unambiguous terms. (Quezon City, supra citing
Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)
10. Why are tax exemptions are strictly construed
against the taxpayer and liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued
existence of the State.
11. In case of a tax overpayment, where the BIRs
obligation to refund or set-off arises from the moment the tax
was paid under the principle of solutio indebeti. (Commissioner of
Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
12. But note Nestle Phil. v. Court of Appeals, et al., G.R.
No. 134114, July 6, 2001 which held that in order for the rule on solutio
indebeti to apply it is an essential condition that the petitioner must first show
that its payment of the customs duties was in excess of what was required
by the law at the time the subject 16 importations of milk and milk products
were made. Unless shown otherwise, the disputable presumption of
regularity of performance of duty lies in favor of the Collector of Customs.
13. Strict interpretation of a tax refund that partakes of
the nature of a tax does not apply to tax refund based on
erroneous payment or where there is no law that authorizes
collection of the tax. There is parity between tax refund and tax
exemption only when the former is based either on a tax exemption
statute or a tax refund statute. (Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are not founded
principally on legislative grace but on the legal principle which underlies all
quasi-contracts abhorring a persons unjust enrichment at the expense of
another. [Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay, Sr.,
178 Phil. 482 (1979); Puyat & Sons v. City of Manila, et al., 117 Phil. 985 (1963)]
The dynamic of erroneous payment of tax fits to a tee the prototypic
quasi-contract, solutio indebiti, which covers not only mistake in fact but
also mistake in law. (Commissioner, supra citing CIVIL CODE, Arts. 2142, 2154
and 2155)
The Government is not exempt from the application of solutio
indebiti. (Commissioner, supra citing Commissioner of Internal Revenue v.
Firemans Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 315,
324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of
Manila, supra)
Indeed, the taxpayer expects fair dealing from the Government,
and the latter has the duty to refund without any unreasonable delay what
it has erroneously collected. (Commissioner, supra citing Commissioner of
Internal Revenue v. Tokyo Shipping Co., supra at 338) If the State expects its
taxpayers to observe fairness and honesty in paying their taxes, it must
hold itself against the same standard in refunding excess (or erroneous)
payments of such taxes. It should not unjustly enrich itself at the expense
of taxpayers. [Commissioner, supra citing AB Leasing and Finance Corporation
v. Commissioner of Internal Revenue, 453 Phil. 297 in turn citing BPI-Family
Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510, 518 (2000)] And
so, given its essence, a claim for tax refund necessitates only
preponderance of evidence for its approbation like in any other ordinary
civil case. (Commissioner, supra)
14. Tax refunds premised upon a tax exemption
strictly construed, Tax exemption is a result of legislative grace. And
he who claims an exemption from the burden of taxation must justify his
claim by showing that the legislature intended to exempt him by words too
plain to be mistaken. [Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao Consolidated
Mining Co. Inc. v. Commissioner of Internal Revenue and Court of Tax Appeals,
119 Phil. 33, 37 (1963)]
The rule is that tax exemptions must be strictly construed such that
the exemption will not be held to be conferred unless the terms under
which it is granted clearly and distinctly show that such was the intention.
[Commissioner, supra citing Phil. Acetylene Co. v. Commission of Internal
Revenue, et al., 127 Phil. 461, 472 (1967); Manila Electric Company v. Vera,
G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao
Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax
exemption or tax refund. In such case, the rule of strict interpretation
against the taxpayer is applicable as the claim for refund partakes of the
 19
nature of an exemption, a legislative grace, which cannot be allowed
unless granted in the most explicit and categorical language. The
taxpayer must show that the legislature intended to exempt him from the
tax by words too plain to be mistaken. [Commissioner, supra with a note to
see Surigao Consolidated Mining Co. Inc. v. CIR, supra at 732-733; Philex
Mining Corp. v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999);
Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-
892 (1998); . Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd., 314
Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a previous ruling
interpreting a law as exempting a taxpayer. A reversal of a BIR
ruling favorable to a taxpayer would not necessarily create a perpetual
exemption in his favor, for after all the government is never estopped from
collecting taxes because of mistakes or errors on the part of its agents.
(Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al.,
293 SCRA 92, 99)
16. A tax amnesty is a general pardon or intentional overlooking
by the State of its authority to impose penalties on persons otherwise guilty
of evasion or violation of a revenue or a tax law.
It partakes of an absolute waiver by the government of its right to
collect what is due it and to give tax evaders who wish to relent a chance
to start with a clean slate. A tax amnesty, much like a tax exemption, is
never favored nor presumed in law. The grant of a tax amnesty, similar to
a tax exemption, must be construed strictly against the taxpayer and
liberally in favor of the taxing authority. (Philippine Banking Corporation, etc.,
v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)
17. The purpose of tax amnesty is to
a. give tax evaders who wish to relent a chance to start a clean
slate, and to
b. give the government a chance to collect uncollected tax from
tax evaders without having to go through the tedious process of a tax
case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February 10,
2000)
18. Tax amnesty distinguished from tax exemption.
a. Tax amnesty is an immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes (People v.
Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax
exemption is an immunity from civil liability only. It is an immunity or
privilege, a freedom from a charge or burden to which others are subjected.
(Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax periods, hence of
retroactive application (Castaneda, supra) WHILE tax exemption has
prospective application.
19. Tax avoidance is the use of legally permissible means to
reduce the tax while tax evasion is the use of illegal means to escape the
payment of taxes.
20. Tax evasion connotes the integration of three
factors:
a. The end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due;
b. an accompanying state of mind which is described as being
evil on bad faith, willful, or deliberate and not accidental; and
c. a course of action or failure of action which is unlawful.
(Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G.
R. No. 147188, September 14, 2004)
21. Tax avoidance distinguished from tax evasion.
a. Tax avoidance is legal while tax evasion is illegal.
b. The objective of tax avoidance in most instances is merely to
reduce the tax that is due while is tax evasion the object is to entirely escape
the payment of taxes.
c. Tax evasion warrants the imposition of civil, administrative and
criminal penalties while tax avoidance does not.
22. Tax sparing is a provision in some tax treaties which
provides that the state of residence allows as credit the amount that would
have been paid, as if no reduction has been made. (Vogel, Klaus on Double
Taxation Conventions, Third Edition, p.1255 cited in Segarra, Venice H, Tax
Treaties: Trick or treat ?, Philippine Daily Inquirer, December 6, 2002, p. C5)
There may be instances where a particular income is exempt from
taxation in order to encourage foreign investments which may lead to
economic development. If the tax credit method is used, there would be
no more tax to credit since there is no more tax to credit as a result of the
tax exemption. Consequently, when the tax method credit method is
applied to these items of income, such incentives are siphoned off since,
in effect, the tax benefits are cancelled out. (Ibid.) Thus, the need for the
tax sparing provision.
NATIONAL INTERNAL REVENUE CODE
 20
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
INTERNAL REVENUE
1. Rep. Act No. 1405, the Bank Deposits Secrecy Law
prohibits inquiry into bank deposits. As exceptions to Rep. Act
No. 1405, the Commissioner of Internal Revenue is only
authorized to inquire into the bank deposits of:
a. a decedent to determine his gross estate; and
b. any taxpayer who has filed an application for compromise of
his tax liability by reason of financial incapacity to pay his tax liability. [Sec. 5
(F), NIRC of 1997]
c. A taxpayer who authorizes the Commissioner to inquire into
his bank deposits.
2. Purpose of the NIRC of 1997. Revenue generation
has undoubtedly been a major consideration in the passage
of the Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
3. Purpose of shift from ad valorem system to
specific tax system in taxation of cigarettes. The shift from the
ad valorem system to the specific tax system is likewise meant to
promote fair competition among the players in the industries
concerned, to ensure an equitable distribution of the tax burden and to
simplify tax administration by classifying cigarettes, among others, into
high, medium and low-priced based on their net retail price and
accordingly graduating tax rates. (Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
TAX ON INCOME
1. The Tax Code has included under the term
corporation partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the
NIRC of 1997]
2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court
held citing Mertens that the term partnership includes a syndicate, group,
pool, joint venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is carried on.
3. Certain business organizations do not fall under the
category of corporations under the Tax Code, and therefore not
subject to tax as corporations, include:
a. General professional partnerships;
b. Joint venture or consortium formed for the purpose of
undertaking construction projects engaging in petroleum, coal, geothermal,
and other energy operations, pursuant to an operation or consortium
st
agreement under a service contract with the Government. [1 sentence,
Sec. 22 (B), BIRC of 1997]
4. Co-heirs who own inherited properties which
produce income should not automatically be considered as
partners of an unregistered corporation subject to income tax
for the following reasons:
a. The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived.
There must be an unmistakable intention to form a partnership or joint
venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)
b. There is no contribution or investment of additional capital to
increase or expand the inherited properties, merely continuing the
dedication of the property to the use to which it had been put by their
forebears. (Ibid.)
c. Persons who contribute property or funds to a common
enterprise and agree to share the gross returns of that enterprise in
proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no
common stock capital, and no community of interest as principal proprietors
in the business itself from which the proceeds were derived. (Elements of the
nd
Law of Partnership by Floyd R. Mechem, 2 Ed., Sec. 83, p. 74 cited in Pascual v.
Commissioner of Internal Revenue, 166 SCRA 560)
5. The common ownership of property does not itself
create a partnership between the owners, though they may use it for
purpose of making gains, and they may, without becoming partners, are
among themselves as to the management and use of such property and the
application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363,
160 No. App. 14, cited in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)
6. The income from the rental of the house, bought
from the earnings of co-owned properties, shall be treated as
the income of an unregistered partnership to be taxable as a
 21
corporation because of the clear intention of the brothers to join together in a
venture for making money out of rentals.
7. Income is gain derived and severed from capital, from labor
or from both combined. For example, to tax a stock dividend would be to
tax a capital increase rather than the income. (Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
8. The term taxable income means the pertinent items of
gross income specified in the Tax Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of
income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997)
9. The cancellation and forgiveness of indebtedness
may amount to (a) payment of income; (b) gift; or to a (c) capital transaction
depending upon the circumstances.
10. If an individual performs services for a creditor who,
in consideration thereof, cancels the debt, it is income to the
extent of the amount realized by the debtor as compensation for his
services.
11. An insolvent debtor does not realize taxable income
from the cancellation or forgiveness. (Commissioner v. Simmons
Gin Co., 43 Fd 327 CCA 10 )
th
12. The insolvent debtor realizes income resulting from
the cancellation or forgiveness of indebtedness when he
becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F)
289)
13. If a creditor merely desires to benefit a debtor and
without any consideration therefor cancels the amount of the
debt it is a gift from the creditor to the debtor and need not be
included in the latters income.
14. If a corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect of payment of a
dividend. (Sec. 50, Rev. Regs. No. 2)
15. Members of cooperatives not subject to tax on the
interest earned from their deposits with the cooperative. No less
than our Constitution guarantees the protection of cooperatives. Section 15,
Article XII of the Constitution considers cooperatives as instruments for social
justice and economic development. At the same time, Section 10 of Article II of
the Constitution declares that it is a policy of the State to promote social justice in
all phases of national development. In relation thereto, Section 2 of Article XIII of
the Constitution states that the promotion of social justice shall include the
commitment to create economic opportunities based on freedom of initiative and
self-reliance. Bearing in mind the foregoing provisions, we find that an
interpretation exempting the members of cooperatives from the imposition of the
final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits)
is more in keeping with the letter and spirit of our Constitution. (Dumaguete
Cathedral Credit Coopertive [DCCC)] etc., v. Commissioner of Internal Revenue,
G. R. No. 182722, January 22, 2010)
In closing, cooperatives, including their members, deserve a preferential
tax treatment because of the vital role they play in the attainment of economic
development and social justice. Thus, although taxes are the lifeblood of the
government, the States power to tax must give way to foster the creation and
growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: The
power of taxation, while indispensable, is not absolute and may be subordinated
to the demands of social justice. (Ibid., citing Commissioner of Internal Revenue
v. American Express International, Inc. (Philippine Branch), 500 Phil. 586 (2005).
16. The Global system of income taxation is a system
employed where the tax system views indifferently the tax base and
generally treats in common all categories of taxable income of the individual.
(Tan v. del Rosario, Jr., 237 SCRA 324, 331)
17. The Schedular system of income taxation is a system
employed where the income tax treatment varies and is made to depend on
the kind or category of taxable income of the taxpayer. (Tan v. del Rosario,
Jr., 237 SCRA 324, 331)
18. Under the National Internal Revenue Code the global
system is applicable to taxable corporations and the schedular
to individuals.
19. Compensation income is considered as having been
earned in the place where the service was rendered and not
considered as sourced from the place of origin of the money.
20. Payment for services, other than compensation
income, is considered as having been earned at the place
where the activity or service was performed.
 22
21. A non-resident alien, who has stayed in the
Philippines for an aggregate period of more than 180 days
during any calendar year, shall be considered as a non-
resident alien doing business in the Philippines. Consequently,
he shall be subject to income tax on his income derived from sources from
within the Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized deductions including the
personal and additional exemptions subject to the rule on reciprocity.
22. What are considered as de minimis benefits
not subject to withholding tax on compensation income of both
managerial and rank and file employees ?
SUGGESTED ANSWER:
a. Monetized unused vacation leave credits of employees not
exceeding ten (10) days during the year;
b. Medical cash allowance to dependents of employees not
exceeding P750.00 per employee per semester or P125 per month;
c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per
month amounting to not more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per
annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per
annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g. for length of service or
safety achievement, which must be in the form of a tangible persona
property other than cash or gift certificate, with an annual monetary value
not exceeding P10,000.00 received by an employee under an established
written plan which does not discriminate in favor of highly paid employees;
h. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per annum;
i. Flowers, fruits, books, or similar items given to employees
under special circumstances, e.g. on account of illness, marriage, birth of a
baby, etc.; and
j. Daily meal allowance for overtime work not exceeding twenty
five percent (25%) of the basic minimum wage.
The amount of de minimis benefits conforming to the ceiling herein
prescribed shall not be considered in determining the P30,000 ceiling of
other benefits provided under Section 32 (B)(7)(e) of the Code. However,
if the employer pays more than the ceiling prescribed by these regulations,
the excess shall be taxable to the employee receiving the benefits only if
such excess is beyond the P30,000.00 ceiling, provided, further, that any
amount given by the employer as benefits to its employees, whether
classified as de minimis benefits or fringe benefits, shall constitute as
deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs.
2-98 as amended by Rev. Regs. No. 8-2000]
23. Income subject to final tax refers to an income
collected through the withholding tax system. The payor of the
income withholds the tax and remits it to the government as a final
settlement of the income tax as a final settlement of the income tax due on
said income. The recipient is no longer required to include the income
subjected to a final tax as part of his gross income in his income tax return.
24. Distinguish exclusions from deductions.
SUGGESTED ANSWER:
a. Exclusions from gross income refer to a flow of wealth to the
taxpayer which are not treated as part of gross income for purposes of
computing the taxpayers taxable income, due to the following reasons: (1)
It is exempted by the fundamental law; (2) It is exempted by statute; and
(3) It does not come within the definition of income (Sec. 61, Rev. Regs.
No. 2) WHILE deductions are the amounts which the law allows to be
subtracted from gross income in order to arrive at net income.
b. Exclusions pertain to the computation of gross income WHILE
deductions pertain to the computation of net income.
c. Exclusions are something received or earned by the taxpayer
which do not form part of gross income WHILE deductions are something
spent or paid in earning gross income.
An example of an exclusion from gross income are life insurance
proceeds, and an example of a deduction are losses.
25. What are excluded from gross income ?
SUGGESTED ANSWER:
a. Proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured whether in a single sum or
otherwise.
b. Amounts received by the insured as a return of premiums paid
by him under life insurance, endowment or annuity contracts either during
the term, or at maturity of the term mentioned in the contract, or upon
surrender of the contract.
c. Value of property acquired by gift, bequest, devise, or descent.
d. Amounts received, through accident or health insurance or
Workmens Compensation Acts as compensation for personal injuries or
sickness, plus the amounts of any damages received on whether by suit or
agreement on account of such injuries or sickness.
e. Income of any kind to the extent required by any treaty
obligation binding upon the Government of the Philippines.
 23
f. Retirement benefits received under Republic Act No. 7641.
Retirement received from reasonable private benefit plan after compliance
with certain conditions. Amounts received for beyond control separation.
Foreign social security, retirement gratuities, pensions, etc. USVA benefits,
SSS benefits and GSIS benefits.
26. What are the conditions for excluding
retirement benefits from gross income, hence tax-exempt ?
SUGGESTED ANSWER:
a. Retirement benefits received under Republic Act No. 7641 and
those received by officials and employees of private firms, whether individual
or corporate, in accordance with the employers reasonable private benefit
plan approved by the BIR.
b. Retiring official or employee
1) In the service of the same employer for at least ten (10)
years;
2) Not less than fifty (50) years of age at time of
retirement;
3) Availed of the benefit of exclusion only once. [Sec. 32
(B) (6) (a), NIRC of 1997] The retiring official or employee should not
have previously availed of the privilege under the retirement plan of
st
the same or another employer. [1 par., Sec. 2.78 (B) (1), Rev.
Regs. No. 2-98]
27. What kind of separation (retirement) pay is
excluded from gross income, hence tax-exempt ?
SUGGESTED ANSWER:
a. Any amount received by an official, employee or by his heirs,
b. From the employer
c. As a consequence of separation of such official or employee
from the service of the employer because of
1) Death, sickness or other physical disability; or
2) For any cause beyond the control of said official or
employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as
st
retrenchment, redundancy and cessation of business. [1 par.,
Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]
28. What are the Itemized deductions from gross
income and who may avail of them ?
a. Ordinary and necessary trade, business or professional
expenses.
b. The amount of interest paid or incurred within a taxable year
on indebtedness in connection with the taxpayers profession, trade or
business.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with
the taxpayers profession.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
d. Ordinary losses, losses from casualty, theft or
embezzlement; and net operating losses.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
e. Bad debts due to the taxpayer, actually ascertained to
be worthless and charged off within the taxable year, connected with
profession, trade or business, not sustained between related parties.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
f. Depreciation or a reasonable allowance for the exhaustion,
wear and tear (including reasonable allowance for obsolescence) of property
used in trade or business.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
 24
Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
g. Depletion or deduction arising from the exhaustion of a non-
replaceable asset, usually a natural resource.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
h. Charitable and other contributions. Resident citizens,
resident alien individuals and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense. Nonresident citizens and
foreign corporations on their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
i. Research and development expenditures treated as deferred
expenses paid or incurred by the taxpayer in connection with his trade,
business or profession, not deducted as expenses and chargeable to capital
account but not chargeable to property of a character which is subject to
depreciation or depletion.
Resident citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
j. Contributions to pension trusts. Resident citizens, resident
alien individuals and nonresident alien individuals who are engaged in trade
and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and
trusts may also deduct this expense. Nonresident citizens and foreign
corporations on their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
k. Insurance premiums for health and hospitalization. Resident
citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Nonresident
citizens and nonresident alien individual engaged in trade or business in the
Philippine on their gross incomes from within may also deduct these
premiums.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and
resident alien on their gross incomes and from compensation income are
allowed to deduct these premiums. Nonresident citizens on their gross
incomes from within may also deduct this expense. Nonresident alien
individuals engaged in trade or business in the Philippines are allowed to
deduct these exemptions under reciprocity.
Nonresident alien individuals not engaged in trade or business in
the Philippines are not allowed to deduct this expense.
29. Distinguish ordinary expenses from capital
expenditures.
SUGGESTED ANSWER: Ordinary expenses are those which are
common to incur in the trade or business of the taxpayer WHILE capital
expenditures are those incurred to improve assets and benefits for more
than one taxable year. Ordinary expenses are usually incurred during a
taxable year and benefits such taxable year. Necessary expenses are those
which are appropriate or helpful to the business.
30. What are the requisites for the deductibility of
business expenses ?
SUGGESTED ANSWER: The following are the requisites for
deductibility of business expenses:
a. Compliance with the business test:
1) Must be ordinary and necessary;
2) Must be paid or incurred within the taxable year;
3) Must be paid or incurred in carrying on a trade or
business.
4) Must not be bribes, kickbacks or other illegal
expenditures
b. Compliance with the substantiation test. Proof by evidence or
records of the deductions allowed by law including compliance with the
business test.
 25
31. What are the requisites for the deductibility of
ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services ?
SUGGESTED ANSWER:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the taxable year
dependent upon the method of accounting upon the basis of which the net
income is computed.
c. it must be supported by receipts, records or other pertinent
papers. (Commissioner of Internal Revenue v, Isabela cultural Corporation,
G. R. No. 172231, February 12, 2007)
32. TMG Corporation is issuing the accrual
method of accounting. In 2005 XYZ Law Firm and ABC
Auditing Firm rendered various services which were billed by
these firms only during the following year 2006. Since the bills
for legal and auditing services were received only in 2006 and
paid in the same year, TMG deducted the same from its 2006
gross income. The BIR disallowed the deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct. TMG should have
deducted the professional and legal fees in the year they were incurred in
2005 and not in 2006 because at the time the services were rendered in
2005, there was already an obligation to pay them. (Commissioner of
Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231,
February 12, 2007)
NOTES AND COMMENTS:
a. Accounting methods for tax purposes comprise a set of rules
for determining when and how to report income and deductions.
(Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R.
No. 172231, February 12, 2007)
The two (2) principal accounting methods for recognition of income
are the (a) accrual method; and the (b) cash method.
b. Recognition of income and expenses under the accrual
method of accounting. Amounts of income accrue where the right to
receive them becomes fixed, where there is created an enforceable liability.
Liabilities, are incurred when fixed and determinable in nature without regard
to indeterminacy merely of time of payment.. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12,
2007)
The accrual of income and expense is permitted when the all-events
test has been met. (Ibid.)
c. All-events test. This 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 test does not demand that the amount of such income or liability
be known absolutely, only that a 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 unknown, 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 implies something less than an
exact or completely accurate amount.
The propriety of an accrual must be judged by the fact that a taxpayer
knew, or could reasonably be expected to have known, at the closing of its
books for the taxable year. Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction. (Commissioner
of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231,
February 12, 2007)
d. Under the cash method income is to be construed as income
for tax purposes only upon actual receipt of the cash payment. It is also
referred to as the cash receipts and disbursements method because both
the receipt and disbursements are considered. Thus, income is recognized
only upon actual receipt of the cash payment but no deductions are allowed
from the cash income unless actually disbursed through an actual payment
in cash.
33. The fringe benefits tax is a final withholding tax imposed on
the grossed-up monetary value of fringe benefits furnished, granted or paid
by the employer to the employee, except rank and file employees. [1st par.,
Sec. 2.33 (A), Rev. Regs. No. 3-98]
34. What is meant by fringe benefit for purposes
of taxation ?
SUGGESTED ANSWER: For purposes of taxation, fringe benefit
means any good, service, or other benefit furnished or granted in cash or in
kind by an employer to an individual employee (except rank and file
employees), such as but not limited to:
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and others;
e. Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
 26
f. Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or other similar
organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or his dependents;
and
j. Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of
st
1997; 1 par., Sec. 2.33 (B), Rev. Regs. No. 3-98]
35. Fringe benefits that are not subject to the fringe
benefits tax:
a. When the fringe benefit is required by the nature of, or
necessary to the trade, business or profession of the employer; or
b. When the fringe benefit is for the convenience or advantage of
st
the employer. [Sec. 32(A), NIRC of 1997; 1 par., Sec. 2.33 (A), Rev. Regs.
No. 3-98]
c. Fringe benefits which are authorized and exempted from
income tax under the Tax Code or under any special law;
d. Contributions of the employer for the benefit of the employee
to retirement, insurance and hospitalization benefit plans;
e. Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not; and
f. De minimis benefits as defined in the rules and regulations to
be promulgated by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec.
2.33 (C), Rev. Regs. No. 3-98]
36. De minimis benefits are facilities and privileges
(such as entertainment, medical services, or so-called courtesy discounts
on purchases), furnished or offered by an employer to his employees. They
are not considered as compensation subject to income tax and
consequently to withholding tax, if such facilities are offered or furnished by
the employer merely as a means of promoting the health, goodwill,
contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-
98 as amended by Rev. Regs. No. 8-2000]
37. Preferred shares are considered capital regardless
of the conditions under which such shares are issued and
dividends or interests paid thereon are not allowed as
deductions from the gross income of corporations. (Revenue
Memorandum Circular No. 17-71)
38. Bad debts are those which result from the
worthlessness or uncollectibility, in whole or in part, of amounts due the
taxpayer by others, arising from money lent or from uncollectible amounts of
income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99)
39. Who are related parties ?
SUGGESTED ANSWER: The following are related parties:
a. Members of the same family. The family of an individual shall
include only his brothers and sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent (50%)
in value of the outstanding stock of which is owned, directly or indirectly, by
or for such individual;
c. Two corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for the same
individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the
same person is a grantor with respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B),
NIRC of 1997]
40. What are the requisites for valid deduction of
bad debts from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to the taxpayer which
must be valid and legally demandable;
b. The same must be connected with the taxpayers trade, business
or practice of profession;
c. The same must not be sustained in a transaction entered into
between related parties;
d. The same must be actually charged off the books of accounts of
the taxpayer as of the end of the taxable year; and
e. The debt must be actually ascertained to be worthless and
uncollectible during the taxable year;
f. The debts are uncollectible despite diligent effort exerted by the
taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99
reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v.
Court of Appeals, et al., 256 SCRA 667]
g. Must have been reported as receivables in the income tax return
of the current or prior years. (Sec. 103, Rev. Regs. No. 2)
:
41. What is the tax benefit rule ?
 27
SUGGESTED ANSWER: The tax benefit rule posits that the
recovery of bad debts previously allowed as deduction in the preceding year
or years shall be included as part of the taxpayers gross income in the year
of such recovery to the extent of the income tax benefit of said deduction.
NOTES AND COMMENTS:
a. If in the year the taxpayer claimed deduction of bad debts
written-off, he realized a reduction of the income tax due from him on
account of the said deduction, his subsequent recovery thereof from his
debtor shall be treated as a receipt of realized taxable income. (Sec. 4, Rev.
Regs. 5-99)
b. If the said taxpayer did not benefit from the deduction of the
said bad debt written-off because it did not result to any reduction of his
income tax in the year of such deduction (i.e. where the result of his
business operation was a net loss even without deduction of the bad debts
written-off), then his subsequent recovery thereof shall be treated as a mere
recovery or a return of capital, hence, not treated as receipt of realized
taxable income. (Sec. 4, Rev. Regs. 5-99)
42. Depreciation is the gradual diminution in the useful value of
tangible property resulting from ordinary wear and tear and from normal
obsolescence. The term is also applied to amortization of the value of
intangible assets the use of which in the trade or business is definitely
limited in duration.
43. The methods of depreciation are the following:
a. Straight line method;
b. Declining balance method;
c. Sum of years digits method; and
d. Any other method prescribed by the Secretary of Finance upon
the recommendation of the Commissioner of Internal Revenue:
1) Apportionment to units of production;
2) Hours of productive use;
3) Revaluation method; and
4) Sinking fund method.
44. What are personal and additional exemptions ?
SUGGESTED ANSWER: These are the theoretical persona, living
and family expenses of an individual allowed to be deducted from the gross
or net income of an individual taxpayer.
These are arbitrary amounts which have been calculated by our
lawmakers to be roughly equivalent to the minimum of subsistence, taking
into account the personal status and additional qualified dependents of the
taxpayer. They are fixed amounts in the sense that the amounts have been
predetermined by our lawmakers and until our lawmakers make new
adjustments on these personal exemptions, the amounts allowed to be
deducted by a taxpayer are fixed as predetermined by Congress. [Pansacola
v. Commissioner of Internal Revenue, G. R. No. 159991, November 16, 2006 citing
Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)]
45. What is the amount allowed as basic personal
exemption ?
SUGGESTED ANSWER: There shall be allowed a basic personal
exemption amounting to Fifty thousand pesos (P50,000) for each
individual taxpayer.
In the case of married individuals where only one of the spouse is
deriving gross income, only such spouse shall be allowed the personal
exemption. [Sec. 35 (A), NIRC of 1997 as amended by Rep. Act No. 9504; Sec.
2.79 (I) (1) (a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008]
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that
each of the spouses may claim the P50,000.00. Thus, the total familial
basic personal exemption for spouses is P100,000.00.
Furthermore, the distinctions between the concepts of single,
married and head of the family for purpose of availing of the basic
personal exemption has already been eliminated by Rep. Act No. 9504.
45. What are the amounts of additional exemptions ?
SUGGESTED ANSWER: An individual,
a. whether single or married,
b. shall be allowed an additional exemption of Twenty-Five
Thousand Pesos (P25,000.00)
c. for each qualified dependent child,
d. provided that the total number of dependents for which
additional exemptions may be claimed
1) shall not exceed four (4) dependents. [1st par., Sec.
2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-
2008, arrangement and numbering supplied; Sec. 35 (B), NIRC of 1997 as
amended by Rep. Act No. 9504]
NOTES AND COMMENTS:
a. It is clear that under the amendment, single individuals may
now claim for the additional exemptions. Furthermore, the concept of
head of a family does not find application anymore.
b. A dependent means
a. a legitimate, illegitimate or legally adopted child
b. chiefly dependent upon and living with the taxpayer
c. if such dependent is
1) not more than twenty-one (21) years of age,
2) unmarried and
3) not gainfully employed or
d. if such dependent,
 28
1) regardless of age
2) is incapable of self-support
3) because of mental or physical defect. [2nd par., Sec.
2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-
2008, arrangement and numbering supplied; Sec. 35 (b), NIRC of 1997,
as amended by Rep. Act No. 9504]
c. It is to be noted that under the NIRC of 1997, as amended by
Rep. Act No. 9504, only qualified dependent children are considered for
additional exemptions. Grandparents, parents, as well, as brothers or
sisters, and other collateral relatives are not qualified dependents to be
claimed as additional exemptions.
However, if they are senior citizens they may qualify as additional
exemptions under the Senior Citizens Law but not under the NIRC of
1997, as amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents provided for in the
National Internal Revenue Code, as amended, and as such, individual
taxpayers caring for them, be they relatives or not shall be accorded the
privileges granted by the Code insofar as having dependents are
concerned. [last par. Sec. 5 (a), Rep. Act No. 7432, as amended by Rep. Act
9257, The Expanded Senior Citizens Act of 2003]
47. Capital assets shall refer to all real properties held by a
taxpayer, whether or not connected with his trade or business, and which
are not included among the real properties considered as ordinary assets.
(Sec. 2.a, Rev. Regs. No. 7-2003)
The term capital assets means property held by the taxpayer
(whether or not connected with his trade or business), BUT DOES NOT
INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or
c. Property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business, or
d. Property used in the trade or business, of a character which is subject to
the allowance for depreciation; or real property used in the trade or business
of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering and
arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
48. Examples of capital assets:
a. Stock and securities held by taxpayers other than dealers in
securities;
b. Jewelry not used for trade and business;
c. Residential houses and lands owned and used as such;
d. Automobiles not used in trade and business;
e. Paintings, sculptures, stamp collections, objects of arts which
are not used in trade or business;
f. Inherited large tracts of agricultural land which were subdivided
pursuant to the government mandate under land reform, then sold to
tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968)
g. Real property used by an exempt corporation in its exempt
operations, such as a corporation included in the enumeration of Section 30
of the Code, shall not be considered used for business purposes, and
rd
therefore considered as capital asset. (last sentence, 3 par., Sec. 3.b,
Rev. Regs. No. 7-2003)
h. Real property, whether single detached, townhouse, or
condominium unit, not used in trade or business as evidenced by a
certification from the Barangay Chairman or from the head of administration,
in case of condominium unit, townhouse or apartment, and as validated
from the existing available records of the Bureau of Internal Revenue,
owned by an individual engaged in business, shall be treated as capital
asset. (last par., Sec. 3.b., Rev. Regs. No. 7-2003)
49. Ordinary assets shall refer to all real properties
specifically excluded from the definition of capital assets,
namely:
a. Stock in trade of a taxpayer or other real property of a kind which
would properly be included in the inventory of a taxpayer if on hand at the
close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business; or
c. Real property used in trade or business (i.e. buildings and/or
improvements), of a character which is subject to the allowance for
depreciation; or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b,
Rev. Regs. No. 7-2003)
50.. Examples of ordinary assets hence not capital
assets:
a. The machinery and equipment of a manufacturing concern
subject to depreciation;
b. The tractors, trailers and trucks of a hauling company;
c. The condominium building owned by a realty company the units of
which are for rent or for sale;
d. The wood, paint, varnish, nails, glue, etc. which are the raw
materials of a furniture factory;
e. Inherited parcels of land of substantial areas located in the
heart of Metro Manila, which were subdivided into smaller lots then sold on
installment basis after introducing comparatively valuable improvements not
 29
for the purpose of simply liquidating the estate but to make them more
saleable ; the employment of an attorney-in-fact for the purpose of
developing, managing, administering and selling the lots; sales made with
frequency and continuity; annual sales income from the sales was
considerable; and the heir was not a stranger to the real estate business.
(Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by introduction of good
roads, concrete gutters, drainage and lighting systems converts the property
to an ordinary asset. The property forms part of the stock in trade of the
owner, hence an ordinary asset. This is so, as the owner is now engaged in
the business of subdividing real estate. (Calasanz v. Commissioner of Internal
Revenue, 144 SCRA at p. 672)
51. Tax treatment of real properties that have been
transferred. Real properties classified as capital or ordinary asset in the
hands of the seller/transferor may change their character in the hands of the
buyer/transferee. The classification of such property in the hands of the
buyer/transferee shall be determined in accordance with the following rules:
a. Real property transferred through succession or donation to the
heir or donee who is not engaged in the real estate business with respect to
the real property inherited or donated, and who does not subsequently use
such property in trade or business, shall be considered as a capital asset in
the hands of the heir or donee.
b. Real property received as dividend by stockholders who are not
engaged in the real estate business and who not subsequently use such
real property in trade or business shall be treated as capital assets in the
hands of the recipient even if the corporation which declared the real
property dividend is engaged in real estate business.
c. The real property received in an exchange shall be treated as
ordinary asset in the hands of the transferee in the case of a tax-free
exchange by taxpayer not engaged in real estate business to a taxpayer
who is engaged in real estate business, or to a taxpayer who, even if not
engaged in real estate business, will use in business the property received
in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
52. The tax is imposed upon capital gains
presumed to have been realized from the sale, exchange, or
other disposition of real property located in the Philippines,
classified as capital assets. [Sec. 24 (D) (1`), NIRC of 1997] Revenue
Regulations No. 7-2003 has defined real property as having the same
meaning attributed to that term under Article 415 of Republic Act No. 386,
otherwise known as the Civil Code of the Philippines. (Sec. 2.c, Rev. Regs.
No. 7-2003)
53. Transactions covered by the presumed capital
gains tax on real property:
a. sale,
b. exchange,
c. or other disposition, including pacto de retro sales and other
forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering
and arrangement supplied]
d. Sale, exchange, or other disposition includes taking by the
government through condemnation proceedings. (Gutierrez v. Court of Tax
Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil.
861)
54. In case the mortgagor exercises his right of
redemption within one (1) year from the issuance of the certificate of sale,
in a foreclosure of mortgage sale of real property, no capital gains tax shall
be imposed because no capital gains has been derived by the mortgagor
and no sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs.
No. 4-99]
55. In case of non-redemption of the property sold upon a
foreclosure of mortgage sale, the presumed capital gains tax shall be
imposed, based on the bid price of the highest bidder but only upon the
expiration of the one year period of redemption provided for under Sec. 6 of
Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty
(30) days from the expiration of the said one-year redemption period. [Sec. 3
(2), Rev. Regs. No. 4-99]
56. The basis for the final presumed capital gains
tax of six per cent (6%) is whichever is the higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each
zone or area as determined by the Commissioner of Internal
Revenue after consultation with competent appraisers both from the
private and public sectors; or
2) the fair market value as shown in the schedule of values
of the Provincial and City Assessors. [Sec. 24 (D) (1) in relation to
Sec. 6 (E), both of the NIRC of 1997]
It does not matter whether there was an actual gain or loss because
the tax is a presumed capital gains tax. It is the transaction that is taxed
not the gain.
 30
57. Holding period not applied to the taxation of the presumed
capital gains derived from the sale of real property considered as capital
assets.
58. The tax liability, of individual taxpayers (not
corporate), if any, on gains from sales or other dispositions of
real property, classified as capital assets, to the government or
any of its political subdivisions or agencies or to government owned or
controlled corporations shall be determined, at the option of the taxpayer, by
including the proceeds as part of gross income to be subjected to the
allowable deductions and/or personal and additional exemptions, then to the
schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC
of 1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24
(D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]
59. The seller of the real property, classified as a capital
asset, pays the presumed capital gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the
Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of the
NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the
Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of the
NIRC of 1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
60. Excepted from the payment of the presumed
capital gains tax are those presumed to have been realized
from the disposition by natural persons of their principal place
of residence
a. the proceeds of which is fully utilized in acquiring or
constructing a new principal residence;
b. within eighteen (18) calendar months from the date of sale or
disposition
c. the BIR Commissioner shall have been duly notified by the
taxpayer within thirty (30) days from the date of sale or disposition through a
prescribed return of his intention to avail of the tax exemption; and
d. the said tax exemption can only be availed of once every ten
(10) years. [Sec. 24 (D) (2), NIRC of 1997]
61. MBC was incorporated in 1961 and engaged in
commercial banking operations since 1987. On May 22, 1987, it
ceased operations that year by reason of insolvency and its
assets and liabilities were placed under the charge of a
government-appointed receiver. On June 23, 1999, the BSP
authorized MBC to operate as a thrift bank.
In 2000, It filed its tax return for the year 1999 paying the
amount of P33 million computed in accordance with the
minimum corporate income tax (MCIT). It sought the BIRs
ruling on whether it is entitled to the four (4) year grace period
for paying on the basis of MCIT reckoned from 1999. BIR then
ruled that cessation of business activities as a result of being
placed under involuntary receivership may be an economic
reason for suspending the imposition of the MCIT.
As a result of the ruling MBC filed an application for
refund of the P33 million. Due to the BIRs inaction, MBC filed
a petition for review with the CTA.
The CTA denied the petition on the ground that MBC is
not a newly organized corporation. In a volte facie the BIR now
maintains that MBC should pay the MCIT beginning January 1,
1998 as it did not close its business operations in 1987 but
merely suspended the same. Even if placed under
receivership, the corporate existence was never affected.
Thus, it falls under the category of an existing corporation
recommencing its banking operations.
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT shall be imposed
beginning in the fourth taxable year immediately following the year in which
the corporation commenced its business operations. [Sec. 27 (E) (1), NIRC
of 1997]
The date of commencement of operations of a thrift bank is the date
it was registered with the SEC or the date when the Certificate of Authority to
Operate was issued to it by the Monetary Board, whichever comes later.
(Sec. 6, Rev. Regs. No. 4-95)
Clearly then. MBC is entitled to the grace period of four years from
June 23, 1999 when it was authorized by the BSP to operate as a thrift bank
before the MCIT should be applied to it. (Manila Banking Corporation v.
Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
NOTES AND COMMENTS:
a. The MCIT and when should be imposed and the four (4)
year grace period. A minimum corporate income tax of two percent (2%)
 31
of the gross income as of the end of the taxable year, as defined herein, is intangible or mixed, situated in the Philippines, to the extent of his interest
hereby imposed on a corporation taxable under this Title, beginning on the existing therein at the time of his death.
fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum corporate income 2. William Smith, an American citizen, was
tax is greater than the tax computed under Subsection (A) of this section for a permanent resident of the Philippines. He died in San
the taxable year. [Sec. 27 (E) (1), NIRC of 1997]
Francisco, California. He left 10,000 shares of San Miguel
b. Period when a corporation becomes subject to the MCIT.
(5) Specific rules for determining the period when a corporation becomes Corporation, a condominium unit at the Twin Towers
subject to the MCIT (minimum corporate income tax) - Building at Pasig, Metro Manila and a house and lot in
For purposes of the MCIT, the taxable year in which business Miami, Florida.
operations commenced shall be the year in which the domestic corporation What assets shall be included in the Estate Tax Return to
registered with the Bureau of Internal Revenue (BIR). be filed with the BIR ?
Firms which were registered with BIR in 1994 and earlier years shall SUGGESTED ANSWER: All of the assets should be included in the
be covered by the MCIT beginning January 1, 1998. x x x (Rev. Regs. No. Estate Tax Return to be filed with the BIR.
9-98) Smith, an American citizen and a permanent resident of the
Manila Banking Corporation v. Commissioner of Internal Revenue, G. Philippines is considered, for Philippine estate tax purposes, a resident
R. No. 168118, August 26, 2006 did not apply Rev. Regs. No. 9-98 because alien. Consequently, the assets to be included in the Estate Tax Return to
Rev. Regs. No. 4-95 specifically refers to thrift banks.) be filed with the BIR should be all property, real or personal, tangible,
c. Purpose of the four (4) year grace period. The intent of intangible or mixed, wherever situated, to the extent of the interest that
Congress relative to the MCIT is to grant a four (43) year suspension of Smith has at the time of his death. Thus, all of the properties enumerated
tax payment to newly organized corporations. Corporations still starting their in the problem irrespective of where they are situated are includible in the
business operations have to stabilize their venture in order to obtain a gross estate of Smith.
stronghold in the industry. It does not come as a surprise then when many
companies reported losses in their initial years of operations. 3. Proceeds of life insurance includible in a
Thus, in order to allow new corporations to grow and develop at the
decedents gross estate.
initial stages of their operations, the lawmaking body saw the need to
a. The decedent takes the insurance policy on his own life
provide a grace period of four years from their registration before they pay
1) The amounts are receivable by
their minimum corporate income tax. (Manila Banking Corporation v.
a) the decedents estate,
Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
b) his executor, or
c) administrator irrespective of whether or not the
ESTATE TAXES insured retained the power of revocation, OR
2) The amounts are receivable by any beneficiary
1. In determining the gross estate of a decedent, designated in the policy of insurance as revocable beneficiary.
are his properties abroad to be included, and more [Sec. 85 (E), NIRC of 1997]
particularly, what constitutes gross estate ? b. One, other than the decedent takes the insurance policy on
SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen the life of the decedent
or a resident alien. 1) The amounts are receivable by
The gross estate of a Filipino citizen or a resident alien comprises a) the decedents estate,
all his real property, wherever situated; all his personal property, tangible, b) his executor, or
intangible or mixed, wherever situated, to the extent of his interest existing c) administrator
therein at the time of his death. 2) irrespective of whether or not the insured retained the
The gross estate of a non-resident alien comprises all his real power of revocation.
property, situated in the Philippines; all his personal property, tangible,
 32
4. Proceeds of life insurance NOT included in a
decedents gross estate.
a. The decedent takes the insurance policy on his own life, and
b. the proceeds are receivable by a beneficiary designated as
irrevocable. [Sec. 85 (E), NIRC of 1997)
NOTES AND COMMENTS: The beneficiary must not be the decedents
estate, executor or administrator, because the proceeds are includible as part of
gross estate whether or not the decedent retained the power of revocation. (Ibid.)
c. Where the insurance was NOT taken by the decedent upon
his own life and the beneficiary is not the decedents estate, his executor
or administrator.
4. Items deductible from the gross estate of a resident
or nonresident Filipino decedent or resident alien decedent:
a. Expenses, losses, claims, indebtedness and taxes;
b. Property previously taxed;
c. Transfers for public use;
d. The Family Home up to a value not exceeding P1 million;
e. Standard deduction of P1 million;
f. Medical expenses not exceeding P500,000.00;
g. Amount of exempt retirement received by the heirs under Rep.
Act Mo. 4917;
h. Net share of the surviving spouse in the conjugal partnership.
5. There is no transfer in contemplation of death if
there is no showing that the transferor retained for his life or for any
period which does not in fact end before his death: (1) the possession or
enjoyment of, or the right to the income from the property, or (2) the right,
either alone or in conjunction with any person, to designate the person who
shall possess or enjoy the property or the income therefrom. [Sec. 85 (B),
NIRC of 1997]
6. Vanishing deduction (deduction for property
previously taxed), defined. The deduction allowed from the gross
estates of citizens, resident aliens and nonresident estates for properties
which were previously subject to donors or estate taxes. The deduction is
called a vanishing deduction because the deduction allowed diminishes
over a period of five (5) years.
It is also known as a deduction for property previously taxed.
7. Vanishing deduction (property previously taxed)
allowed as a deduction from the gross estate of a Filipino
citizen, whether resident or not, of a resident alien decedent,
or of a nonresident alien decedent.
a. An amount equal to the value specified below of
b. Any property forming a part of the gross estate situated in
the Philippines
c Of any person who died within five years prior to the death
of the decedent, or transferred to the decedent by gift within five years
prior to his death,
d. 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
e. Which can be identified as having been acquired in
exchange for property so received:
100% of the value if the prior decedent died within one 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;
80% of the value if the prior decedent died more than one year but
not more than two 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;
60% of the value if the prior decedent died more than two years but
not more than three 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;
40% of the value if the prior decedent died more than three years
but not more than four 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
20% of the value if the prior decedent died more than four years but
not more than five 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. [Sec. 86 (A) (2) and (B) (2), NIRC of 1997, numbering, arrangement and
underlining supplied]
8. The approval of the court sitting in probate, or
as a settlement tribunal over the estate of the deceased is not a
mandatory requirement for the collection of the estate. The
probate court is determining issues which are not against the property of the
decedent, or a claim against the estate as such, but is against the interest or
property right which the heir, legatee, devisee, etc. has in the property
formerly held by the decedent.
The notices of levy were regularly issued within the prescriptive
period.
 33
The tax assessment having become final, executory and enforceable, SUGGESTED ANSWER: The real property shall be appraised at its
the same can no longer be contested by means of a disguised protest. fair market value as of the time of the gift.
(Marcos, II v. Court of Appeals, et al., 273 SCRA 47) However, the appraised value of the real property at the time of the
gift shall be whichever is the higher of:
DONORS TAXES a. the fair market value as determined by the Commissioner of
Internal Revenue (zonal valuation) or
1. What is the donors tax rate if the donee is a b. the fair market value as shown in the schedule of values fixed
by the Provincial and City Assessors. [Sec. 102, in relation to Sec. 88 (B) both
stranger ? of the NIRC of 1997]
SUGGESTED ANSWER: When the donee or beneficiary is a
stranger, the tax payable by the donor shall be 30% of the net gifts.
7. A died leaving as his only heirs, his surviving
2. For purposes of the donors tax who is a spouse B, and three minor children, X, Y and Z. Since B does
stranger ? not want to participate in the distribution of the estate, she
SUGGESTED ANSWER: A stranger is a is person who is not a: renounced her hereditary share in the estate.
a. Brother, sister (whether by whole or half-blood), spouse, a. Is the renunciation subject to donors tax ? Explain.
ancestor and lineal descendant; or SUGGESTED ANSWER: No. The general renunciation by an heir,
b. Relative by consanguinity in the collateral line within the fourth including the surviving spouse, as in the case B, of her share in the
th
degree of relationship. [Sec. 99 (B), NIRC of 1997] hereditary estate left by the decedent is not subject to donors tax. (4
NOTES AND COMMENTS: All relatives by affinity, irrespective of the par., Sec. 11, Rev. Regs. No. 2-2003)
degree, are considered as strangers. This is so because the general renunciation by B was not
specifically and categorically done in favor of identified heir/s to the
3. What is the tax base for donations ? exclusion or disadvantage of the other co-heirs in the hereditary estate.
SUGGESTED ANSWER: The net gifts made during the calendar b. Supposing that instead of a general renunciation,
year. [Sec. 99 (A), NIRC of 1997] B renounced her hereditary share in As estate to X who is a
special child, would your answer be the same ? Explain.
4. For purposes of the donors tax, what is meant by SUGGESTED ANSWER: My answer would be different. The
net gifts ? renunciation in favor of X would be subject to donors tax.
SUGGESTED ANSWER: The net economic benefit from the This is so because the renunciation was specifically and
transfer that accrues to the donee. Accordingly, if a mortgaged property is categorically done in favor of X and identified heir to the exclusion or
transferred as a gift, but imposing upon the donee the obligation to pay the disadvantage of Y and Z, the other co-heirs in the hereditary estate. (4th
mortgage liability, then the net gift is measured by deducting from the fair par., Sec. 11, Rev. Regs. No. 2-2003)
market value of the property the amount of the mortgage assumed. (last
par., Sec. 11, Rev. Regs.No.2-2003) 8. Give some donations that are exempt from
donors tax.
5. How are gifts of personal property to be valued for SUGGESTED ANSWER:
donors tax purposes ? a. The first P100,000.00 net donation during a calendar year is
SUGGESTED ANSWER: The market value of the personal property exempt from donors tax [Sec. 99 (A), NIRC of 1997] made by a resident or
at the time of the gift shall be considered the amount of the gift. (Sec. 102, non resident;
NIRC of 1997) b. The donation by a resident or non-resident of a prize to an
athlete in an international sports tournament held abroad and sanctioned by
6. What is the valuation of donated real property for the national sports association is exempt from donors tax (Sec. 1, Rep. Act
donors tax purposes ? No. 7549)

c. Political contributions made by a resident or non-resident
individual if registered with the COMELEC irrespective of whether donated
to a political party or individual.
However, the Corporation Code prohibits corporations from making
political contributions. (Corp. Code, Title IV, Sec. 36.9)
d. Dowries or gifts made on account of marriage and before
its celebration or within one year thereafter by residents who are parents
to each of their legitimate, recognized natural, or adopted children to the
extent of the first ten thousand pesos (P10,000.00);
e. Gifts made by residents or non-residents 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 subdivisions of the
said Government;
f. Gifts made by residents or non residents 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. [Sec. 101 (A), NIRC of 1997, numbering and
arrangement supplied]
g. Gifts made by non-resident aliens outside of the Philippines to
Philippine residents are exempt from donors taxes because taxation is
basically territorial. The transaction, which should have been subject to tax
was made by non-resident aliens and took place outside of the Philippines.
9. What is the concept of donation or gift splitting ?
Illustrate.
SUGGESTED ANSWER: Donation or gift splitting is spreading the
gift over numerous calendar years in order to avail of lower donors taxes.
In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his
first cousin. The P200,000.00 is the totality of the net gifts for 2008. If he
donated the P200,000.00 in 2008 the first P100,000 would be exempt
and the remaining P50,000.00 would be subject to donors tax
If Leon spreads the P200,000 donation over two (2) calendar years,
donating P100,000.00 on December 30, 2008 and the remaining
P100,000.00 on January 1, 2009 the transaction would be exempt from
donors tax. This is so even if the donation is separated only by two days
because the basis is the calendar year. Leon would be enjoying the
exemption for the first P100,000.00 net gifts for each calendar year.
10. A, who is engaged in the car buy and sell
business sold to B P7 million Jaguar for only P4 million. The
proper VAT on the sale was paid. If you are the BIR examiner
34
assigned to review the sale, would you issue a tax assessment
on the transaction ? Explain your answer briefly.
SUGGESTED ANSWER: Donors taxes would be due on the
insufficiency of consideration.
Where property, other than real property that has been subjected to
the final capital gains tax, 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 at the time of the execution of the
Contract to Sell or execution of the Deed of Sale which is not preceded by
a Contract to Sell exceeded the value of the agreed or actual
consideration or selling price shall be deemed a gift, and shall be included
in computing the amount of gifts made during the calendar year. (5th par.,
Sec. 11, Rev. Regs. No. 2-2003)
VALUE-ADDED TAXES (VAT)
WARNING !!! Approximately 10% of the total questions asked in
the Bar Examination are sourced from VAT and its concepts. This area is
probably the most difficult area to forecast because there are no statistically
perceived patterns. The author has retained the Stars System for VAT.
Considering the limited period of time, the reader is advised to focus on
areas marked with stars and just browse the unmarked areas.
1. Value-added tax (VAT) is a tax which is imposed
only on the increase in the worth, merit or importance of goods, properties
or services, and not on the total value of the goods or services being sold
or rendered.
2. Nature of VAT. VAT is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. As such, it should be understood not in the context
of the person or entity that is primarily, directly liable for its payment, but in
terms of its nature as a tax on consumption. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11,
2005 citing various authorities}
VAT is a percentage tax imposed on any person whether or not a
franchise grantee, who in the course of trade or business, sells, barters,
exchanges, leases, goods or properties, renders services. It is also levied
on every importation of goods whether or not in the course of trade or
business. The tax base of the VAT is limited only to the value added to
such goods, properties, or services by the seller, transferor or lessor.
Further, the VAT is an indirect tax and can be passed on to the buyer.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008)
 35
3. Effect of exemptions from VAT which is an
indirect tax. If a special law merely exempts a party as a seller from its
direct liability for payment of the VAT, but does not relieve the same party
as a purchaser from its indirect burden of the VAT shifted to it by its VAT-
registered suppliers, the purchase transaction is not exempt.
REASON: The VAT is a tax on consumption, the amount of which
may be shifted or passed on by the seller to the purchaser of the goods,
properties or services. [Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866, February 11, 2005)
4. Illustration of effects of exemptions from VAT
which is an indirect tax. A VAT exempt seller sells to a non-VAT
exempt purchaser. The purchaser is subject to VAT because the VAT is
merely added as part of the purchase price and not as a tax because the
burden is merely shifted. The seller is still exempt because it could pass
on the burden of paying the tax to the purchaser.
5. The VAT is a tax on consumption. Meaning of
consumption as used under the VAT system. Consumption is
"the use of a thing in a way that thereby exhausts it."
Applied to services, the term means the performance or "successful
completion of a contractual duty, usually resulting in the performer's
release from any past or future liability x x x" Unlike goods, services
cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a "predetermined
end of a course" when determining the service "location or position x x x
for legal purposes." [Commissioner of Internal Revenue v. Placer Dome
Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007]
6. Illustration of the meaning of consumption as used
under the VAT system. For example the services rendered by a local
firm to its foreign client are performed or successfully completed upon its
sending to a foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the
Philippines, are therefore also consumed in the Philippines. Such
facilitation service has no physical existence, yet takes place upon
rendition, and therefore upon consumption, in the Philippines.
[Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.),
Inc. G. R. No. 164365, June 8, 2007]
7. Who are liable for the value-added tax.
a. Any person who, in the course of his trade or business,
1) Sells, barters, exchanges or leases goods or
properties, or
2) renders services, and
b. any person who imports goods xxx
However, in the case of importation of taxable goods, the importer,
whether an individual or corporation and whether or not made in the
course of his trade or business, shall be liable to VAT xxx . (Rev. Regs. No.
16-2005,Sec. 4.105-1, paraphrasing supplied)
8. Various VAT methods and systems.
a. Cost deduction method. This is a single-stage tax which is
payable only by the original sellers. (Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases)
This was subsequently modified and a mixture of cost deduction method
and tax credit method was used to determine the value-added tax
payable. (Ibid.)
b. Tax credit method. This method relies on invoices, an
entity can credit against or subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and imports.
[Commissioner of Internal Revenue v. Seagate Technology (Philippines),
G. R. No. 153866, February 11, 2005]
If at the end of a taxable period, the output taxes charged by a
seller are equal to the input taxes passed on by the suppliers, no payment
is required. It is when the output taxes exceed the input taxes that the
excess has to be paid.
If however, the input taxes exceed the output taxes, the excess
shall be carried over to the succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively zero-rated transactions or
from acquisition of capital goods, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other internal
revenue taxes. (Ibid.)
9. How the VAT is imposed on the increase in worth,
merit or improvement of the goods or services. The VAT utilizes
the concept of the output and input taxes.
Output VAT less Input VAT = VAT due on the increase in worth,
merit or improvement f the goods or services.
10. The right to credit the input tax be limited by
legislation because it is a mere creation of law. Prior to the
enactment of multi-stage sales taxation, the sales taxes paid at every level
of distribution are not recoverable from the taxes payable. With the
advent of Executive Order No. 273 imposing a 10% multi-stage tax on all
sales, it was only then that the crediting of the input tax paid on purchase
 36
or importation of goods and services by VAT-registered persons against
the output tax was established. This continued with the Expanded VAT
Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424).
The right to credit input tax as against the output tax is clearly a privilege
created by law, a privilege that also the law can limit. It should be
stressed that a person has no vested right in statutory privileges.
(ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207, October 15,
2005, and companion cases, on the motion for reconsideration)
11. Output tax is the value-added tax due on the sale or
lease or taxable goods, properties or services by any VAT-registered
person.
12. Input tax is the value-added tax due on or paid by a
VAT-registered person on importation of good or local purchases of goods
or services, including lease or use of properties, in the course of his trade
or business. (Rev. Regs. No. 4.110-1, 1st par.)
13. Included in the input tax.
a. the transitional input tax and
b. the presumptive input tax xxx.
It includes
c. input taxes which can be directly attributed to transactions
subject to the VAT plus a ratable portion of any input tax which cannot be
directly attributed to either the taxable or exempt activity. (Rev. Regs. No.
st nd nd
4.110-1, 1 par., 2 sentence,. And 2 par., paraphrasing, arrangement
and numbering supplied )
14. Concept of transitional input tax credits on
beginning inventories. Taxpayers who become VAT-registered
persons upon exceeding the minimum turnover of P1,500,000.00 in any
12-month period, or who voluntarily register even if their turnover does not
exceed P1,500,000.00 (except franchise grantees of radio and television
broadcasting whose threshold is P10,000,000.00) shall be entitled to a
transitional input tax on the inventory on hand as of the effectivity of their
VAT registration, on the following:
a. goods purchased for resale in their present condition;
b. materials purchased for further processing, but which have
not yet undergone processing;
c. goods which have been manufactured by the taxpayer;
d. goods in process for sale; or
e. goods and supplies for use in the course of the taxpayers
trade or business as a VAT-registered person. [Rev. Regs. No. 16-2005,
st
Sec.4.111-1, (a), 1 par., arrangement and numbering supplied]
15. Concept of presumptive input tax credits. Persons
or firms engaged in the processing of sardines, mackerel, and milk, and in
manufacturing refined sugar, cooking oil and packed noodle-based instant
meals, shall be allowed a presumptive input tax, creditable against the
output tax, equivalent to four percent (4%) of the gross value in money of
their purchases of primary agricultural products which are used as inputs
to their production.
As used in this paragraph, the term processing shall mean
pasteurization, canning and activities which through physical or chemical
process alter the exterior texture or form or inner substance of a product
in such a manner as to prepare it for special use to which it could not have
been put in its original form or condition. [Rev. Regs. No. 16-2005,
Sec.4.111-1, (b)]
16. The VAT registration fee does NOT violate religious
freedom. The VAT registration fee imposed on non-VAT enterprises
which includes among others, religious sects which sells and distributes
religious literature is not violative of religious freedom, although a fixed
amount is not imposed for the exercise of a privilege but only for the
purpose of defraying part of the cost of registration.
The registration fee is thus more of an administrative fee, one not
imposed on the exercise of a privilege, much less a constitutional right.
(Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)
17. Interpretation of the term In the Course of Trade
or Business as used in the VAT system. The term "doing
business" or course of business conveys the idea of business being
done, not from time to time, but all the time. It does not include isolated
transactions. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et
al., G. R. No. 146984, July 28, 2006)
18. Pursuant to a government program of
privatization, NDC, a VAT-registered entity created for the
purpose of selling real property, 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 five (5) of its ships, which are
3,700 DWT Tween-Decker, "Kloeckner" type vessels. The
vessels were constructed for the NDC between 1981 and 1984,
then initially leased to Luzon Stevedoring Company, also its
wholly-owned subsidiary. Subsequently, the vessels were
transferred and leased, on a bareboat basis, to the NMC.
 37
The NMC shares and the vessels were offered for public
bidding. Among the stipulated terms and conditions for the
public auction was that the winning bidder was to pay "a
value added tax of 10% on the value of the vessels."
Magsaysay Lines, Inc., offered to buy the shares and the
vessels for P168,000,000.00. The bid was made by Magsaysay
Lines, purportedly for a new company still to be formed
composed of itself, Baliwag Navigation, Inc., and FIM Limited
of the Marden Group based in Hongkong . The bid was
approved by the Committee on Privatization, and a Notice of
Award was issued to Magsaysay Lines.
Is the sale subject to VAT ? business deemed sale subject to VAT.
SUGGESTED ANSWER: No. The term "carrying on business"
does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing
business" conveys the idea of business being done, not from time to
time, but all the time. "Course of business" is what is usually done in the
management of trade or business. "Course of business" or "doing
business" connotes regularity of activity. In the instant case, the sale was
an isolated transaction.
The sale which was involuntary and made pursuant to the declared
policy of Government for privatization could no longer be repeated or
carried on with regularity. It should be emphasized that the normal VAT-
registered activity of NDC is leasing personal property. This finding is
confirmed by the Revised Charter of the NDC which bears no indication
that the NDC was created for the primary purpose of selling real property.
(Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No.
146984, July 28, 2006)
19. Under the Value Added Tax (VAT), the tax is
imposed on sales, barter, or exchange or goods and services.
The VAT is also imposed on certain transactions deemed
sales which include:
a. Transfer, use or consumption not in the course of
business or properties originally intended for sale or for use in the course
of business. xxx
b. Distribution or transfer to:
1) Shareholders or investors as share in the profits of the
VAT- registered person; xxx or
2) Creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within
sixty (60) days following the date such goods were consigned. Consigned
goods returned by the consignee within the 60-day period are not deemed
sold.
d. Retirement from or cessation of business, with respect to
all goods on hand,
1) whether capital goods, stock-in-trade, supplies or
materials as of the date of such retirement, or cessation,
2) whether or not the business is continued by the new
owner or successor. xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7,
paraphrasing, arrangement and numbering supplied]
20. Transactions considered retirement or cessation of
a. Change of ownership of the business. There is change in
the ownership of the business where a single proprietorship incorporates;
or
1) the proprietor of a single proprietorship sells his entire
business.
b. Dissolution of a partnership and creation of a new
partnership which takes over the business. [Rev. Regs. No. 16-2005,
Sec. 4.106-7 (a), (4) paraphrasing, arrangement and numbering supplied]
21. Sale of or lease of real properties subject to VAT.
Sale of real properties primarily for sale to customers or held for lease in
the ordinary course of trade or business of the seller shall be subject to
VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.)
Thus, capital transactions of individuals are not subject to VAT.
Only real estate dealers are subject to VAT.
22. On September 4, 2009, XYZ, Inc., a domestic
corporation engaged in the real estate business, sold a
building for P10,000,000.00. Is the sale subject to the value-
added tax (VAT)? If so, how much? Explain.
SUGGESTED ANSWER: Yes. 12% on the gross selling price
because the sale was made in the ordinary course of trade of business of
X, a domestic corporation engaged in the real estate business.
23. The following sales of real properties
are exempt from VAT, namely:
a. Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or business;
 38
b. Sale of real properties utilized for low-cost housing as
defined by RA No. 7279, otherwise known as the Urban and
Development Housing Act of 1992 and other related laws, such as RA
No. 7835 and RA No. 8763.
xxx xxx xxx
c. Sale of real properties utilized for socialized housing as
defined under RA No. 7279, and other related laws wherein the price
ceiling per unit is P225,000.00 or as may from time to time be determined
by the HUDCC and the NEDA and other related laws.
xxx xxx xxx
d. Sale of residential lot valued at One Million Five Hundred
Thousand Pesos (P1,500,000.00) and below, or house & lot and other
residential dwellings valued at Two Million Give Hundred Thousand Pesos
(P2,500,000.00) and below where the instrument of
sale/transfer/disposition was executed on or after November 1, 2005,
provided, That not later than January 31, 2009 and every three (3) years
thereafter, the amounts stated herein shall be adjusted to its present value
using the Consumer Price Index, as published by the National Statistics
Office (NSO); provided, further, that such adjustment shall be published
through revenue regulations to be issued not later than March 31 of each
year.
If two or more adjacent residential lots are sold or disposed in favor
of one buyer, for the purpose of utilizing the lots as one residential lot, the
sale shall be exempt from VAT only if the aggregate value of the lots do
not exceed P1,500,000.00. Adjacent residential lots, although covered by
separate titles and/or separate tax declarations, when sold or disposed of
to one and the same buyer, whether covered by one or separate Deed of
Conveyance, shall be presumed as a sale of one residential lot. [Rev.
Regs. No. 4.109-1 (B), (p), paraphrasing and numbering supplied]
24. VAT on services and lease of properties.
a. There shall be levied, assessed, and collected,
b. a value-added tax equivalent to twelve percent (12%) of
gross receipts
c. derived from the sale or exchange of services,
1) including the use or lease of properties. [NIRC of
1997, Sec. 108 (A), as amended by R.A. No. 9337, arrangement and
numbering supplied]
25. Sale or exchange of services, defined. The term
sale or exchange of services 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:
a. construction and service contractors;
b. stock, real estate, commercial, customs and immigration
brokers;
c. lessors of property, whether personal or real;
d. persons engaged in warehousing services
e. lessors or distributors of cinematographic films;
f. persons engaged in milling, processing, manufacturing or
repacking goods for others;
g. proprietors, operators or keepers of hotels, motels, rest-
houses, pension houses, inns, resorts; theaters, and movie houses;
h. proprietors or operators of restaurants, refreshment parlors,
cafes and other eating places, including clubs and caterers;
i. dealers in securities;
j. lending investors;
k. 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;
l. 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 Philippines;
m. sales of electricity by generation companies, transmission,
and/or distribution companies;
n. franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise
grantees except franchise grantees of radio and/or television broadcasting
whose annual gross receipts of the preceding year do not exceed Ten
Million Pesos (P10,000,000.00), and franchise grantees of gas and water
utilities;
o. non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and
p. similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental
faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev.
st
Regs. No. 16-2005, Sec. 4,108-2, 1 par., arrangement and numbering supplied]
26. Also included in the phrase sale or exchange of
services.
a. 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;
b. The lease or the use of, or the right to use any industrial,
commercial or scientific equipment;
c. The supply of scientific, technical, industrial or commercial
knowledge or information;
 39
d. The supply of any assistance that is ancillary and subsidiary
to and is furnished as a means of enabling the application or enjoyment of
any such property, or right as is mentioned in subparagraph (2) hereof or
any such knowledge or information as is mentioned in subparagraph (3)
hereof; or
e. The supply of services by a non-resident person or his
employee in connection with the use of property or rights belonging to, or
the installation or operation of any brand, machinery or other apparatus
purchased from such non-resident person;
f. 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 of
scheme;
g. The lease of motion picture films, film tapes and discs;
h. The lease or the use of or the right to use radio,
television, satellite transmission and cable television time. (Rev. Regs. No.
16-2005, Sec. 4.108-2, 2
nd
par.)
27. Zero-rated Sales of Goods or Properties. A
zero-rated sale of goods or properties by a sale by a VAT-registered
person is a taxable transaction for VAT purposes but the sale does not
result in any output tax.
However, the input tax on the purchases of goods, properties or
services related to such zero-rated sale shall be available as tax credit or
refund in accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No.
st
16-2005, 1 par.)
28. Concept of VAT zero-rating. The tax rate is set
at zero. When applied to the tax base, such rate obviously results in no
tax chargeable against the purchaser. The seller of such transactions
charges no output tax, but can claim a refund or a tax credit certificate for
the VAT previously charged by suppliers. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005]
Under a zero-rating scheme, the sale or exchange of a particular
service is completely freed from the VAT, because the seller is entitled to
recover, by way of a refund or as an input tax credit, the tax that is
included in the cost of purchases attributable to the sale or exchange.
The tax paid or withheld is not deducted from the tax base. (Commissioner,
of Internal Revenue v. American Express International, Inc. (Philippine Branch),
G. R. No. 152609, June 29, 2005 citing various cases)
29. Situs of taxation of zero-rated VAT services such
as facilitating the collection of receivables from credit card
members situated in the Philippines and payment to service
establishments in the Philippines. The place where the service is
rendered determines the jurisdiction to impose the VAT
Performed in the Philippines, the service is necessarily subject to its
jurisdiction for the State necessarily has to have a substantial connection
to it in order to enforce a zero rate. The place of payment is immaterial
much less is the place where the output of the service will be further or
ultimately used.
This is so because the law neither makes a qualification nor adds a
condition in determining the tax situs of a zero-rated service.
(Commissioner of Internal Revenue v. American Express International, Inc.
(Philipppine Branch), G. R. No. 152609, June 29, 2005)
30. Destination principle under the VAT
System. As a general rule, the VAT system uses the destination
principle as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are taxed.
This is also known as the Cross Border Doctrine.
31. Exception to the destination principle.
The law clearly provides for an exception to the destination principle; that
is, for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP]."
32. Rationale for zero-rating of exports. The
Philippine VAT system adheres to the Cross Border Doctrine, according to
which, no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority.
[Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.),
Inc., G. R.. No. 150154, August 9, 2005] The Cross Border Doctrine is also
known as the destination principle.
Hence, actual or constructive export of goods and services from the
Philippines to a foreign country must be zero-rated for VAT; while, those
destined for use or consumption within the Philippines shall be imposed
the twelve percent (12%) VAT.
33. Zero-rated sale distinguished from exempt
transactions:
a. A zero-rated sale is a taxable transaction but does not result
in an output tax WHILE an exempt transaction is not subject to the output
tax.
 40
b. The input tax on the purchases of a VAT registered person
who has zero-rated sales may be allowed as tax credits or refunded
WHILE the seller in an exempt transaction is not entitled to any input tax
on his purchases despite the issuance of a VAT invoice or receipt.
c. Persons engaged in transactions which are zero rated being
subject to VAT are required to register WHILE registration is optional for
VAT-exempt persons.
34. Zero-rated sales by VAT-registered persons.
The following sales by VAT-registered persons shall be subject to zero
percent (0%) rate:
a. Export sales;
b. Considered export sales under Executive Order No. 224;
c. Foreign currency denominated sale; and
d. Sales to persons or entities deemed tax-exempt under
special law or international agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-
5, 2
nd
par., paraphrasing supplied)
35. Sale of gold to the Central Bank considered as
export sales. As export sales, the sale of gold to the Central Bank is
zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is
primarily intended to be enjoyed by the seller, which charges no output
VAT but can claim a refund of or a tax credit certificate for the input VAT
previously charged to it by suppliers. (Commissioner of Internal Revenue v.
Manila Mining Corporation, G.R. No. 153204, August 31, 2005)
36. Sales to ecozone, such as PEZA, considered
export-sale. Notably, while an ecozone is geographically within the
Philippines, it is deemed a separate customs territory and is regarded in
law as foreign soil. Sales by suppliers from outside the borders of the
ecozone to this separate customs territory are deemed as exports and
treated as export sales. These sales are zero-rated or subject to a tax
rate of zero percent. (Commissioner of Internal Revenue v. Sekisui Jushi
Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities)
37. Ecozone, defined. An ECOZONE or a Special
Economic Zone has been described as [S]elected areas with highly
developed or which have the potential to be developed into agro-industrial,
industrial, tourist, recreational, commercial, banking, investment and
financial centers whose metes and bounds are fixed or delimited by
Presidential Proclamations. An ECOZONE may contain any or all of the
following: industrial estates (IEs), export processing zones (EPZs), free
trade zones and tourist/recreational centers. The national territory of the
Philippines outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory. [Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]
38. Zero-rated sale of service, defined. A zero-
rated sale of service (by a VAT-registered person) is a taxable transaction
for VAT purposes, but shall not result in any output tax. However, the
input tax on purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in accordance
with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5
(a), words in italics supplied)
39. Service performed by American Express in
facilitating the collection of receivables from credit card
members situated in the Philippines and payment to service
establishments in the Philippines in behalf of its Hong-Kong
based client is subject to VAT but zero-rated. This is so because
it meets all the requirements for VAT imposition, as follows:
a. It regularly renders in the Philippines the service of facilitating
the collection and payment of receivables belonging to a foreign company
that is a clearly separate and distinct entity.
b. Such service is commercial in nature; carried on over a
sustained period of time; on a significant scale with a reasonable degree
of frequency; and not at random, fortuitous, or attenuated.
c. For this service, it definitely receives consideration in foreign
currency that is accounted for in conformity with law.
d. It is not an entity exempt under any of our laws or
international agreements. (Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005)
40. While the service performed by American Express
is subject to VAT it is zero-rated, and BIR Revenue
Regulations that alter the legal requirements for zero-rating
are ultra vires and invalid. The VAT system uses the destination
principle which posits that the goods and services are taxed only in the
country where they are consumed,
However, the law itself provides for clear exceptions under which
the supply of services shall be zero-rated, among which are the following:
a. The service is performed in the Philippines;
b. The services are within the categories provided for under the
Tax Code; and
c. It is paid for in acceptable foreign currency of the Bangko
Sentral ng Pilipinas.
 41
American Express renders assistance to its foreign clients by
receiving the bills of service establishments located in the country and
forwarding them to their clients abroad. The services are performed or
successfully completed upon send to its foreign clients the drafts and bills
it has gathered from service establishments here, Its services, having
been performed in the Philippines are therefore also consumed in the
Philippines. Thus, its services are exempt from the destination principle
and are zero-rated.
The BIR could not change the law. [Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005]
41. A foreign Consortium composed of BWSC-
Denmark, Mitsui Engineering and Shipbuilding Ltd., and
Mitsui and Co., Ltd., which entered into a contract with
NAPOCOR for the operation and maintenance of two power
barges appointed BWSC-Denmark as its coordination
manager. BWSCMI was established as the subcontractor to
perform the actual work in the Philippines. The Consortium
paid BWSCMI in acceptable foreign exchange and accounted
for in accordance with the rules and regulations of the BSP.
Through a February 14, 1995 ruling the BIR declared that
BWSCMI may choose to register as a VAT persons subject to
VAT at zero rate. For 1996, it filed the proper VAT returns
showing zero rating. On December 29, 1997, believing that it
is covered by Rev. Regs. 5-96, dated February 20, 1996,
BWSCMI paid 10% output VAT for the period April-December
1996, through the Voluntary Assessment Program (VAP).
On January 7, 1999, BWSCMI was able to obtain a Ruling
from the BIR reconfirming that it is subject to VAT at zero-
rating. On this basis, BWSCMI applied for a refund of the
output VAT it paid.
a. Is BWSCMI subject to the 10% VAT or is it zero
rated ?
SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is
subject to the 10% VAT. It is rendering service for the Consortium which
is not doing business in the Philippines. Zero-rating finds application only
where the recipient of the services are other persons doing business
outside of the Philippines. BWSCMI provides services to the Consortium
which by virtue of its contract with NAPOCOR is doing business within the
Philippines. (Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22,
2007)
b. Could it obtain a refund of the VAT it paid through
the VAP ? Explain.
SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of the
10% output VAT it paid the based on the non-retroactivity of the prejudicial
revocation of the BIR Rulings which held that its services are subject to
0% VAT and which BWSCMI invoked in applying for refund of the output
VAT. (Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., supra)
NOTES AND COMMENTS:
a. Do not confuse the BWSCMI case with the
American Express case. American Express International, Inc.
(Philippine Branch)] is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-resident
foreign client [American Express International, Inc. (Hongkong Branch)],
for which it gets paid in acceptable foreign currency inwardly remitted and
accounted for in accordance with BSP rules and regulations.
(Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian
Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007)
42. What are VAT-Exempt transactions ? SUGGESTED
ANSWER: The sale of goods or properties and/or services and the
use or lease of properties that is
b. not subject to VAT (output tax) and
c. the seller is not allowed any tax credit on VAT (input tax)
purchases.
The person making the exempt sale of goods, properties or
services shall not bill any output tax to his customers because the said
transaction is not subject to VAT . [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A),
arrangement and numbering supplied]
43. VAT-exempt transactions distinguished from
VAT-exempt entities.
a. An exempt transaction, on the one hand, involves goods or
services which, by their nature, are specifically listed in and expressly
exempted from the VAT under the Tax Code, without regard to the tax
status VAT-exempt or not of the party to the transaction.
An exempt party, on the other hand, is a person or entity granted
VAT exemption under the Tax Code, a special law or an international
agreement to which the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from VAT. [Commissioner of
Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No.
150154, August 9, 2005]
 42
b. An exempt transaction shall not be the subject of any billing
for output VAT but it shall not also be allowed any input tax credits WHILE
an exempt party being zero-rated is allowed to claim input tax credits.
44. Transactions are exempt from VAT. (Subject to the
election by a VAT-registered person not to be subject to the value-added
tax), the following shall be exempt from VAT:
(A) Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of a kind generally used as, or
yielding or producing foods for human consumption; and breeding stock
and genetic materials therefor.
Livestock shall include cows, bulls and calves, pigs, sheep, goats
and rabbits. Poultry shall include fowls, ducks, geese and turkey,
Livestock or poultry does not include fighting cocks, race horses, zoo
animals and other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such as,
but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels
and clams.
Meat, fruit, fish, vegetables and other agricultural and marine food
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, including those using
advanced technological means of packaging, such as shrink wrapping in
plastics, vacuum packing, tetra-pack, and other similar packaging
methods. Polished and/or husked rice, corn grits, raw cane sugar and
molasses, ordinary salt, and copra shall be considered in their original
state.
Sugar whose content of sucrose by weight, in the dry state, has a
polarimeter reading of 99.5o and above are presumed to be refined sugar.
Cane sugar produced from the following shall be presumed, for
internal revenue purposes, to be refined sugar:
(1) product of a refining process,
(2) products of a sugar refinery, or
(3) product of a production line of a sugar mill accredited by
the BIR to be producing sugar with polarimeter reading of 99.5o and
above, and for which the quedanissued therefor, and verified by the Sugar
Regulatory Administration, identifies the same to be of a polarimeter
reading of 99.5o and above.
Bagasse is not included in the exemption provided for under this
section.
(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);
Specialty feeds refers to non-agricultural feeds or food for race
horses, fighting cocks, aquarium fish, zoo animals and other animals
generally considered as pets.
(C) Importation of personal and household effects belonging to
the residents of the Philippines returning from abroad and nonresident
citizens coming to resettle in the Philippines: Provided, That such goods
are exempt from customs duties under the Tariff and Customs Code of
the Philippines;
(D) Importation of professional instruments and implements,
wearing apparel, domestic animals, and personal household effects
(except any vehicle, vessel, aircraft, machinery, other goods for use in 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 of Internal
Revenue, 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 of the Tax
Code, as enumerated below:
(1) Sale or lease of goods or properties or the
performance of services of non-VAT-registered persons, other
than the transactions mentioned in paragraphs (A) to (U) of Sec.
109 (1) of the Tax Code, the annual sales and/or receipts of which
does not exceed the amount of One Million Five Hundred
thousand Pesos (P1,500,000.00), 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). (Sec. 116, Tax Code)
(2) Services rendered by domestic common carriers by
land for the transport of passengers and keepers of garages.
(Sec. 117)
(3) Services rendered by international air/shipping
carriers. (Sec. 118)
(4) Service rendered by franchise grantees of radio and/or
television broadcasting whose annual gross receipts of the
preceding year do not exceed Ten Million Pesos (P10,000,000.00)
and by franchises of gas and water utilities. (Sec. 119)
(5) Service rendered for overseas dispatch message or
conversation originating from the Philippines. (Sc. 120)
(6) Services rendered by any person, company or
corporation (except purely cooperative companies or associations
 43
) doing life insurance business of any sort in the Philippines.
(Sec. 123)
(7) Services rendered by fire, marine or miscellaneous
insurance agents of foreign insurance companies. (Sec. 124)
(8) Services of proprietors, lessees or operators of
cockpits, cabarets, night or day clubs, boxing exhibitions
professional basketball games, jai-Alai and race tracks. (Sec.
125). and
(9) Receipts on sale, barter or exchange of shares of
stock listed and traded through the local stock exchange or
through initial public offering. (Sec. 127)
(F) Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into raw sugar;
Agricultural contract growers refers to those persons producing for
others poultry, livestock or other agricultural and marine food products in
their original state.
(G) Medical, dental, hospital and veterinary services except
those rendered by professionals;
Laboratory services are exempted. If the hospital or clinic operates
a pharmacy or drug store, the sale of drugs and medicine is subject to
VAT.
(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;
Educational services shall refer to academic, technical or
vocational education provided by private educational institutions duly
accredited by the DepED, the CHED and TESDA and those rendered by
government educational institutions and it does not include seminars, in-
service training, review classes and other similar services rendered by
persons who are not accredited by the DepED, the CHED and/or the
TESDA.
(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 Petroleum Exploration
Concessionaires under the Petroleum Act of 1949; and;
(L) Sales by agricultural cooperatives duly registered with the
Cooperative Development Authority (CDA) 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 and in good standing with the
Cooperative Development Authority;
(N) Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with the Cooperative Development Authority:
Provided, That the share capital contribution of each member does not
exceed Fifteen thousand pesos (P15,000) and regardless of the
aggregate capital and net surplus ratably distributed among the members;
Importation by non-agricultural, non-electric and non-credit
cooperatives of machineries and equipment, including spare parts thereof,
to be used by them are subject to VAT.
(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, such as RA No. 7835 and
RA No. 8765, residential lot valued at One million five hundred thousand
pesos (P 1,500,000) and below, house and lot, and other residential
dwellings valued at Two million five hundred thousand pesos (P
2,500,000) and below: Provided, That not later than January 31, 2009
and every three (3) years thereafter, the amounts herein stated shall be
adjusted to their present values using the Consumer Price Index, as
published by the National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental not
exceeding Ten thousand pesos (P 10,000) 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) Sale, importation or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof for domestic
or international transport operations; Provided, that the exemption from
VAT on the importation and local purchase of passenger and/or cargo
vessels shall be limited to those of one hundred fifty (150) tons and above,
including engine and spare parts of said vessels; Provided, further, that
 44
the vessels be imported shall comply with the age limit requirement, at the
time of acquisition counted from the date of the vessels original
commissioning, as follows: (i) for passenger and/or cargo vessels, the
age limit is fifteen years (15) years old, (ii) for tankers, the age limit is ten
(10) years old, and (iii) For high-speed passenger cars, the age limit is
five (5) years old, Provided, finally, that exemption shall be subject to the
provisions of section 4 of Republic Act No. 9295, otherwise known as The
Domestic Shipping Development Act of 2004.
(T) Importation of fuel, goods and supplies by persons engaged
in international shipping or air transport operations; Provided, that the said
fuel, goods and supplies shall be used exclusively or shall pertain to the
transport of goods and/or passenger from a port in the Philippines directly
to a foreign port without stopping at any other port in the Philippines;
provided, further, that if any portion of such fuel, goods or supplies is used
for purposes other than that mentioned in this paragraph, such portion of
fuel, goods and supplies shall be subject to 10% VAT (now 12%);
(U) Services of banks, non-bank financial intermediaries performing
quasi-banking functions, and other non-bank financial intermediaries; and
(V) Sale or lease of goods or properties or the
performance of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts do not
exceed the amount of One million five hundred thousand pesos
(P1,500,000): Provided, That not later than January 31, 2009 and every
three (3) years thereafter, the amount herein stated shall be adjusted to its
present value using the Consumer Price Index as published by the
National Statistics Office (NSO).
For purposes of the threshold of P1,500,000.00, the husband and
wife shall be cnsidered separate taxpayers. However, the aggregation
rule for each taxpayer shall apply. For instance, if a profesional, aside
from the practice ofhis profession, also derives revenue from other lines of
business which are otherwise subject to VAT, the same shall be combined
for purposes of determining whether the threshold has been exceeded.
Thus, the VAT-exempt sales shall to be icluded in determining the
threshold. [NIRC of 1997, Sec. 109 (1), as amended by R. A. No. 9337; words in
italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses
supplied]
45. Tax to be paid by persons exempt from VAT.
a. Any person, whose sales or receipts are exempt under Sec.
109 (1) (V) of the Tax Code,
(V) Sale or lease of goods or properties or the performance
of services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not exceed
the amount of One million five hundred thousand pesos
(P1,500,000): Provided, That not later than January 31, 2009 and
every three (3) years thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer Price Index as
published by the National Statistics Office (NSO), from the
payment of VAT and
b. who is not a VAT-registered person
c. shall pay a tax equivalent to three percent (3%) of his gross
monthly sales or receipts;
Provided, that cooperatives shall be exempt from the three (3%)
gross receipts tax herein imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1,
arrangement, numbering and words in italics supplied)
RETURNS AND WITHHOLDING
1. Income tax returns being public documents, until
controverted by competent evidence, are competent evidence, are prima
facie correct with respect to the entries therein. (Ropali Trading v. NLRC, et al.,
296 SCRA 309, 317)
2. Individuals required to file an income tax return.
a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines on his
income from sources within the Philippines;
c. Every alien residing in the Philippines on income derived from
sources within the Philippines; and
d. Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines. [Sec. 51 (A) (1), NIRC of 1997]
3. Married individuals who are earning purely
compensation income allowed to file separate returns.
4. Married individuals, whether citizens, resident or
non-resident aliens, who do not derive income purely from
compensation shall file a consolidated return for the taxable
year to include the income of both spouses, but where it is
impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by
the Bureau for purposes of verification. [Section 51 (D) of the NIRC of
1997]
5. Computation of income tax for married individuals
whether citizens, resident or non-resident aliens, who do not
derive income purely from compensation required file a
 45
consolidated return for the taxable year but could not do so.
For married individuals, the husband and wife, subject to no. 2, supra,,
shall compute separately their individual income tax based on their
respective total taxable income: Provided, that 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. [2nd to the last par., Sec. 24 (A) (2), NIRC of 1997 as amended
by Rep. Act No. 9504]
6. Individuals who are not required to file an income
tax return.
a. An individual whose gross income does not exceed his total
personal and additional exemptions for dependents, Provided, That a citizen
of the Philippines and any alien individual engaged in business or practice of
profession within the Philippines shall file an income tax return regardless of
the amount of gross income [Sec. 51 (A) (2), NIRC of 1997]
b. An individual with respect to pure compensation income,
derived from such sources within the Philippines, the income tax on which
has been correctly withheld: Provided, That an individual deriving
compensation concurrently from two or more employers at any time during
the taxable year shall file an income tax return [Sec. 51 (A) (2), NIRC of 1997,
as amended by Rep. Act No. 9504, paraphrasing supplied]
c. An individual whose sole income has been subject to final
withholding tax;
d. A minimum wage earner (is a worker in the private sector
paid the statutory minimum wage, or is 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), an individual who
is exempt from income tax pursuant to the provisions of the Tax Code and
other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec.
22 (HH), both as amended by Rep. Act. 9504]
7. Minimum wage earners are exempt from income
taxation. That minimum wage earners (is a worker in the private sector
paid the statutory minimum wage, or is 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) shall be exempt
from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential pay and hazard
pay received by such minimum wage earners shall likewise be exempt
from income tax. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as
amended by Rep. Act. 9504]
8. An individual who is not required to file an income
tax return may nevertheless be required to file an information
return. [Sec. 51 (A) (3), NIRC of 1997]
9. A corporation files its income tax return and pays its
income tax four (4) times during a single taxable year. Quarterly
returns are required to be filed for the first three quarters, then a final
adjustment return is filed covering the total taxable income for the whole
taxable year, be it calendar or fiscal.
10. An individual earning from the practice of his
profession or who engages in trade or business files his
income tax return and pays his income tax four (4) times during
a single taxable year. Quarterly returns are required to be filed for the
first three quarters, then an annual income tax return is filed covering the
total taxable income for the whole of the previous calendar year.
11. The purpose of the above four (4) times a year
requirement is to make available sufficient funds to meet the
budgetary requirements, on a quarterly basis thereby increasing
government liquidity. It also eases hardships on the part of individuals who
are required to make this four time return. Thus, the taxpayer does not have
to raise large sums of money in order to pay the tax.
12. An individual earning purely compensation income
files only one annual income tax return covering the total taxable
compensation income for the whole of the previous calendar year.
13. Under the withholding tax system, taxes imposed or
prescribed by the NIRC of 1997 are to be deducted and
withheld by the payors from payments made to payees for the
former to pay directly to the Bureau of Internal Revenue. It is
also known as collection of the tax at source.
14. A withholding agent is explicitly made personally
liable under the Tax Code for the payment of the tax required to
be withheld, in order to compel the withholding agent to withhold the tax
under any and all circumstances. In effect, the responsibility for the
collection of the tax as well as the payment thereof is concentrated upon the
person over whom the Government has jurisdiction. (Filipinas Synthetic Fiber
Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12,
1999) The system facilitates tax collection and reduces tax evasion.
 46
15. The two (2) types of withholding at source are the 1)
final withholding tax; and 2) creditable withholding tax.
16. Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as
a full and final payment of the income due from the payee on
the said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
The liability for payment of the tax rests primarily on the payor or the
withholding agent.. Thus, in case of his failure to withhold the tax or in case
of under withholding, the deficiency tax shall be collected from the payor
withholding agent. The payee is not required to file an income tax return for
the particular income.
17. Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or
at least approximate the tax due from the payee on the said
income. The income recipient is still required to file an income tax return
and/or pay the difference between the tax withheld and the tax due on the
income. [1st and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]
18. The two kinds of creditable withholding taxes are (a)
taxes withheld on income payments covered by the expanded withholding
tax; and (b) taxes withheld on compensation income.
19. Payments to the following are exempt from the
requirement of withholding or when no withholding taxes
required:
a. National Government and its instrumentalities including
provincial, city, or municipal governments;
b. Persons enjoying exemption from payment of income taxes
pursuant to the provisions of any law, general or special, such as but not
limited to the following:
1) Sales of real property by a corporation which is registered
with and certified by the HLURB or HUDCC as engaged in socialized
housing project where the selling price of the house and lot or only
the lot does not exceed P180,000.00 in Metro Manila and other
highly urbanized areas and P150,000.00 in other areas or such
adjusted amount of selling price for socialized housing as may later
be determined and adopted by the HLURB;
2) Corporations registered with the Board of Investments and
enjoying exemptions from income under the Omnibus Investment
Code of 1997;
3) Corporations exempt from income tax under Sec. 30,
of the Tax Code, like the SSS, GSIS, the PCSO, etc. However,
income payments arising from any activity which is conducted for
profit or income derived from real or personal property shall be
subject to a withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)
20. For tax amnesty purposes, the withholding agent is
not a taxpayer. He is made to pay the tax where he fails to withhold as a
penalty and not because the tax is due from him. (Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999, the Anscor
case)
PENALTIES, INTERESTS AND SURCHARGES
1. Surtaxes or surcharges, also known as the civil penalties, are
the amounts imposed in addition to the tax required.
They are in the nature of penalties and shall be collected at the same
time, in the same manner, and as part of the tax. [Sec.248 (A), NIRC of
1997]
2. What are the two (2) kinds of civil penalties ?
SUGGESTED ANSWER:
a. the 25% surcharge for late filing or late payment [Sec. 248 (A),
NIRC of 1997] (also known as the delinquency surcharge), and
b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B), Ibid.]
3. Define deficiency income tax.
SUGGESTED ANSWER: Deficiency income tax is the amount by
which the tax imposed under the NIRC of 1997 exceeds the amount shown
as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1), NIRC of
1997]
4. Deficiency interest, defined. The interest assessed and
collected on any unpaid amount of tax at the rate of 20% per annum or such
higher rate as may be prescribed by regulations, from the date prescribed
for payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]
5. Delinquency interest, defined. The interest assessed
and collected on the unpaid amount until fully paid where there is failure on
the part of the taxpayer to pay the amount die on any return required to be
filed; or the amount of the tax due for which no return is required; or a
deficiency tax, or any surcharge or interest thereon, on the date appearing in
the notice and demand by the Commissioner of Internal Revenue. [Sec.249
(c), NIRC of 1997]
 47
6. After resolving the issues the BIR Commissioner
reduced the assessment. Was it proper to impose delinquency
interest despite the reduction of the assessment ? Why ?
SUGGESTED ANSWER: Yes. The intention of the law is to
discourage delay in the payment of taxes due to the State and in this sense
the surcharge and interest charged are not penal but compensatory in
nature they are compensation to the State for the delay in payment, or for
the concomitant tuse of the funds by the taxpayer beyond the date he is
supposed to have paid them to the State. (Bank of the Philippine Islands v.
Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006)
7. Compromise penalty is the amount agreed upon between
the taxpayer and the Government to be paid as a penalty in cases of a
compromise.
8. As a result of divergent rulings on whether it is
subject to tax or not, the taxpayer was not able to pay his taxes
on time. Imposed surcharges and interests for such delay, the
taxpayer not invokes good faith with the BIR countering by
saying that good faith is not a valid defense for violation of a
special law. Furthermore, the BIR further raises the defense
that the government is not bound by the errors of its agents.
Who is correct ?
SUGGESTED ANSWER: The taxpayer is correct. The settled rule is
that good faith and honest belief that one is not subject to tax on the basis of
previous interpretation of government agencies tasked to implement the tax,
are sufficient justification to delete the imposition of surcharges. (Michel J.
Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G. R. No. 166786,
September 11, 2006)
REPUBLIC ACT NO. 1125, CREATING THE
COURT OF TAX APPEALS INCLUDING
JURISDICTION OF THE CTA, AS AMENDED
COURT OF TAX APPEALS, IN GENERAL
1. Discuss the role of the judiciary in taxation.
SUGGESTED ANSWER: The role of the judiciary is to be the
sympathetic or vigilant court which would check injustices or abuses of the
legislative and administrative agents of the State in their exercise of the
power of taxation.
2. What is the nature and composition of the Court of
Tax Appeals ?
SUGGESTED ANSWER: The Court of Tax Appeals is the special
tax court created under Republic Act No. 1125, as amended, and is
composed of a Presiding Justice and eight (8) Associate Justices, organized
into three (3) divisions.
3. What are the purposes for the creation of the Court
of Tax Appeals ?
SUGGESTED ANSWER:
a. To prevent delay in the disposition of tax cases by the then
Courts of First Instance (now RTCs), in view of the backlog of civil, criminal,
and cadastral cases accumulating in the dockets of such courts; and
b. To have a body with special knowledge which ordinary Judges
of the then Courts of First Instance (now RTCs), are not likely to possess,
thus providing for an adequate remedy for a speedy determination of tax
cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209)
4. Jurisdiction of the Court of Tax Appeals.
a. Exclusive appellate jurisdiction to review by appeal, as
herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties, in relation thereto, or other matters arising under
the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue; (DIVISION)
2. Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds or internal revenue taxes, fees or
other charges, penalties in relation thereto, or other matter arising under the
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial; (The inaction on refunds in two years from the time tax was paid.
Thus, if the prescriptive period of two years is about to expire, the taxpayer
should interpose a petition for review with the CTA DIVISION)
3. Decisions, orders or resolutions of the Regional Trial Courts in
local tax cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction; (If original DIVISION; if appellate EN
BANC)
4. Decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges, seizure, detention
 48
or release of property affected, fines, forfeitures or other penalties in relation
thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs; (DIVISION)
5. Decisions of the Central Board of Assessment Appeals in the
exercise of its appellate jurisdiction over cases involving the assessment
and taxation of real property originally decided by the provincial or city board
of assessment appeals; (EN BANC)
6. Decisions of the Secretary of Finance on customs cases
elevated to him automatically for review from decisions of the Commissioner
of Customs which are adverse to the Government under Section 2315 of the
Tariff and Customs Code; (This has reference to forfeiture cases where the
decision is to release the seized articles DIVISION)
7. Decisions of the Secretary of Trade and Industry, in case of
nonagricultural product, commodity or article, and the Secretary of
Agriculture in the case of agricultural product, commodity or article, involving
dumping and countervailing duties under Section 301 and 302, respectively,
of the Tariff and Customs Code, and safeguard measures under Republic
Act No. 8800, where either party may appeal the decision to impose or not
to impose said duties. (DIVISION)
b. Jurisdiction over cases involving criminal offenses as
herein provided:
1. Exclusive original jurisdiction over all criminal cases
arising from violations of the National Internal Revenue Code or Tariff and
Customs Code and other laws administered by the Bureau of Internal
Revenue or the Bureau of Customs: Provided, however, That offenses or
felonies mentioned in this paragraph where the principal amount of taxes
and fees, exclusive of charges and penalties claimed, is less than One
million pesos (P1,000,000.00) or where there is no specified amount
claimed shall be tried by the regular Courts and the jurisdiction of the CTA
shall be appellate. Any provision of law or the Rules of Court to the contrary
notwithstanding, the criminal action and the corresponding civil action for the
recovery of civil liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in the same
proceeding by the CTA, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no right to reserve
the filing of such civil action separately from the civil action will be
recognized.
2. Exclusive appellate jurisdiction in criminal offenses:
a) Over appeals from the judgments, resolutions or orders
of the Regional Trial Courts in tax cases originally decided by them, in
their respective territorial jurisdiction.
b) Over petitions for review of the judgments, resolutions
or orders of the Regional Trial Courts in the exercise of their appellate
jurisdiction over tax cases originally decided by the Metropolitan Trial
Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in
their respective jurisdiction.
c. Jurisdiction over tax collection cases:
1. Exclusive original jurisdiction in tax collection cases involving
final and executory assessments for taxes, fees, charges and penalties:
Provided, however, That collection cases where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is less than One
million pesos (P1,000,000) shall be tried by the proper Municipal Trial Court,
Metropolitan Trial Court and Regional Trial Court.
2. Exclusive appellate jurisdiction in tax collection cases:
a) Over appeals from judgments, resolutions, or orders of
the Regional Trial Courts in tax collection cases originally decided by
them, in their respective territorial jurisdiction.
b) Over petitions for review of the judgments, resolutions
or orders of the Regional Trial Courts in the exercise of their appellate
jurisdiction over tax collection cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit
Trial Courts, in their respective jurisdiction. (Sec. 7, R. A. No. 1125, as
amended by R. A. No. 9282, emphasis and words in parentheses supplied)
The petition for review to be filed with the CTA en banc
as the mode for appealing a decision, resolution, or order of
the CTA Division, under Section 18 of Republic Act No. 1125,
as amended, is not a totally new remedy, unique to the CTA,
with a special application or use therein. To the contrary, the
CTA merely adopts the procedure for petitions for review and appeals
long established and practiced in other Philippine courts. Accordingly,
doctrines, principles, rules, and precedents laid down in jurisprudence by
this Court as regards petitions for review and appeals in courts of general
jurisdiction should likewise bind the CTA, and it cannot depart therefrom.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
5. It is the Regional Trial Court that has
jurisdiction to rule upon the constitutionality of a tax law or a
regulation issued by the taxing authorities. Where what is
assailed is the validity or constitutionality of a law, or a rule or regulation
issued by the administrative agency in the performance of its quasi-
legislative function, the regular courts have jurisdiction to pass upon the
same. The determination of whether a specific rule or set of rules issued
by an administrative agency contravenes the law or the constitution is
within the jurisdiction of the regular courts.
Indeed, the Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation in the
courts, including the regional trial courts. This is within the scope of
 49
judicial power, which includes the authority of the courts to determine in an
appropriate action the validity of the acts of the political departments.
Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and
enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part
of any branch or instrumentality of the Government. (British American
Tobacco v. Camacho et al., G. R. No. 163583, August 20, 2008 with an
intervenor)
NOTES AND COMMENTS: The above doctrine supersedes Asia
International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R.
No. 103445, December 18, 2007 which ruled that it is the Court of Tax
Appeals that has jurisdiction relative to matters involving the constitutionality
of regulations issued by the BIR. The reason was that this falls under the
concept of decisions of the BIR Commissioner on other matter arising
under the provisions of laws administered by the Commission. Issuance of
revenue regulations are authorized under the NIRC.
British American Tobacco reversed Asia International Auctioneers
upon the concept of the judiciarys expanded power.
6. Instances where the Court of Tax Appeals would
have jurisdiction even if there is no decision of the
Commissioner of Customs:
a. Decisions of the Secretary of Trade and Industry or the
Secretary of Agriculture in anti-dumping and countervailing duty cases are
appealable to the Court of Tax Appeals within thirty (30) days from receipt of
such decisions.
b. In case of automatic review by the Secretary of Finance in
seizure or forfeiture cases where the value of the importation exceeds P5
million or where the decision of the Collector of Customs which fully or
partially releases the shipment seized is affirmed by the Commissioner of
Customs.
c. In case of automatic review by the Secretary of Finance of a
decision of a Collector of Customs acting favorably upon a customs protest.
ASSESSMENT OF INTERNAL REVENUE TAXES
1. Outline of tax remedies of a taxpayer and the
government relative to ASSESSMENT of internal revenue
taxes.
a. The taxpayer files his tax return.
b. A Letter of Authority is issued authorizing BIR examiner to
audit or examine the tax return and determines whether the full and
complete taxes have been paid.
c. If the examiner is satisfied that the tax return is truly reflective
of the taxable transaction and all taxes have been paid, the process ends.
However, if the examiner is not satisfied that the tax return is truly reflective
of the taxable transaction and that the taxes have not been fully paid, a
Notice of Informal Conference is issued inviting the taxpayer to explain why
he should not be subject to additional taxes.
d. If the taxpayer attends the informal conference and the
examiner is satisfied with the explanation of the taxpayer, the process is
again ended.
If the taxpayer ignores the invitation to the informal conference, or if
the examiner is not satisfied with taxpayers explanation,, and he believes
that proper taxes should be assessed, the Commissioner of Internal
Revenue or his duly authorized representative shall then notify the taxpayer
of the findings in the form of a pre-assessment notice. The pre-assessment
notice requires the taxpayer to explain within fifteen (15) days from receipt
why no notice of assessment and letter of demand for additional taxes
should be directed to him.
e. If the Commissioner is satisfied with the explanation of the
taxpayer, then the process is again ended.
If the taxpayer ignores the pre-assessment notice by not responding
or his explanations are not accepted by the Commissioner, then a notice of
assessment and a letter of demand is issued.
The notice of assessment must be issued by the Commissioner to
the taxpayer within a period of three (3) years from the time the tax return
was filed or should have been filed whichever is the later of the two events.
Where the taxpayer did not file a tax return or where the tax return filed is
false or fraudulent, then the Commissioner has a period of ten (10) years
from discovery of the failure to file a tax return or from discovery of the fraud
within which to issue an assessment notice. The running of the above
prescriptive periods may however be suspended under certain instances.
The notice of assessment must be issued within the prescriptive
period and must contain the facts, law and jurisprudence relied upon by the
Commissioner. Otherwise it would not be valid.
f. The taxpayer should then file an administrative protest by filing
a request for reconsideration or reinvestigation within thirty (30) days from
receipt of the assessment notice.
The taxpayer could not immediately interpose an appeal to the
Court of Tax Appeals because there is no decision yet of the Commissioner
that could be the subject of a review.
To be valid the administrative protest must be filed within the
prescriptive period, must show the error of the Bureau of Internal Revenue
and the correct computations supported by a statement of facts, and the law
and jurisprudence relied upon by the taxpayer. There is no need to pay
under protest. If the protest was not seasonably filed the assessment
 50
becomes final and collectible and the Bureau of Internal Revenue could use
its administrative and judicial remedies in collecting the tax.
g. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall be submitted, otherwise the assessment shall
become final and collectible and the BIR could use its administrative and
judicial remedies to collect the tax.
Once an assessment has become final and collectible, not even the
BIR Commissioner could change the same. Thus, the taxpayer could not
pay the tax, then apply for a refund, and if denied appeal the same to the
Court of Tax Appeals.
h. If the protest is denied in whole or in part, or is not acted upon
within one hundred eighty (180) days from the submission of documents,
the taxpayer adversely affected by the decision or inaction may appeal to the
Court of Tax Appeals within thirty (30) days from receipt of the adverse
decision, or from the lapse of the one hundred eighty (180-) day period, with
an application for the issuance of a writ of preliminary injunction to enjoin the
BIR from collecting the tax subject of the appeal.
If the taxpayer fails to so appeal, the denial of the Commissioner
or the inaction of the Commissioner would result to the notice of
assessment becoming final and collectible and the BIR could then utilize its
administrative and judicial remedies to collect the tax.
i. A decision of a division of the Court of Tax Appeals adverse to
the taxpayer or the government may be the subject of a motion for
reconsideration or new trial, a denial of which is appealable to the Court of
Tax Appeals en banc by means of a petition for review.
The Court of Tax Appeals, has a period of twelve (12) months from
submission of the case for decision within which to decide.
j. If the decision of the Court of Tax Appeals en banc affirms the
denial of the protest by the Commissioner or the assessment in case of
failure by the Commissioner to decide the taxpayer must file a petition for
review on certiorari with the Supreme Court within fifteen (15) days from
notice of the judgment on questions of law. An extension of thirty (30) days
may for justifiable reasons be granted. If the taxpayer does not so appeal,
the decision of the Court of Tax Appeals would become final and this has
the effect of making the assessment also final and collectible. The BIR
could then use its administrative and judicial remedies to collect the tax.
2. The word assessment when used in connection
with taxation, may have more than one meaning. More commonly
the word assessment means the official valuation of a taxpayers property
for purpose of taxation. The above definition of assessment finds application
under tariff and customs taxation as well as local government taxation.
For real property taxation, there may be a special meaning to the
burdens that are imposed upon real properties that have been
benefited by a public works expenditure of a local government. It is
sometimes called a special assessment or a special levy. (Commissioner of
Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No.
128315, June 29, 1999)
For internal revenue taxation assessment as laying a tax. The
ultimate purpose of an assessment to such a connection is to ascertain the
amount that each taxpayer is to pay. (Ibid.)
3. An assessment is a notice duly sent to the taxpayer
which is deemed made only when the BIR releases, mails or
sends such notice to the taxpayer. (Commissioner of Internal Revenue v.
Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29,
1999)
4. Self-assessed tax, defined. A tax that the taxpayer
himself assesses or computes and pays to the taxing authority. It is a tax
that self-assessed by the taxpayer without the intervention of an assessment
by the tax authority to create the tax liability.
The Tax Code follows the pay-as-you-file system of taxation under
which the taxpayer computes his own tax liability, prepares the return, and
pays the tax as he files the return. The pay-as-you-file system is a self-
assessing tax return.
Internal revenue taxes are self-assessing. (Dissent of J. Carpio in
Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April
26, 2005 and companion case)
A clear example of a self-assessed tax is the annual income tax,
which the taxpayer himself computes and pays without the intervention of
any assessment by the BIR. The annual income tax becomes due and
payable without need of any prior assessment by the BIR. The BIR may or
may not investigate or audit the annual income tax return filed by the
taxpayer. The taxpayers liability for the income tax does not depend on
whether or not the BIR conducts such subsequent investigation or audit.
However, if the taxing authority is first required to investigate, and
after such investigation to issue the tax assessment that creates the tax
liability, then the tax is no longer self-assessed. (Ibid.)
5. Sec. 6 (B) of the NIRC of 1997 allows the BIR to
make or amend a tax return from his own knowledge or
obtained through testimony or otherwise. Thus, the Commissioner
of Internal Revenue investigates any circumstance which led him to believe
that the taxpayer had taxable income larger than that reported. Necessarily,
this inquiry would have to be outside of the books because they supported
the return as filed. He may take the sworn testimony of the taxpayer, he
may take the testimony of third parties; he may examine and subpoena, if
 51
necessary, traders and brokers accounts and books and the taxpayers
books of accounts. The Commissioner is not bound to follow any set of
patterns. The existence of unreported income may be shown by any
particular proof that is available in the circumstances of the particular
situation. (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R.
No. 136975, March 31, 2005)
6. General rule: When the Commissioner of Internal
Revenue may rely on estimates. The rule is that in the absence of
accounting records of a taxpayer, his tax liability may be determined by
estimation. The petitioner (Commissioner of Internal Revenue) is not
required to compute such tax liabilities with mathematical exactness.
Approximation in the calculation of taxes due is justified. To hold otherwise
would be tantamount to holding that skillful concealment is an invincible
barrier to proof. (Commissioner of Internal Revenue v. Hantex Trading Co., Inc.
G. R. No. 136975, March 31, 2005)
However, the rule does not apply where the estimation is arrived at
arbitrarily and capriciously. (Ibid.)
7. Meaning of "best evidence obtainable" under Sec. 6
(B), NIRC of 1997. This means that the original documents must be
produced. If it could not be produced, secondary evidence must be
adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA -
G.R. SP No. 47172, September 30, 1998)
8. The following are the general methods developed by
the Bureau of Internal Revenue for reconstructing a taxpayers
income where the records do not show the true income or where no return
was filed or what was filed was a false and fraudulent return
(a) Percentage method;
(b) Net worth method.;
(c) Bank deposit method;
(d) Cash expenditure method;
(e) Unit and value method;
(f) Third party information or access to records method;
(g) Surveillance and assessment method. (Chapter XIII. Indirect
Approach to Investigation, Handbook on Audit Procedures and Techniques
Volume I, pp. 68-74)
9. Third party information or access to records
method. The BIR may require third parties, public or private to supply
information to the BIR, and thus, obtain on a regular basis from any person
other than the person whose internal revenue tax liability is subject to audit
or investigation, or from any office or officer of the national and local
governments, government agencies and instrumentalities including the
Bangko Sentral ng Pilipinas and government-owned or controlled
corporations, any information such as, but not limited to, costs and volume
of production, receipts or sales and gross incomes of taxpayers, and the
names , addresses, and financial statements of corporations, mutual fund
companies, insurance companies, regional operating headquarters or
multinational companies, joint accounts, associations, joint ventures or
consortia and registered partnerships, and their members; xxx [Sec. 5 (B),
NIRC of 1997)
10. A pre-assessment notice is a letter sent by the Bureau of
Internal Revenue to a taxpayer asking him to explain within a period of
fifteen (15) days from receipt why he should not be the subject of an
assessment notice. It is part of the due process rights of a taxpayer.
As a general rule, the BIR could not issue an assessment notice
without first issuing a pre-assessment notice because it is part of the due
process rights of a taxpayer to be given notice in the form of a pre-
assessment notice, and for him to explain why he should not be the subject
of an assessment notice.
11. Instances where a pre-assessment notice is not
required before a notice of assessment is sent to the taxpayer.
a. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the face of
the return; or
b. When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding agent; or
c. When a taxpayer opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
table year; or
d. When the excess tax due on excisable articles has not been paid;
or
e. When an article locally purchased or imported by an exempt
person, such as, but not limited to vehicles, capital equipment, machineries
and spare parts, has been sold, trade or transferred to non-exempt persons.
(Sec. 228, NIRC of 1997)
12. Prescriptive periods for making assessments
of internal revenue taxes.
a. Three (3) years from the last day within which to file a return or
when the return was actually filed, whichever is later (Sec. 203, NIRC of 1997).
The CIR has three (3) years from the date of actual filing of the tax return
 52
to assess a national internal revenue tax or to commence court
proceedings for the collection thereof without an assessment. [Bank of
Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner
of Internal Revenue, G. R. No. 174942, March 7, 2008]
b. ten years from discovery of the failure to file the tax return or
discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997[ ; or
c. within the period agreed upon between the government and
the taxpayer where there is a waiver of the prescriptive period for
assessment (Sec. 222 (b), NIRC of 1997).
13. Purpose of period of limitations in taxation. For the
purpose of safeguarding taxpayers from any unreasonable examination,
investigation or assessment, our tax law provides a statute of limitations in
the collection of taxes. [Commissioner of Internal Revenue v. B.F. Goodrich Phils,
Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171, February
24, 1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of Internal
Revenue, G. R. No. 162852, December 16, 2004], as well as their assessments.
The law prescribing a limitation of actions for the collection of the
income tax is beneficial both to the Government and to its citizens; to the
Government because tax officers would be obliged to act promptly in the
making of assessment, and to citizens because after the lapse of the
period of prescription citizens would have a feeling of security against
unscrupulous tax agents who will always find an excuse to inspect the
books of taxpayers, not to determine the latters real liability, but to take
advantage of every opportunity to molest peaceful, law-abiding citizens.
Without such a legal defense taxpayers would furthermore be under
obligation to always keep their books and keep them open for inspection
subject to harassment by unscrupulous tax agents. The law on prescription
being a remedial measure should be interpreted in a way conducive to
bringing about the beneficent purpose of affording protection to the
taxpayer within the contemplation of the Commission which recommend
the approval of the law. [Bank of Philippine Islands (Formerly Far East Bank
and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942,
March 7, 2008]
This mandate governs the question of prescription of the
governments right to assess internal revenue taxes primarily to safeguard
the interests of taxpayers from unreasonable investigation. Accordingly,
the government must assess internal revenue taxes on time so as not to
extend indefinitely the period of assessment and deprive the taxpayer of
the assurance that it will no longer be subjected to further investigation for
taxes after the expiration of reasonable period of time. (Commissioner of
Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30,
2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R.
No. 162852, December 16, 2004, 447 SCRA 214, 225)
14. Unreasonable investigation contemplates cases
where the period for assessment extends indefinitely because
this deprives the taxpayer of the assurance that it will not longer be
subjected to further investigation for taxes after the expiration of a
reasonable period of time. (Philippine Journalists, Inc. v. Commissioner of
Internal Revenue, G. R. No. 162852, December 16, 2004 with note to see Republic
v. Ablaza, 108 Phil. 1105. 1108)
Laws on prescription should be liberally construed in favor of the
taxpayer. Reason: for the purpose of safeguarding taxpayers from an
unreasonable examination, investigation or assessment, our tax laws
provide a statute of limitation on the collection of taxes. Thus, the law on
prescription, being a remedial measure, should be liberally construed in
order to afford such protection, As a corollary, the exceptions to the law on
prescription should perforce be strictly construed. [Philippine Journalists, Inc.
v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 citing
Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby
International Tire Co., Inc.),., et al., G.R. No. 104171, February 24, 1999, 303 SCRA
546]
The prescriptive period was precisely intended to give the taxpayers
peace of mind. (Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc.,
et al., G.R. No. 104171, February 24, 1999)
15. A jeopardy assessment is a delinquency tax
assessment which was assessed without the benefit of complete or partial
audit by an authorized revenue officer, who has reason to believe that the
assessment and collection of a deficiency tax will be jeopardized by delay
because of the taxpayers failure to comply with the audit and investigation
requirements to present his books of accounts and/or pertinent records, or
to substantiate all or any of the deductions, exemptions, or credits claimed in
his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000)
Jeopardy assessment is an indication of the doubtful validity of the
assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev.
Regs. No. 6-2000]
16.Requisites for Formal Letter of Demand and
Assessment Notice. The formal letter of demand and assessment
notice shall be issued by the Commissioner or his duly authorized
representative. The letter of demand calling for payment of the taxpayers
deficiency tax or taxes shall state the facts, the law, rules and regulations,
or jurisprudence on which the assessment is based, otherwise, the formal
letter of demand and assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by personal delivery.
 53
17. What are the requirements for the validity of a
formal letter of demand and assessment notice ?
SUGGESTED ANSWER:
a. There must have been previously issued a pre-assessment
notice until excepted;
b. It must have been issued prior to the prescriptive period; and
c. The letter of demand calling for payment of the taxpayers
deficiency tax or taxes shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based, otherwise, the formal
letter of demand and assessment notice shall be void. (Sec. 3.1.4, Rev. Regs.
No. 12-99)
18. What are the reasons for presumption of
correctness of assessments ?
SUGGESTED ANSWER:
a. Lifeblood theory
b. Presumption of regularity (Commissioner of Internal Revenue v.
Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005) in the performance
of public functions. (Commissioner of Internal Revenue v. Tuazon, Inc., 173
SCRA 397)
c. The likelihood that the taxpayer will have access to the
relevant information [Commissioner of Internal Revenue, supra citing United
States v. Rexach, 482 F.2d 10 (1973). The certiorari was denied by the United
States Supreme Court on November 19, 1973]
d. The desirability of bolstering the record-keeping requirements
of the NIRC. (Ibid.)
19. Give instances where prima facie correctness of a
tax assessment does not apply.
SUGGESTED ANSWER: The prima facie correctness of a tax
assessment does not apply upon proof that an assessment is utterly without
foundation, meaning it is arbitrary and capricious. Where the BIR has come
out with a naked assessment i.e., without any foundation character, the
determination of the tax due is without rational basis. [Commissioner of
Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005
citing United States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In
such a situation, the determination of the Commissioner contained in a
deficiency notice disappears. [Commissioner of Internal Revenue, supra citing a
U.S. Court of Appeals ruling, in Clark and Clark v. Commissioner of Internal
Revenue, 266 F. 2d 698 (1959)] Hence, the determination by the CTA must
rest on all the evidence introduced and its ultimate determination must find
support in credible evidence. [Commissioner of Internal Revenue, supra]
20. What are the instances that suspends the
running of the prescriptive periods (Statute of Limitations)
within which to make an assessment and the beginning of
distraint or levy or of a proceeding in court for the collection, in
respect of any tax deficiencies?
SUGGESTED ANSWER:
a. When the Commissioner is prohibited from making the
assessment, or beginning distraint, or levy or proceeding in court and for
sixty (60) days thereafter;
b. When the taxpayer requests for and is granted a
reinvestigation by the commissioner;
c. When the taxpayer could not be located in the address given
by him in the return filed upon which the tax is being assessed or collected;
d. When the warrant of distraint and levy is duly served upon the
taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and
e. When the taxpayer is out of the Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case) that
the waiver of the period for assessment must be in writing and have the
written consent of the BIR Commissioner is still doctrinal because of the
provisions of Sec. 223, NIRC of 1997 which provides for the suspension of
the prescriptive period:
21. Under RMO No. 20-90, which implements
Sections 203 and 222 (b), the following procedures should be
followed for a valid waiver of the prescriptive period for an
assessment:
a. The waiver must be in the proper form;
b. The waiver shall be signed by the taxpayer himself or his
duly authorized representative. In the case of a corporation, the waiver
must be signed by any of its responsible officials.
Soon after the waiver is signed by the taxpayer, the Commissioner
of Internal Revenue or the revenue official authorized by him, as
hereinafter provided, shall sign the waiver indicating that the Bureau has
accepted and agreed to the waiver. The date of such acceptance by
the Bureau should be indicated. 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.
 54
c. The following revenue officials are authorized to sign the
waiver.
A. In the National Office
xxxx
3. Commissioner
For tax cases involving more than P1M
B. In the Regional Offices
1. The Revenue District Officer with respect to tax
cases still pending investigation and the period to assess is
about to prescribe regardless of amount.
xxxx
d. The waiver must be executed in three (3) copies, the
original copy to be attached to the docket of the case, the second copy
for the taxpayer and the third copy for the Office accepting the waiver.
The fact of receipt by the taxpayer of his/her file copy shall be
indicated in the original copy.
d. The foregoing procedures shall be strictly followed. Any
revenue official found not to have complied with this Order resulting in
prescription of the right to assess/collect shall be administratively dealt
with. (Renumbering and emphasis supplied.)
If the above are not followed there is no valid waiver and
prescription would run. (Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine
Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852,
December 16, 2004, 447 SCRA 214, 228-229)
22. The procedures in RMO No. 20-90 are NOT
merely directory and that the execution of a waiver is a
renunciation of a taxpayers right to invoke prescription. RMO
No. 20-90 must be strictly followed. A waiver of the statute of
limitations under the NIRC, to a certain extent being a derogation of the
taxpayers right to security against prolonged and unscrupulous
investigations, must be carefully and strictly construed. The waiver of the
statute of limitations does not mean that the taxpayer relinquishes the right
to invoke prescription unequivocally, particularly where the language of the
document is equivocal.
Thus a waiver becomes unlimited in time, and invalid, because it did
not specify a definite date, agreed upon between the BIR and the taxpayer,
within which the former may assess and collect taxes. It also would have no
binding effect on the taxpayer if there was no consent by the Commissioner.
On this basis, no implied consent can be presumed, nor can it be contended
that the concurrence to such waiver is a mere formality. (Commissioner of
Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30,
2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R.
No. 162852, December 16, 2004, 447 SCRA 214, 229 in turn citing Id. at 229,
citing Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 115712,
February 25, 1999, 303 SCRA 614, 620-622.)
23. BIR cannot rely on its invocation of the rule that
the government cannot be estopped by the mistakes of its
revenue officers in the enforcement of RMO No. 20-90 because the
law on prescription should be interpreted in a way conducive to bringing about
the beneficent purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommended the approval of the
law. To the Government, its tax officers are obliged to act promptly in the
making of assessment so that taxpayers, after the lapse of the period of
prescription, would have a feeling of security against unscrupulous tax agents
who will always try to find an excuse to inspect the books of taxpayers, not to
determine the latters real liability, but to take advantage of a possible
opportunity to harass even law-abiding businessmen. Without such legal
defense, taxpayers would be open season to harassment by unscrupulous tax
agents. [Commissioner of Internal Revenue v. FMF Development Corporation, G.
R. No. 167765, June 30, 2008 citing Republic of the Phils. v. Ablaza, 108 Phil.
1105, 1108 (1960)]
24. The signatures of both the Commissioner and
the taxpayer, are required for a waiver of the prescriptive
period, thus a unilateral waiver on the part of the taxpayer does not
suspend the prescriptive period. [Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case)]
47. The act of requesting a reinvestigation alone does
not suspend the running of the prescriptive period. The
request for reinvestigation must be granted by the CIR. The
Supreme Court declared that the burden of proof that the request for
reinvestigation had been actually granted shall be on the Commissioner of
Internal Revenue. Such grant may be expressed in its communications
with the taxpayer or implied from the action of the Commissioner or his
authorized representative in response to the request for reinvestigation.
[Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v.
Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]
PROTESTING INTERNAL REVENUE TAX ASSESSMENTS
1. What is the presumption that flows from a taxpayers
failure to protest an assessment ?
SUGGESTED ANSWER: Tax assessments by tax examiners are
presumed correct and made in good faith. The taxpayer has the duty to
 55
prove otherwise. In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a Bureau of Internal
Revenue examiner and approved by his superior officers will not be
disturbed. All presumptions are in favor of the correctness of tax
assessments. (Commissioner of Internal Revenue v. Bank of Philippine Islands.,
G, R. No. 134062, April 17, 2007 citing Sy Po v. Court of Appeals, G. R. No. L-
81446, 18 August 1988, 164 SCRA 524, 530, citations omitted)
2. What are the two ways of protesting an
assessment notice for an internal revenue tax ? Alternatively,
what are the two types of protests ? Explain briefly.
SUGGESTED ANSWER:
a. Request for reconsideration which refers to a plea for re-
evaluation of an assessment on the basis of existing records without need of
additional evidence. It may involve both a question of fact or of law or both.
b. Request for reinvestigation which refers to a plea for re-
evaluation of an assessment on the basis of newly-discovered evidence or
additional evidence that a taxpayer intends to present in the investigation. It
may also involve a question of fact or law or both. (Commissioner of Internal
Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31,
2006 citing Rev. Regs. No. 12-85)
3. What is that type of protest that suspends the
running of the statute of limitations for the beginning of
distraint or levy or a proceeding in court for collection ? Why ?
SUGGESTED ANSWER: It is that type of protest when the taxpayer
requests for a reinvestigation which is granted by the Commissioner (Sec.
223, NIRC of 1997), that suspends the running of the statute of limitations
for collection of the tax. (Commissioner of Internal Revenue v. Philippine Global
Communication, Inc., G. R. No. 167146, October 31, 2006 citing Sec. 271, now Sec.
223, NIRC of 1997) When a taxpayer demands a reinvestigation, the time
employed in reinvestigation should be deducted from the total period of
limitation. [Commissioner of Internal Revenue, supra citing Republic v. Lopez, 117
Phil. 575, 578; 7 SCRA 566, 568-569 (1963)]
Undoubtedly, a reinvestigation, which entails the reception and
evaluation of additional evidence, will take more time than a reconsideration
of a tax assessment which will be limited to the evidence already at hand;
this justifies why the former can suspend the running of the statute of
limitations on collection of the assessed tax, while the latter cannot.
(Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R.
No. 167146, October 31, 2006 citing Bank of Philippine Islands v. Commissioner of
Internal Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231)
4. What are the requirements for the validity of a
taxpayers protest ?
SUGGESTED ANSWER:
a. It must be filed within the reglementary period of thirty (30)
days from receipt of the notice of assessment.
b. The taxpayer must not only show the errors of the Bureau of
Internal Revenue but also the correct computation through
1) A statement of the facts, the applicable law, rules and
regulations, or jurisprudence on which the taxpayers protest is
based,
2) If there are several issues involved in the disputed
assessment and the taxpayer fails to state the facts, the applicable
law, rules and regulations, or jurisprudence in support of his protest
against some of the several issues on which the assessment is
based, the same shall be considered undisputed issue or issues, in
which case, the taxpayer shall be required to pay the corresponding
deficiency tax or taxes attributable thereto. (Sec. 3.1.5, Rev. Regs.
12-99)
c. Within sixty (60) days from filing of the protest, the taxpayer
shall submit all relevant supporting documents. [4th par., Sec. 228 (e), NIRC of
1997]
5. Relevant supporting documents, defined. The
term relevant supporting documents should be understood as those
documents necessary to support the legal basis in disputing a tax
assessment as determined by the taxpayer. The BIR can only inform the
taxpayer to submit additional documents.
The BIR cannot demand what type of supporting documents should
be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which
may require the production of documents that a taxpayer cannot submit.
(Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., G. R.
172045-46, June 16, 2009)
JUDICIAL REMEDIES INVOLVING PROTESTED
ASSESSMENTS
1. Acts of BIR Commissioner that may be
considered as denial of a protest which serve as basis for
appeal to the Court of Tax Appeals.
a. Filing by the BIR of a civil suit for collection of the deficiency
tax is considered a denial of the request for reconsideration. (Commissioner
of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)
b. An indication to the taxpayer by the Commissioner in clear
and unequivocal language of his final denial not the issuance of the warrant
 56
of distraint and levy. What is the subject of the appeal is the final decision
not the warrant of distraint. (Ibid.)
c. A BIR demand letter sent to the taxpayer after his protest of
the assessment notice is considered as the final decision of the
Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax
Appeals, et al., 57 SCRA 523)
d. A letter of the BIR Commissioner reiterating to a taxpayer his
previous demand to pay an assessment is considered a denial of the
request for reconsideration or protest and is appealable to the Court of Tax
Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204)
e. Final notice before seizure considered as commissioners
decision of taxpayers request for reconsideration who received no other
response. Commissioner of Internal Revenue v. Isabela Cultural
Corporation, G.R. No. 135210, July 11, 2001 held that not only is the Notice
the only response received: its content and tenor supports the theory that it
was the CIRs final act regarding the request for reconsideration. The very
title expressly indicated that it was a final notice prior to seizure of property.
The letter itself clearly stated that the taxpayer was being given this LAST
OPPORTUNITY to pay; otherwise, its properties would be subjected to
distraint and levy.
2. The taxpayer seasonably protested the assessment
issued by the Commissioner of Internal Revenue. During the
pendency of the protest the CIR issued a warrant of distraint
and levy to collect the taxes subject of the protest.
As counsel what advice shall you give the taxpayer.
Explain briefly your answer.
SUGGESTED ANSWER: The taxpayer should appeal, by way of a
petition for review, to the Court of Tax Appeals not on the ground of the
denial of the protest but on other matter arising under the provisions of the
National Internal Revenue Code. The actual issuance of a warrant of
distraint and levy in certain cases cannot be considered a final decision on
a disputed assessment.
To be a valid decision on a disputed assessment, the decision of
the Commissioner or his duly authorized representative shall (a) state the
facts, the applicable law, rules and regulations, or jurisprudence on which
such decision is based, otherwise, the decision shall be void, in which case
the same shall not be considered a decision on the disputed assessment;
and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99)
These conditions are not complied with by the mere issuance of a warrant of
distraint and levy. (Commissioner of Internal Revenue v. Union Shipping Corp.,
185 SCRA 547)
Furthermore, a motion for the suspension of the collection of the tax
may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA
effective December 15, 2005) because the collection of the tax may jeopardize
the interest of the taxpayer.
3. As a general rule, there must always be a decision
of the Commissioner of Internal Revenue or Commissioner of
Customs before the Court of Tax Appeals, would have
jurisdiction. If there is no such decision, the petition would be dismissed
for lack of jurisdiction unless the case falls under any of the following
exceptions.
4. Instances where the Court of Tax Appeals would
have jurisdiction even if there is no decision yet by the
Commissioner of Internal Revenue:
a. Where the Commissioner has not acted on the disputed
assessment after a period of 180 days from submission of complete
supporting documents, the taxpayer has a period of 30 days from the
expiration of the 180 day period within which to appeal to the Court of Tax
Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue
v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001)
b. Where the Commissioner has not acted on an application for
refund or credit and the two year period from the time of payment is about to
expire, the taxpayer has to file his appeal with the Court of Tax Appeals
before the expiration of two years from the time the tax was paid.
It is disheartening enough to a taxpayer to be kept waiting for an
indefinite period for the ruling,. It would make matters more exasperating for
the taxpayer if the doors of justice would be closed for such a relief until after
the Commissioner, would have, at his personal convenience, given his go
signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No.
82618, March 16, 1989, unrep.)
5. The characteristic of a BIR denial of a protest
such as would enable the taxpayer to appeal the same to the
Court of Tax Appeals. The Commissioner of Internal Revenue should
always indicate to the taxpayer in clear and unequivocal language whenever
his action on an assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment.
On the basis of his statement indubitably showing that the
Commissioners communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to
the tax court at the opportune time. Without needless difficulty, the taxpayer
would be able to determine when his right to appeal to the tax court accrues.
(Commissioner of Internal Revenue v. Bank of the Philippines Islands, G. R. No.
134062, April 17, 2007)
 57
COLLECTION OF INTERNAL REVENUE TAXES
1. General rule: Collection of taxes is imprescriptible.
While this may be so, statutes may provide for periods of prescription,
2. Why is the collection of taxes imprescriptible ?
SUGGESTED ANSWER:
a. As a general rule, revenue laws are not intended to be liberally
construed, and exemptions are not given retroactive application,
considering that taxes are the lifeblood of the government and in Holmes
memorable metaphor, the price we pay for civilization, tax laws must be
faithfully and strictly implemented. (Commissioner of Internal Revenue v.
Acosta, etc.,G. R. No. 154068, August 3, 2007) However, statutes may provide
for prescriptive periods for the collection of particular kinds of taxes.
b. Tax laws, unlike remedial laws, are not to be applied
retroactively. Revenue laws are substantive laws and their application must
not be equated with remedial laws. (Acosta, supra)
3. What is the prescriptive period for collecting
internal revenue taxes ?
SUGGESTED ANSWER: There are four (4) prescriptive periods for
the collection of an internal revenue tax:
a. Collection upon a false or fraudulent return or no return without
assessment. In case of a false or fraudulent return with the intent to evade
tax or of failure to file a return, a proceeding in court for the collection of
such tax may be filed without assessment, at any time within ten (10) years
after the discovery of the falsity, fraud or omission. [Sec. 222 (a), NIRC of
1997]
b. Collection upon a false or fraudulent return or no return with
assessment. Any internal revenue tax which has been assessed (because
the return is false or fraudulent with intent to evade tax or of failure to fail a
return), within a period of ten (10) years from discovery of the falsity, fraud or
omission may be collected by distraint or levy or by a proceeding in
court within five (5) years following the assessment of the tax. [Sec.
222 (c), in relation to Sec. 222 (a) NIRC of 1997, emphasis supplied]
c. Collection upon an extended assessment. Where a tax has
been assessed with the period agreed upon between the Commissioner and
the taxpayer in writing (which should initially be within three (3) years from
the time the return was filed or should have been filed), or any extensions
before the expiration of the period agreed upon, the tax may be collected
by distraint or levy or by a proceeding in court within the period
agreed upon in writing before the expiration of the five (5) year period.
The period so agreed upon may be extended by subsequent written
agreements made before the expiration of the period previously agreed
upon. [Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997, emphasis
supplied]
d. Collection upon a return that is not false or fraudulent, or
where the assessment is not an extended assessment. Except as
provided in Section 222, internal revenue taxes shall be assessed within
three (3) years after the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period; Provided,
That in case where a return is filed beyond the period prescribed by law, the
three (3) year period shall be computed from the day the return was filed.
For purposes of this Section, a return filed before the last day prescribed by
law for the filing thereof shall be considered filed on such last day. (Sec.
203, NIRC of 1997, emphasis supplied)
When the BIR validly issues an assessment within the three (3)-
year period, it has another three (3) years within which to collect the tax
due by distraint, levy, or court proceeding. The assessment of the tax is
deemed made and the three (3)-year period for collection of the assessed
tax begins to run on the date the assessment notice had been released,
mailed or sent to the taxpayer. [Bank of Philippine Islands (Formerly Far East
Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No.
174942, March 7, 2008 citing BPI v. Commissioner of Internal Revenue, G.R.
No. 139736, 17 October 2005, 473 SCRA 205, 222-223]
NOTES AND COMMENTS:
a. Both the former Sec. 269, NIRC of 1977 and Sec.222 of
NIRC of 1997 do not refer to a regular return. It is clear that in enacting
Sec. 222, entitled Exceptions as to the period of limitation of assessment
and collection of taxes, the NIRC of 1997 has eliminated sub-paragraph c
of the former Sec. 269 of the NIRC, also entitled Exceptions as to the
period of limitation of assessment and collection of taxes. Said Sec. 269
(c), reads Any internal revenue tax which has been assessed within the
period of limitation above-prescribed may be collected by distraint or levy or
by a proceeding in court within three years following the assessment of the
tax.
A perusal of Sec. 222 of the NIRC is clear that it covers only three
scenarios only. 1) No assessment was made upon a false or fraudulent
return or omission to file a return; 2) an assessment was made upon a
false or fraudulent return or omission to file a return; and 3) an extended
assessment issued within a period agreed upon by the Commissioner and
the taxpayer. The same scenarios are those referred to in the former Sec.
269 which provided for a prescriptive period for collection of three (3) years.
It is clear therefore that neither Sec. 222 nor the former Sec. 269
provide for an instance where the assessment was made upon a regular
return or one that is not false or fraudulent, or that there was an agreement
to extend the period for assessment.
 58
Resort should therefore be made to the three (3) year period referred
to in Sec. 203 of the NIRC of 1997 which reads, Except as provided in
Section 222, internal revenue taxes shall be assessed within three (3) years
after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such
taxes x x x (paraphrasing and emphasis supplied)
4. What is a compromise ?
SUGGESTED ANSWER: A compromise is a contract whereby the
parties, by making reciprocal concessions, avoid a litigation or put an end to
one already commenced. (Art. 2028, Civil Code)
A compromise penalty could not be imposed by the BIR, if the
taxpayer did not agree. A compromise being, by its nature, mutual in
essence requires agreement. The payment made under protest could only
signify that there was no agreement that had effectively been reached
between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal
Revenue, G. R. No. 138485, September 10, 2001)
5. What tax cases may be the subject of a
compromise ?
SUGGESTED ANSWER: The following cases may, upon
taxpayers compliance with the basis for compromise, be the subject matter
of compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest after issuance of the Final
Assessment Notice to the taxpayer which are still pending in the Regional
Offices, Revenue District Offices, Legal Service, Large Taxpayer Service
(LTS), Collection Service, Enforcement Service and other offices in the
National Office;
c. Civil tax cases being disputed before the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than those already filed in court, or
those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)
6. What tax cases could not be the subject of
compromise ?
SUGGESTED ANSWER:
a. Withholding tax cases unless the applicant-taxpayer invokes
provisions of law that cast doubt on the taxpayers obligation to withhold.;
b. Criminal tax fraud cases, confirmed as such by the
Commissioner of Internal Revenue or his duly authorized representative;
c. Criminal violations already filed in court;
d. Delinquent accounts with duly approved schedule of
installment payments;
e. Cases where final reports of reinvestigation or reconsideration
have been issued resulting to reduction in the original assessment and the
taxpayer is agreeable to such decision by signing the required agreement
form for the purpose. On the other hand, other protested cases shall be
handled by the Regional Evaluation Board (REB) or the National Evaluation
Board (NEB) on a case to case basis;
f. Cases which become final and executory after final judgment
of a court where compromise is requested on the ground of doubtful validity
of the assessment; and
g. Estate tax cases where compromise is requested on the
ground of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. 30-
2002)
7. When may the Commissioner of Internal Revenue
compromise the payment of any internal revenue tax ?
Alternatively, what are the grounds for a compromise, and what
are the amounts for which a compromise may be entered into ?
SUGGESTED ANSWER:
a. A reasonable doubt as to the validity of the claim against the
taxpayer exists provided that the minimum compromise entered into is
equivalent to forty percent (40%) of the basic tax; or
b. The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax provided that the minimum compromise
entered into is equivalent to ten percent (10%) of the basic assessed tax
In the above instances the Commissioner is allowed to enter into a
compromise only if the basic tax involved does not exceed One million
pesos (P1,000,000.00), and the settlement offered is not less than the
prescribed percentages. [Sec. 204 (A), NIRC of 1997]
In instances where the Commissioner is not authorized, the
compromise shall be subject to the approval of the Evaluation Board
composed of the Commissioner and the four (4) Deputy Commissioners.
8. When is the Commissioner of Internal Revenue
authorized to abate or cancel a tax liability ?:
SUGGESTED ANSWER:
a. The tax or any portion thereof appears to be unjustly or
excessively assessed; or
b. The administration and collection costs involved do not justify the
collection of the amount due. [Sec. 204 (B), NIRC of 1997]
9. The collection of a tax may not be suspended. Only
the Court of Tax Appeals may issue an order suspending the collection of a
tax.
 59
10. As a general rule, No court shall have the
authority to grant an injunction to restrain the collection of any
national internal revenue tax, fee or charge. (Sec. 218, NIRC)
No appeal taken to the CTA from the decision of the Commissioner
of Internal Revenue or the Commissioner of Customs or the Regional Trial
Court, provincial, city or municipal treasurer or the Secretary of Finance, the
Secretary of Trade and Industry and Secretary of Agriculture, as the case
may be shall suspend the payment, levy, distraint, and/or sale of any
property of the taxpayer for the satisfaction of his tax liability as provided by
existing law: Provided, however, That when in the opinion of the Court the
collection by the aforementioned government agencies may jeopardize the
interest of the Government and/or the taxpayer the Court at any stage of the
proceeding may suspend the said collection and require the taxpayer either
to deposit the amount claimed or to file a surety bond for not more than
double the amount with the Court. (Sec. 11, Rep. Act No. 1125, as amended
by Sec. 9, Rep. Act No. 9282 )
The Supreme Court may enjoin the collection of taxes under its
general judicial power but it should be apparent that the source of the power
is not statutory but constitutional.
11. What is the procedure for suspension of
collection of taxes ?
SUGGESTED ANSWER: Where the collection of the amount of
the taxpayers liability, sought by means of a demand for payment, by levy,
distraint or sale of property of the taxpayer, or by whatever means, as
provided under existing laws, may jeopardize the interest of the
government or the taxpayer, an interested party may file a motion for the
suspension of the collection of the tax liability (Sec. 1, Rule 10, RRCTA
effective December 15, 2005) with the Court of Tax Appeals.
The motion for suspension of the collection of the tax may be filed
together with the petition for review or with the answer, or in a separate
motion filed by the interested party at any stage of the proceedings. (Sec.
3, Rule 10, RRCTA effective December 15, 2005)
REFUND OF INTERNAL REVENUE TAXES
1. What are the grounds for refund or credit of
internal revenue taxes ?
SUGGESTED ANSWER: The grounds for refund or credit or internal
revenue taxes are the following:
a. The tax was illegally collected. There is no law that authorizes
the collection of the tax.
b. The tax was excessively collected. There is a law that
authorizes the collection of a tax but the tax collected was more than what
the law allows.
c. The tax was paid through a mistaken belief that the taxpayer
should pay the tax (solution indebeti)
2. What are the three (3) conditions for the grant
of a claim for refund of creditable withholding tax ?
SUGGESTED ANSWER:
a. The claim is filed with the Commissioner of Internal Revenue
within the two-year period from the date of the payment of the tax.
b. It is shown on the return of the recipient that the income
payment received was declared as part of the gross income; and
c. The fact of withholding is established by a copy of a statement
duly issued by the payee showing the amount paid and the amount of tax
withheld therefrom. (Banco Filipino Savings and Mortgage Bank v. Court of
Appeals, et al., G. R. No. 155682, March 27, 2007)
NOTES AND COMMENTS:
a. Proof of fact of withholding. Sec. 10. Claim for tax credit
or refund. (a) Claims for Tax Credit or Refund of Income tax deducted
and withheld on income payments shall be given due course only when it is
shown on the return that the income payment received has been declared
as part of the gross income and the fact of withholding is established by a
copy of the Withholding Tax Statement duly issued by the payor to the
payee showing the amount paid and the amount of the tax withheld
therefrom xxx (Rev. Regs. No. 6-85, as amended)
The document which may be accepted as evidence of the third
condition, that is, the fact of withholding, must emanate from the payor itself,
and not merely from the payee, and must indicate the name of the payor,
the income payment basis of the tax withheld, the amount of the tax withheld
and the nature of the tax paid. (Banco Filipino Savings and Mortgage Bank v.
Court of Appeals, et al., G. R. No. 155682, March 27, 2007)
3. What should be established by a taxpayer for the
grant of a tax refund ? Why ?
SUGGESTED ANSWER: A taxpayer needs to establish not only
that the refund is justified under the law, but also the correct amount that
should be refunded.
If the latter requisite cannot be ascertained with particularity, there is
cause to deny the refund, or allow it only to the extent of the sum that is
actually proven as due.
Tax refunds partake of the nature of tax exemptions and are thus
construed strictissimi juris against the person claiming the exemption. The
burden in proving the claim for refund necessarily falls on the taxpayer. (Far
 60
East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G.
R. No. 138919, May 2, 2006)
4. What is The legal remedy under the NIRC of
1997 at the judicial level with respect to refund or recovery of
tax erroneously or illegally collected ?
SUGGESTED ANSWER: Filing of a suit or proceeding with the
Court of Tax Appeals
a. before the expiration of two (2) years from the date of payment
of the tax regardless of any supervening cause that may arise after payment
nd
(2 par., Sec. 229, NIRC of 1997), or
b. within thirty (30) days from receipt of the denial by the
Commissioner of the application for refund or credit. (Sec. 11, R.A. No. 1125)
5. The two (2) year period and the thirty (30) day
period should be applied on a whichever comes first basis.
Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year
period is about to lapse but there is no decision yet by the Commissioner
which would trigger the 30-day period, the taxpayer should file an appeal,
despite the absence of a decision. (Commissioners, etc. v. Court of Tax
Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.)
6. Where the taxpayer is a corporation the two year
prescriptive period from date of payment for refund of
income taxes should be the date when the corporation filed its
final adjustment return not on the date when the taxes were paid on a
quarterly basis. (Philippine Bank of Communications v. Commissioner of Internal
Revenue, et al., G.R. No. 112024, January 28, 1999)
It is only when the return, covering the whole year, is filed that the
taxpayer will be able to ascertain whether a tax is still due or refund can be
claimed based on the adjusted and audited figures. (Bank of the Philippine
Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001)
7. What is solutio indebeti as applied to tax
cases ?
SUGGESTED ANSWER: Under the principle of solutio indebiti
provided in Art. 2154, Civil Code, If something is received when there is
no right to demand it, and it was unduly delivered through mistake, the
obligation to return it arises. The BIR received something when there
[was] no right to demand it, and thus, it has the obligation to return it.
[State Land Investment Corporation v. Commissioner of Internal Revenue,
G. R. No. 171956, January 18, 2008citing Citibank, N. A. v. Court of
Appeals and Commissioner of Internal Revenue, G.R. No. 107434,
October 10, 1997, 280 SCRA 459, in turn citing Ramie Textiles, Inc. v.
Mathay, Sr., 89 SCRA 586 (1979)]. It is an ancient principle that no one,
not even the state, shall enrich oneself at the expense of another. Indeed,
simple justice requires the speedy refund of the wrongly held taxes. (Ibid.)
8. Why is it necessary to file an administrative
claim for refund with the BIR, before filing a case with the Court
of Tax Appeals ?
a. To afford the Commissioner an opportunity to correct his errors
or that of subordinate officers. (Gonzales v. Court of Tax Appeals, et al., 14
SCRA79)
b. To notify the Government that such taxes have been questioned
and the notice should be borne in mind in estimating the revenue available
for expenditures.
9. As a general rule the filing of an application for
refund or credit with the Bureau of Internal Revenue is an
administrative precondition before a suit may be filed with the
Court of Tax Appeals ?
SUGGESTED ANSWER: Yes. The failure to first file a written claim for
refund or credit is not fatal to a petition for review involving a disputed
assessment where
was
denied by the Bureau of Internal Revenue. To hold that the taxpayer has
now lost the right to appeal from the ruling on the disputed assessment and
require him to file a claim for a refund of the taxes paid as a condition
precedent to his right to appeal, would in effect require of him to go through
a useless and needless ceremony that would only delay the disposition of
the case, for the Commissioner would certainly disallow the claim for refund
in the same way as he disallowed the protest against the assessment. The
law, should not be interpreted as to result in absurdities. (vda. de San
Agustin., etc., v. Commissioner of Internal Revenue, G.R. No. 138485, September
10, 2001 citing Roman Catholic Archbishop of Cebu v. Collector of Internal
Revenue, 4 SCRA 279) NOTE: Reconciliation between above two
numbers (8 and 9). An application for refund or credit under Sec. 229 of
the NIRC of 1997 is required where the case filed before the CTA is a
refund case, which is not premised upon a disputed assessment. There is

no need for a prior application for refund or credit, if the refund is merely a
consequence of the resolution of the BIRs denial of a protested
assessment.
10. Who could apply for a refund or credit ?
SUGGESTED ANSWER: The person who paid the tax may apply
for a refund or credit.
A withholding tax agent may also apply for a refund. In a sense, he
is also a taxpayer because the tax may be collected from him if he does not
withhold.
11. What is the nature of the taxpayers remedy of either
to ask for a refund of excess tax payments or to apply the same
in payment of succeeding taxable periods taxes ?
SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76
of the NIRC of 1997) provides that any excess of the total quarterly
payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to the corporation,
or (b) may be credited against the estimated quarterly income tax liabilities
for the quarters of the succeeding taxable year. To ease the administration
of tax collection, these remedies are in the alternative and the choice of one
precludes the other. Since the Bank has chosen the tax credit approach it
cannot anymore avail of the tax refund. (Philippine Bank of Communications
v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28,
1999)
NOTES AND COMMENTS:
a. The choice, is given to the taxpayer, whether to claim for
refund under Sec. 76 or have its excess taxes applied as tax credit for
the succeeding taxable year, such election is not final. Prior verification and
approval by the Commissioner of Internal Revenue is required. The
availment of the remedy of tax credit is not absolute and mandatory. It does
not confer an absolute right on the part of the taxpayer to avail of the tax
credit scheme if it so chooses. Neither does it impose a duty on the part of
the government to sit back and allow an important facet of tax collection to
be at the sole control and discretion of the taxpayer. (Paseo Realty &
Development Corporation v. Court of Appeals, et al., G. R. No. 119286,
October 13, 2004)
12. What is the irrevocability rule in claims for
refund and what is the rationale behind this ?
SUGGESTED ANSWER: A corporation entitled to a tax credit or
refund of the excess estimated quarterly income taxes paid has two
61
options: (1) to carry over the excess credit or (2) to apply for the issuance
of a tax credit certificate or to claim a cash refund. If the option to carry
over the excess credit is exercised, the same shall be irrevocable for that
taxable period.
In exercising its option, the corporation must signify in its annual
corporate adjustment return (by marking the option box provided in the
BIR form) its intention either to carry over the excess credit or to claim a
refund. To facilitate tax collection, these remedies are in the alternative
and the choice of one precludes the other. [Systra Philippines, Inc., v.
Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing
Philippine Bank of Communications v. Commissioner of Internal Revenue, 361
Phil. 916 (1999)]
This is known as the irrevocability rule and is embodied in the last
sentence of Section 76 of the Tax Code. The phrase such option shall be
considered irrevocable for that taxable period means that the option to
carry over the excess tax credits of a particular taxable year can no longer
be revoked.
The rule prevents a taxpayer from claiming twice the excess
quarterly taxes paid: (1) as automatic credit against taxes for the taxable
quarters of the succeeding years for which no tax credit certificate has
been issued and (2) as a tax credit either for which a tax credit certificate
will be issued or which will be claimed for cash refund. (Systra Philippines,
Inc., supra citing De Leon, Hector, THE NATIONAL INTERNAL REVENUE
CODE, Seventh Edition, 2000, p. 430)
13. In the year 2000 Systra derived excess tax credits
and exercised the option to carry them over as tax credits for
the next taxable year. However, the tax due for the next
taxable year is lower than excess tax credits. It now applies
for a refund of the unapplied tax credits. May its refund be
granted ? If the refund is denied, does Systra lose the
unapplied tax credits ? Explain briefly your answer.
SUGGESTED ANSWER: Systras claim for refund should be
denied. Once the carry over option was made, actually or constructively, it
became forever irrevocable regardless of whether the excess tax credits
were actually or fully utilized Under Section 76 of the Tax Code, a claim
for refund of such excess credits can no longer be made. The excess
credits will only be applied against income tax due for the taxable
quarters of the succeeding taxable years.
Despite the denial of its claim for refund, Systra does not lose the
unapplied tax credits. The amount will not be forfeited in favor of the
government but will remain in the taxpayers account. Petitioner may claim
and carry it over in the succeeding taxable years, creditable against future
income tax liabilities until fully utilized. (Systra Philippines, Inc., v.
 62
Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing
Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos.
156637/162004, 14 December 2005, 477 SCRA 761)
Supposing in the above problem that Systra permanent
ceased operations, what happens to the unapplied credits ?
SUGGESTED ANSWER: Where, the corporation permanently
ceases its operations before full utilization of the tax credits it opted to
carry over, it may then be allowed to claim the refund of the remaining tax
credits. In such a case, the remaining tax credits can no longer be carried
over and the irrevocability rule ceases to apply. Cessante ratione legis,
cessat ipse lex. (Footnote no. 23, Systra Philippines, Inc., v.
Commissioner of Internal Revenue, G. R. No. 176290, September 21,
2007)
NOTES AND COMMENTS: The holding in State Land Investment
Corporation v. Commissioner of Internal Revenue, G. R. No. 171956,
January 18, 2008 that the taxpayer is entitled to a refund because during
the succeeding year there was no tax due against which the excess tax
credits may be applied is not doctrinal. This is so because it interpreted
the provisions of then Sec. 69 of the NIRC, which did not provide for the
irrevocability rule now contained in Sec. 76 of the NIRC of 1997.
14. A simultaneous filing of the application with the BIR
for refund/credit and the institution of the court suit with the
CTA is allowed. There is no need to wait for a BIR denial. REASONS:
a. The positive requirement of Section 230 NIRC (now Sec. 229,
NIRC of 1997);
b. The doctrine that delay of the Commissioner in rendering
decision does not extend the peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for
refund with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204
[C], NIRC of 1997), and for filing suit in court under Sec. 230, NIRC (now
Sec. 229, NIRC of 1997), unlike in protests of assessments under Sec. 229
(now Sec. 228, NIRC of 1997), which fixed the period (thirty days from
receipt of decision) for appealing to the court, thus clearly implying that the
prior decision of the Commissioner is necessary to take cognizance of the
case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al.,
CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal Revenue,
et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)
15. The grant of a refund is founded on the assumption
that the tax return is valid, i.e. that the facts stated therein are true and
correct. (Commissioner of Internal Revenue v. Court of Tax Appeals, G. R.
No. 106611, July 21, 1994, 234 SCRA 348) Without the tax return it would
be virtually impossible to determine whether the proper taxes have been
assessed and paid. After all, it is axiomatic that a claimant has the burden of
proof to establish the factual basis of his or her claim for tax credit or refund.
Tax refunds, like tax exemptions, are construed strictly against the taxpayer.
(Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No.
119286, October 13, 2004)
However, in BPI-Family Savings Bank v. Court of Appeals, 386 Phil.
719; 326 SCRA 641 (2000), refund was granted, despite the failure to
present the tax return, because other evidence was presented to prove that
the overpaid taxes were not applied. (Ibid.)
16. Discuss the difference between tax refund and
tax credit..
SUGGESTED ANSWER: There are unmistakable formal and
practical differences between the two modes. Formally, a tax refund
requires a physical return of the sum erroneously paid by the taxpayer, while
a tax credit involves the application of the reimbursable amount against any
sum that may be due and collectible from the taxpayer.
On the practical side, the taxpayer to whom the tax is refunded would
have the option, among others, to invest for profit the returned sum, an
option not proximately available if the taxpayer chooses instead to receive a
tax credit. (Commissioner of Customs v. Philippine Phosphate Fertilizer
Corporation, G. R. No. 144440, September 1, 2004)
NOTES AND COMMENTS: It may be that there is no essential
difference between a tax refund and a tax credit since both are moves of
recovering taxes erroneously or illegally paid to the government.
(Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No.
144440, September 1, 2004)
17. A bank-trustee of employee trusts filed an
application for the refund of taxes withheld on the interest
incomes of the investments made of the funds of the
employees trusts. Instead of presenting separate accounts
for interest incomes made of these investments, the bank-
trustee instead presented witness to establish that it would
next to impossible to single out the specific transactions
involving the employees trust funds from the totality of all
interest income from its total investments. On the above
basis will the application for refund prosper ?
SUGGESTED ANSWER: No. The application for refund will not
prosper.
The bank-trustee needs to establish not only that the refund is
justified under the law (which is so because incomes of employees trusts
are tax exempt), but also the correct amount that should be refunded.
 63
Tax refunds partake of the nature of tax exemptions and are thus
construed strictissimi juris against the person or entity claiming the
exemption. The burden in proving the amount to be refunded necessarily
falls on the bank-trustee, and there is an apparent failure to do so.
A necessary consequence of the special exemption enjoyed alone
by employees trusts would be a necessary segregation in the accounting
of such income, interest or otherwise, earned from those trusts from that
earned by the other clients of the bank-trustee. (Far East Bank and Trust
Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, May 2,
2006) The amounts that are the exempt earnings of the employees trust
has not been shown as they have been commingled with the interest
income of the other clients of the bank-trustee.
18. CTA Circular No. 1-95 clearly requires that
photocopies of the receipts or invoices must be pre-marked
and submitted to the CTA to verify the correctness of the
summary listing and the CPA certification. CTA Circular No. 1-95,
issued on 25 January 1995, reads:
1. The party who desires to introduce as evidence such
voluminous documents must present: (a) Summary containing the total
amount/s of the tax account or tax paid for the period involved and a
chronological or numerical list of the numbers, dates and amounts
covered by the invoices or receipts; and (b) a Certification of an
independent Certified Public Accountant attesting to the correctness of the
contents of the summary after making an examination and evaluation of
the voluminous receipts and invoices. Such summary and certification
must properly be identified by a competent witness from the accounting
firm.
2. The method of individual presentation of each and every receipt
or invoice or other documents for marking, identification and comparison
with the originals thereof need not be done before the Court or the
Commissioner anymore after the introduction of the summary and CPA
certification. It is enough that the receipts, invoices and other
documents covering the said accounts or payments must be pre-
marked by the party concerned and submitted to the Court in order
to be made accessible to the adverse party whenever he/she desires
to check and verify the correctness of the summary and CPA
certification. However, the originals of the said receipts, invoices or
documents should be ready for verification and comparison in case doubt
on the authenticity of the particular documents presented is raised during
the hearing of the case. (Emphasis supplied)
19. Manila Electric Company a grantee of a legislative
franchise under Act No. 484, as amended by Republic Act No.
1[3]
4159 and Presidential Decree No. 551, had been paying a
2% franchise tax based on its gross receipts, in lieu of all
other taxes and assessments of whatever nature. Upon the
effectivity of Executive Order No. 72 on February 10, 1987,
however, respondent became subject to the payment of
regular corporate income tax.
For the last quarter ending December 31, 1987,
respondent filed on April 15, 1988 its tentative income tax
reflecting a refundable amount of P101,897,741, but only
P77,931,812 was applied as tax credit for the succeeding
taxable year 1988.
Acting on a yearly routinary Letter of Authority No.
0018064 NA dated June 27, 1988 issued by petitioner,
directing the investigation of tax liabilities of respondent for
taxable year 1987, an investigation was conducted by
Revenue Officer Frederick Capitan which showed that
respondent was liable for 1. deficiency income tax in the
amount of P2,340,902.52; and 2. deficiency franchise tax in
the amount of P2,838,335.84.
On April 17, 1989, respondent filed an amended final
corporate Income Tax Return ending December 31, 1988
reflecting a refundable amount of P107,649,729.
Respondent thus filed on March 30, 1990 a letter-claim
for refund or credit in the amount of P107,649,729
representing overpaid income taxes for the years 1987 and
1988.
Petitioner not having acted on its request, respondent
filed on April 6, 1990 a judicial claim for refund or credit with
the Court of Tax Appeals.
It is gathered that respondent paid the deficiency
franchise tax in the amount of P2,838,335.84. It protested the
payment of the alleged deficiency income tax and claimed as
an alternative remedy the deduction thereof from its claim for
refund or credit.
The Court of Tax Appeals granted the P107,649,729
claim for refund, or in the alternative for the BIR to issue a tax
credit. Is the Court of Tax Appeals correct ?
 64
SUGGESTED ANSWER: Yes. Section 69 of the National Internal
Revenue Code of 1986, now Sec. 76 provides, if the sum of the quarterly
tax payments made during a taxable year is not equal to the total tax due
on the entire taxable income of that year as shown in its final adjustment
return, the corporation has the option to either: (a) pay the excess tax still
due, or (b) be refunded the excess amount paid. The returns submitted
are merely pre-audited which consist mainly of checking mathematical
accuracy of the figures in the return. After such checking, the purpose of
which being to insure prompt action on corporate annual income tax
returns showing refundable amounts arising from overpaid quarterly
income taxes, (Revenue Memorandum Order No. 32-76 dated June 11,
1976) the refund or tax credit is granted. (Commissioner of Internal
Revenue v. Manila Electric Company, G. R. No. 121666, October 10,
2007)
TARIFF AND CUSTOMS LAWS
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
INTERNAL REVENUE
TARIFF AND CUSTOMS CODE
1. When does importation begin, and why is it
important to know whether importation has already begun or
not ?
SUGGESTED ANSWER: Importation begins when the conveying
vessel or aircraft enters the jurisdiction of the Philippines with intention to
unlade therein. (Sec. 1202, TCCP)
The jurisdiction of the Bureau of Customs to enforce the provisions of
the TCCP including seizure and forfeiture also begins from the beginning of
importation. Thus, the Bureau of Customs obtains jurisdiction over imported
articles only after importation has begun.
2. When is importation deemed terminated and
why is it important to know whether importation has already
ended?
SUGGESTED ANSWER: Importation is deemed terminated upon
payment of the duties, taxes and other charges due upon the agencies, or
secured to be paid, at the port of entry and the legal permit for withdrawal
shall have been granted.
In case the articles are free of duties, taxes and other charges, until
they have legally left the jurisdiction of the customs. (Sec. 1202, TCCP)
The Bureau of Customs loses jurisdiction to enforce the TCCP and to make
seizures and forfeitures after importation is deemed terminated.
3. The flexible tariff clause is a provision in the Tariff
and Customs Code, which implements the constitutionally delegated
power to the Congress to further delegate to the President of the
Philippines, in the interest of national economy, general welfare and/or
national security upon recommendation of the NEDA (a) to increase,
reduce or remove existing protective rates of import duty, provided that, the
increase should not be higher than 100% ad valorem; (b) to establish import
quota or to ban imports of any commodity, and (c) to impose additional duty
on all imports not exceeding 10% ad valorem, among others.
4. Customs duties defined. Customs duties is the name
given to taxes on the importation and exportation of commodities, the tariff
or tax assessed upon merchandise imported from, or exported to, a foreign
country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6,
2001)
5. Special customs duties are additional import duties
imposed on specific kinds of imported articles under certain
conditions. The special customs duties under the Tariff and Customs
Code (TCCP) are the anti-dumping duty, the countervailing duty, the
discriminatory duty, and the marking duty, and under the Safeguard
Measures Act (SMA) additional tariffs as safeguard measures.
6. The special customs duties are imposed for the
protection of consumers and manufacturers, as well as
Philippine products.
7. Dumping duty is an additional special duty
amounting to the difference between the export price and the
normal value of such product, commodity or article (Sec. 301 (s)
(1), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999.)
imposed on the importation of a product, commodity or article of commerce
into the Philippines at less than its normal value when destined for domestic
consumption in the exporting country which is causing or is threatening to
cause material injury to a domestic industry, or materially retarding the
establishment of a domestic industry producing the like product. [Sec. 301
(s) (5), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999]
8. When is the anti-dumping duty imposed ?
SUGGESTED ANSWER: The anti-dumping duty is imposed
 65
a. Where a product, commodity or article of commerce is exported
into the Philippines at a price less than its normal value when destined for
domestic consumption in the exporting country,
b. and such exportation is causing or is threatening to cause material
injury to a domestic industry, or materially retards the establishment of a
domestic industry producing the like product. [Sec. 301 (a), TCC, as amended
by Rep. Act No. 8752, Anti-Dumping Act of 1999]
9. Normal value for purposes of imposing the anti-
dumping duty is the comparable price at the date of sale of like product,
commodity, or article in the ordinary course of trade when destined for
consumption in the country of export. [Sec. 301 (s) (3 ), TCC, as amended
by Rep. Act No. 8752, Anti-Dumping Act of 1999]
10. The imposing authority for the anti-dumping duty is
the Secretary of Trade and Industry in the case of non-
agricultural product, commodity, or article or the Secretary of
Agriculture, in the case of agricultural product, commodity or
article, after formal investigation and affirmative finding of the Tariff
Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-
Dumping Act of 1999]
11. Even when all the requirements for the imposition
have been fulfilled, the decision on whether or not to impose a
definitive anti-dumping duty remains the prerogative of the
Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752,
Anti-Dumping Act of 1999] Thus, the cabinet secretaries could not
contravene the recommendation of the Tariff Commission. They could not
impose the anti-dumping duty or any special customs duty without the
favorable recommendation of the Tariff Commission.
12. In the determination of whether to impose the anti-
dumping duty, the Tariff Commission, may consider among
others, the effect of imposing an anti-dumping duty on the
welfare of the consumers and/or the general public, and other
related local industries. (Sec. 301 (a), TCC, as amended by Rep. Act No.
8752, Anti-Dumping Act of 1999)
13. The amount of anti-dumping duty that may be
imposed is the difference between the export price and the
normal value of such product, commodity or article. (Sec. 301 (s)
(1), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999)
The anti-dumping duty shall be equal to the margin of dumping on
such product, commodity or article thereafter imported to the Philippines
under similar circumstances, in addition to ordinary duties, taxes and
charges imposed by law on the imported product, commodity or article.
14. What are countervailing duties and when are they
imposed ?
SUGGESTED ANSWER: Countervailing duties are additional
customs duties imposed on any product, commodity or article of commerce
which is granted directly or indirectly by the government in the country of
origin or exportation, any kind or form of specific subsidy upon the
production, manufacture or exportation of such product commodity or
article, and the importation of such subsidized product, commodity, or article
has caused or threatens to cause material injury to a domestic industry or
has materially retarded the growth or prevents the establishment of a
domestic industry. (Sec. 302, TCCP as amended by Section 1, R.A. No.
8751)
15. The imposing authority for the countervailing duties
is the Secretary of Trade and Industry in the case of non-
agricultural product, commodity, or article or the Secretary of
Agriculture, in the case of agricultural product, commodity or
article, after formal investigation and affirmative finding of the Tariff
Commission.
Even when all the requirements for the imposition have been fulfilled,
the decision on whether or not to impose a definitive anti-dumping duty
remains the prerogative of the Tariff Commission. (Sec. 301 (a), TCC, as
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999)
16. The countervailing duty is equivalent to the value of
the specific subsidy.
17. Marking duties are the additional customs duties
imposed on foreign articles (or its containers if the article itself cannot be
marked), not marked in any official language in the Philippines, in a
conspicuous place as legibly, indelibly and permanently in such manner as
to indicate to an ultimate purchaser in the Philippines the name of the
country of origin.
18. The Commissioner of Customs imposes the marking
duty.
 66
19. The marking duty is equivalent to five percent (5%) ad value, which shall be the price actually paid or payable for the goods when
valorem. sold for export to the Philippines, adjusted by adding certain cost elements
to the extent that they are incurred by the buyer but are not included in the
20. A discriminatory duty is a new and additional price actually paid or payable for the imported goods, and may include the
customs duty imposed upon articles wholly or in part the growth or product following:
of, or imported in a vessel, of any foreign country which imposes, directly or a. Cost of containers and packing,
indirectly, upon the disposition or transportation in transit through or re- b. Insurance, and
exportation from such country of any article wholly or in part the growth or c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No.
product of the Philippines, any unreasonable charge, exaction, regulation or 9135)
limitation which is not equally enforced upon like articles of every foreign
country, or discriminates against the commerce of the Philippines, directly or 26. The above transaction value is the primary
indirectly, by law or administrative regulation or practice, by or in respect to method of determining dutiable value. If the transaction value
any customs, tonnage, or port duty, fee, charge, exaction, classification, of the imported article could not be determined using the
regulation, condition, restriction or prohibition, in such manner as to place above, the following alternative methods should be used one
the commerce of the Philippines at a disadvantage compared with the
commerce of any foreign country.
after the other:
a. Transaction value of identical goods
b. Transaction value of similar goods
21. The President of the Philippines imposes the c. Deductive method
discriminatory duties. d. Computed method
e. Fallback method
22. Safeguard measures are emergency measures,
including tariffs, to protect domestic industries and producers from 27. How and to whom should claims for refund of
increased imports which inflict or could inflict serious injury on them. customs duties be made ?
The CTA is vested with jurisdiction to review decisions of the SUGGESTED ANSWER: All claims for refund of duties shall be
Secretary of Trade and Industry imposing safeguard measures as provided made in writing and forwarded to the Collector of Customs to whom such
under Rep. Act No. 8800 the Safeguard Measures Act (SMA). (Southern duties are paid, who upon receipt of such claim, shall verify the same by the
Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G.
R. No. 158540, July 8, 2004)
records of his Office, and if found to be correct and in accordance with law,
The DTI Secretary cannot impose the safeguard measures if the shall certify the same to the Commissioner of Customs with his
Tariff Commission does not favorably recommend its imposition. recommendation together with all necessary papers and documents. Upon
receipt by the Commissioner of such certified claim he shall cause the same
to be paid if found correct. (Sec. 1708, TCC)
23. Imposing authority for safeguard measures. The
imposing authority for the countervailing duties is the 28. What is mean by the term entry in Customs Law
Secretary of Trade and Industry in the case of non-agricultural ?
product, commodity, or article or the Secretary of Agriculture, SUGGESTED ANSWER: It has a triple meaning.
in the case of agricultural product, commodity or article, after a. the documents filed at the Customs house;
formal investigation and affirmative finding of the Tariff Commission. b. the submission and acceptance of the documents; and
c. Customs declaration forms or customs entry forms required
24. Safeguards measures that may be imposed. to be accomplished by passengers of incoming vessels or passenger
Additional tariffs, import quotas or banning of imports. planes as envisaged under Sec. 2505 of the TCCP (Failure to declare
baggage). (Jardeleza v. People, G.R. No. 165265, February 6, 2006)
25. The basis of dutiable value of merchandise that
is subject to ad valorem customs duties is the transaction
 67
29. A flight stewardess arrived from Singapore. Upon
her arrival she was asked whether she has anything to declare.
She answered none, and she submitted her Customs Baggage
Declaration Form which she accomplished and signed with
nothing or written on the space for items to be declared. When
her hanger bag was examined some pieces of jewelry were
found concealed within the lining of said bag.
She was then convicted of violating of Sec. 3601 of the
Tariff and Customs Code for unlawful importation which
penalizes any person who shall fraudulently import or bring
into the Philippines any article contrary to law.
She now appeals claiming that lower court erred n
convicting her under Sec. 3601 when the facts alleged both in
the information and those shown by the prosecution constitute
the offense under Sec. 2505 Failure to Declare Baggage, of
which she was acquitted. Is she correct ?
SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. It
merely provides, inter alia, the administrative remedies which can be
resorted to by the Bureau of Customs when seizing dutiable articles found
the baggage of any person arriving in the Philippines which is not included in
the accomplished baggage declaration submitted to the customs authorities,
and the administrative penalties that such person must pay for the release
of such goods if not imported contrary to law.
Such administrative penalties are independent of the criminal liability
for smuggling that may be imposed under Sec. 3601, and other provisions
of the TCC which can only be determined after the appropriate criminal
proceedings, prescinding from the outcome in any administrative case that
may have been filed and disposed of by the customs authorities.
Indeed the second paragraph of Sec. 2505 provides that nothing shall
prevent the bringing of a criminal action against the offender for smuggling
under Section 3601. (Jardeleza v. People, G. R. No. 165265, February 6,
2006)
30. Payment is not a defense in smuggling. When upon
trial for violation of this section, the defendant is shown to have possession
of the article in question, possession shall be deemed sufficient evidence to
authorize conviction, unless the defendant shall explain the possession to
the satisfaction of the court: Provided, however, That payment of the tax due
after apprehension shall not constitute a valid defense in any prosecution
under this section. (last par., Sec. 3601, TCC)
31. How is smuggling committed ?
SUGGESTED ANSWER: Smuggling is committed by any person
who:
a. fraudulently imports or brings into the country any article
contrary to law;
b. assists in so doing any article contrary to law; or
c. receives, conceals, buys, sells or in any manner facilitates
the transportation, concealment or sale of such goods after importation,
knowing the same to have been imported contrary to law. (Jardeleza v.
People, G.R. No. 165265, February 6, 2006 citing Rodriguez v. Court of
Appeals, G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296)
NOTES AND COMMENTS:
a. Importation consists of bringing an article into the country
from the outside. Importation begins when the conveying vessel or
aircraft enters the jurisdiction of the Philippines with intention to unload
therein.
b. When unlawful importation is complete. In the absence
of a bona fide intent to make entry and pay duties when the prohibited
article enters the Philippine territory. Importation is complete when the
taxable, dutiable commodity is brought within the limits of the port of entry.
Entry through a custom house is not the essence of the act. (Jardeleza v.
People, G.R. No. 165265, February 6, 2006)
32. The Collector of Customs sitting in seizure and
forfeiture proceedings has exclusive jurisdiction to hear and
determine all questions touching on the seizure and forfeiture
of dutiable goods. RTCs are precluded from assuming
cognizance over such matters even through petitions of
certiorari, prohibition or mandamus. (The Bureau of Customs, et al.,
v. Ogario, et al., G.R. No. 138081, March 20, 2000)
What is the rationale for this doctrine ?
SUGGESTED ANSWER:
a. Regional Trial Courts have no jurisdiction to replevin a property
which is subject to seizure and forfeiture proceedings for violation of the
Tariff and Customs Code otherwise, actions for forfeiture of property for
violation of the Customs laws could easily be undermined by the simple
device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)
b. The doctrine of exclusive customs jurisdiction over customs
cases to the exclusion of the RTCs is anchored upon the policy of placing
no unnecessary hindrance on the governments drive, not only to prevent
smuggling and other frauds upon Customs,
c. but more importantly, to render effective and efficient the
collection of import and export duties due the State, which enables the
government to carry out the functions it has been instituted to perform. (Jao,
et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43)
 68
d. The issuance by regular courts of writs of preliminary injunction
in seizure and forfeiture proceedings before the Bureau of Customs may
arouse suspicion that the issuance or grant was for consideration other than
the strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003])
e. Under the doctrine of primary jurisdiction, the Bureau of Customs
has exclusive administrative jurisdiction to conduct searches, seizures and
forfeitures of contraband without interference from the courts. It could
conduct searches and seizures without need of a judicial warrant except if
the search is to be conducted in a dwelling place.
Where an administrative office has obtained a technical expertise in a
specific subject, even the courts must defer to this expertise.
NOTES AND COMMENTS: The Bureau of Customs could search
and seize articles without need of a judicial warrant unless the place to be
searched is a dwelling place. In such a case customs requires a judicial
warrant.
33. A claiming to be the owner of a vessel which is
the subject of customs warrant of seizure and detention
sought the intercession of the RTC to restrain the Bureau of
Customs from interfering with his property rights over the
vessel. Would the suit prosper?
SUGGESTED ANSWER: No. His remedy was not with the RTC
but with the CTA, as issues of ownership of goods in the custody of
customs officials are within the power of the CTA to determine.
The Collector of Customs has exclusive jurisdiction over seizure
and forfeiture proceedings and trial courts are precluded from assuming
cognizance over such matters even through petitions for certiorari,
prohibition or mandamus. (Commissioner of Customs v. Court of
Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)
34. The customs authorities do not have to prove to the
satisfaction of the court that the articles on board a vessel were
imported from abroad or are intended to be shipped abroad
before they may exercise the power to effect customs
searches, seizures, or arrests provided by law and continue
with the administrative hearings. (The Bureau of Customs, et al., v.
Ogario, et al., G.R. No. 138081, March 20, 2000)
35. The Tariff and Customs Code allows the Bureau of
Customs to resort to the administrative remedy of seizure, such
as by enforcing the tax lien on the imported article when the
imported articles could be found and be subject to seizure and
forfeiture.
36. The Tariff and Customs Code allows the Bureau of
Customs to resort to the judicial remedy of filing an action in
court when the imported articles could not anymore be found.
37. Section 2301 of the TCCP states that seized
articles may not be released under bond if there is prima facie
evidence of fraud in their importation. Commissioner of Customs
v. Court of Tax Appeals, et al., G. R. No. 171516-17, February 13, 2009
Section 2301. Warrant for Detention of Property-Cash Bond.
Upon making any seizure, the Commissioner shall issue a warrant for the
detention of the property; and if the owner or importer desires to secure
the release of the property for legitimate use, the Collector shall, with the
approval of the Commissioner of Customs, surrender it upon the filing of a
cash bond, in an amount fixed by him, conditioned upon the payment of
the appraised value of the article and/or any fine, expenses and costs
which may be adjudged in the case: Provided, That such importation
shall not be released under any bond when there is prima facie
evidence of fraud in the importation of the article: Provided, further,
That articles the importation of which is prohibited by law shall not be
released under any circumstances whatsoever: Provided, finally, That
nothing in this section shall be construed as relieving the owner or
importer from any criminal liability which may arise from any violation of
law committed in connection with the importation of the article. (emphasis
supplied)
38. Instances where there is no right of redemption of
seized and forfeited articles:
a. There is fraud;
b. The importation is absolutely prohibited, or
c. The release of the property would be contrary to law.
(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January
25, 1999)
39. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in
Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the Supreme
Court clarified that the fraud contemplated by law must be actual
and not constructive. It must be intentional, consisting of deception,
willfully and deliberately done or resorted to in order to induce another to
give up some right.
 69
40. Requisites for forfeiture of imported goods:
a. Wrongful making by the owner, importer, exporter or
consignee of any declaration or affidavit, or the wrongful making or delivery
by the same person of any invoice, letter or paper all touching on the
importation or exportation of merchandise.
b. the falsity of such declaration, affidavit, invoice, letter or paper;
and
c. an intention on the part of the importer/consignee to evade the
payment of the duties due. (Republic, etc., v. The Court of Appeals, et al.,
G.R. No. 139050, October 2, 2001)
41. On January 7, 1989, the vessel M/V Star Ace,
coming from Singapore laden with cargo, entered the Port of
San Fernando, La Union for needed repairs. When the Bureau
of Customs later became suspicious that the vessels real
purpose in docking was to smuggle cargo into the country,
seizure proceedings were instituted and subsequently two
Warrants of Seizure and Detention were issued for the vessel
and its cargo.
Cesar does not own the vessel or any of its cargo but
claimed a preferred maritime lien. Cesar then brought several
cases in the RTC to enforce his lien. Would these suits prosper
? not to the Bureau of Customs because the goods are in custodia legis.
SUGGESTED ANSWER: No. The Bureau of Customs having first
obtained possession of the vessel and its goods has obtained jurisdiction to
the exclusion of the trial courts.
When Cesar has impleaded the vessel as a defendant to enforce his
alleged maritime lien, in the RTC, he brought an action in rem under the
Code of Commerce under which the vessel may be attached and sold.
However, the basic operative fact is the actual or constructive
possession of the res by the tribunal empowered by law to conduct the
proceedings. This means that to acquire jurisdiction over the vessel, as a
defendant, the trial court must have obtained either actual or constructive
possession over it. Neither was accomplished by the RTC as the vessel
was already in the possession of the Bureau of Customs. (Commissioner of
Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31,
2006)
NOTES AND COMMENTS:
a. Forfeiture of seized goods in the Bureau of Customs is in
the nature of a proceeding in rem, i.e. directed against the res or imported
goods and entails a determination of the legality of their importation. In this
proceeding, it is in legal contemplation the property itself which commits the
violation and is treated as the offender, without reference whatsoever to the
character or conduct of the owner.
The issue is limited to whether the imported goods should be forfeited
and disposed of in accordance with law for violation of the Tariff and
Customs Code. .(Transglobe International, Inc. v. Court of Appeals, et al.,
G.R. No. 126634, January 25, 1999)
Forfeiture of seized goods in the Bureau of Customs is a proceeding
against the goods and not against the owner. (Asian Terminals, Inc. v.
Bautista-Ricafort, G .R. No. 166901, October 27, 2006 citing Transglobe)
42. The Collector of Customs upon probable cause that
the articles are imported or exported, or are attempted to be
imported or exported, in violation of the tariff and customs laws
shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, then
a search warrant should be issued by the regular courts not the Bureau of
Customs.
There may be instances where no warrants issued by the Bureau of
Customs or the regular courts is required, as in search and seizures of
motor vehicles and vessels.
43. Smuggled goods seized by virtue of a court warrant
should be surrendered to the court that issued the warrant and
44. Decisions of the Commissioner of Customs
in cases involving liability for customs duties, fees or other
money charges that must be appealed to the Court of Tax
Appeals Division within thirty (30) days from receipt specifically
refer to his decisions on administrative tax protest cases, as stated in
Section 2402 of the Tariff and Customs Code of the Philippines (TCCP):
Section 2402. Review by Court of Tax Appeals.
The party aggrieved by a ruling of the Commissioner
in any matter brought before him upon protest or by
his action or ruling in any case of seizure may appeal to
the Court of Tax Appeals, in the manner and within the
period prescribed by law and regulations.
Unless an appeal is made to the Court of Tax Appeals in the
manner and within the period prescribed by laws and regulations, the
action or ruling of the Commissioner shall be final and conclusive.
 70
[Emphasis supplied.] (Pilipinas Shell Petroleum Corporation v. Commissioner
of Customs, G. R. No. 176380, June 18, 2009)
45. Administrative tax protest under the Tariff and
Customs Code (TCCP). A tax protest case, under the TCCP,
involves a protest of the liquidation of import entries. (Pilipinas Shell
Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18,
2009)
46. Liquidation, defined. A liquidation is the final
computation and ascertainment by the collector of the duties on imported
merchandise, based on official reports as to the quantity, character, and
value thereof, and the collectors own finding as to the applicable rate of
duty; it is akin to an assessment of internal revenue taxes under the
National Internal Revenue Code where the tax liability of the taxpayer is
definitely determined. (Pilipinas Shell Petroleum Corporation v. Commissioner
of Customs, G. R. No. 176380, June 18, 2009)
47. The following letters of demand can not be
considered as a liquidation or an assessment of Shells
import tax liabilities that can be the subject of an
administrative tax protest proceeding before the
Commissioner of Customs whose decision is appealable to
the Court of Tax Appeals:
a. the One Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center (the Center) November 3 letter, signed by the Secretary
of Finance, informing it of the cancellation of the Tax Credit Certificates
(TCCs);
b. the Commissioner of Customs November 19 letter requiring
Shell to replace the amount equivalent to the amount of the cancelled
TCCs used by Shell; and
c. the Commissioner of Customs collection letters, issued
through Deputy Commissioner Atty. Valera, formally demanding the
amount covered by the cancelled TCCs.
None of these letters, however, can be considered as a liquidation
or an assessment of Shells import tax liabilities that can be the subject of
an administrative tax protest proceeding before the respondent whose
decision is appealable to the CTA. Shells import tax liabilities had long
been computed and ascertained in the original assessments, and Shell
paid these liabilities using the TCCs transferred to it as payment.
It is even an error to consider the letters as a reassessment
because they refer to the same tax liabilities on the same importations
covered by the original assessments. The letters merely reissued the
original assessments that were previously settled by Shell with the use of
the TCCs. However, on account of the cancellation of the TCCs, the tax
liabilities of Shell under the original assessments were considered unpaid;
hence, the letters and the actions for collection.
When Shell went to the CTA, the issues it raised in its petition were
all related to the fact and efficacy of the payments made, specifically the
genuineness of the TCCs; the absence of due process in the enforcement
of the decision to cancel the TCCs; the facts surrounding the fraud in
originally securing the TCCs; and the application of estoppel. These are
payment and collection issues, not tax protest issues within the CTAs
jurisdiction to rule upon.
Shell never protested the original assessments of its tax liabilities
and in fact settled them using the TCCs. These original assessments,
therefore, have become final, incontestable, and beyond any subsequent
protest proceeding, administrative or judicial, to rule upon.
To be very precise, Shells petition before the CTA principally
questioned the validity of the cancellation of the TCCs a decision that
was made not by the Commissioner of Customs, but by the Center. As
the CTA has no jurisdiction over decisions of the Center, Shells remedy
against the cancellation should have been a certiorari petition before the
regular courts, not a tax protest case before the CTA. Records do not
show that Shell ever availed of this remedy.
Alternatively, as held in Shell v. Republic of the Philippines, G.R.
No. 161953, March 6, 2008, 547 SCRA 701, the appropriate forum for
Shell under the circumstances of this case should be at the collection
cases before the RTC where Shell can put up the fact of its payment as a
defense. (Pilipinas Shell Petroleum Corporation v. Commissioner of
Customs, G. R. No. 176380, June 18, 2009)
48. A case becomes ripe for filing with the
Regional Trial Court (RTC), as a collection matter after the
finality of the Commissioner of Customs assessment. (Pilipinas
Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380,
June 18, 2009 citing Shell v. Republic of the Philippines, G.R. No. 161953, March
6, 2008, 547 SCRA 701)
The assessment has long been final, and this recognition of finality
removes all perceived hindrances, based on this case, to the continuation
of the collection suits.
A suit for the collection of internal revenue taxes, where the
assessment has already become final and executory, the action to collect
is akin to an action to enforce the judgment. No inquiry can be made
therein as to the merits of the
In light of the conclusion that the present case does not involve a
decision of the Commissioner of Customs on a matter brought to him as a
tax protest, Atty. Valeras lack of authority to issue the collection letters
 71
and to institute the collection suits is irrelevant. For this same reason, the
injunction against Atty. Valera cannot be invoked to enjoin the collection of
unpaid taxes due from Shell. (Pilipinas Shell Petroleum Corporation v.
Commissioner of Customs, supra)
LOCAL GOVERNMENT TAXATION
1. The fundamental principles of local taxation are:
a. Uniformity;
b. Taxes, fees, charges and other impositions shall be equitable
and based on ability to pay, for public purposes, not unjust, excessive,
oppressive or confiscatory, not contrary to law, public policy, national
economic policy or in restraint of trade;
c. The levy and collection shall not be let to any private person;
d. Inures solely to the local government unit levying the tax;
e. The progressivity principle must be observed.
2. A law which deprives local government units of
their power to tax would be unconstitutional. The constitution has
delegated to local governments the power to levy taxes, fees and other
charges. This constitutional delegation may only be removed by a
constitutional amendment.
3. Under the now prevailing Constitution, where there is
neither a grant nor prohibition by statute, the taxing power of
local governments must be deemed to exist although Congress
may provide statutory limitations and guidelines in order to
safeguard the viability and self-sufficiency of local government units by
directly granting them general and broad tax powers. (City Government of
San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25,
1999)
4. The Local Government Code explicitly authorizes
provinces and cities, notwithstanding any exemption granted
by any law or other special law to impose a tax on businesses
enjoying a franchise. Indicative of the legislative intent to carry out the
constitutional mandate of vesting broad tax powers to local government
units, the Local Government Code has withdrawn tax exemptions or
incentives theretofore enjoyed by certain entities. (City Government of San
Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
5. Philippine Long Distance Telephone Company, Inc.,
v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001,
upheld the authority of the City of Davao, a local government unit, to impose
and collect a local franchise tax because the Local Government has
withdrawn all tax exemptions previously enjoyed by all persons and
authorized local government units to impose a tax on business enjoying a
franchise tax notwithstanding the grant of tax exemption to them.
6. Explain the concept of the paradigm shift in
local government taxation.
SUGGESTED ANSWER: Paradigm shift from exclusive
Congressional power to direct grant of taxing power to local legislative
bodies. The power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other
charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas
Power Corporation v. Batangas City, et al. G. R. No. 152675, and
companion case, April 28, 2004 citing National Power Corporation v. City of
Cabanatuan, G. R. No. 149110, April 9, 2003)
7. The fundamental law did not intend the direct grant to
local government units to be absolute and unconditional, the
constitutional objective obviously is to ensure that, while local government
units are being strengthened and made more autonomous, the legislature
must still see to it that:
a. the taxpayer will not be over-burdened or saddled with multiple
and unreasonable impositions;
b. each local government unit will have its fair share of available
resources;
c. the resources of the national government will be unduly
disturbed; and
d. local taxation will be fair, uniform and just. (Manila Electric
Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
8. Taxing power of the local government is limited.
The taxing power of local governments is limited in the sense that
Congress can enact legislation granting tax exemptions.
While the system of local government taxation has changed with
the onset of the 1987 Constitution, the power of local government units to
tax is still limited.
While the power to tax by local governments may be exercised by
local legislative bodies, no longer merely be virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of
the Constitution, the basic doctrine on local taxation remains essentially
the same, the power to tax is [still] primarily vested in the Congress.
 72
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in
turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No.
120082, September 11, 1996, 261 SCRA 667, 680)
9. Further amplification by Bernas of the local
governments power to tax. What is the effect of Section 5 on the
fiscal position of municipal corporations? Section 5 does not change the
doctrine that municipal corporations do not possess inherent powers of
taxation. What it does is to confer municipal corporations a general power
to levy taxes and otherwise create sources of revenue. They no longer
have to wait for a statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of local governments has
been reduced to the authority to impose limitations on municipal powers.
Moreover, these limitations must be consistent with the basic policy of
local autonomy. The important legal effect of Section 5 is thus to reverse
the principle that doubts are resolved against municipal corporations.
Henceforth, in interpreting statutory provisions on municipal fiscal powers,
doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for
a public purpose, uniform within a locality, must not be confiscatory, and
must be within the jurisdiction of the local unit to pass. (Quezon City, et al.,
v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing
City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R.
No. 162015, March 6, 2006, 484 SCRA 169)
10. Reconciliation of the local governments authority
to tax and the Congressional general taxing power. Congress
has the inherent power to tax, which includes the power to grant tax exemptions.
On the other hand, the power of local governments, such as provinces and cities
for example Quezon City, to tax is prescribed by Section 151 in relation to
Section 137 of the LGC which expressly provides that notwithstanding any
exemption granted by any law or other special law, the City or a province may
impose a franchise tax. It must be noted that Section 137 of the LGC does not
prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of
Congress to grant tax exemptions over and above the power of the local
governments delegated power to tax. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No.
162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local government units under
the Constitution and the LGC does not affect the power of Congress to
grant exemptions to certain persons, pursuant to a declared national
policy. The legal effect of the constitutional grant to local governments
simply means that in interpreting statutory provisions on municipal taxing
powers, doubts must be resolved in favor of municipal corporations.
[Ibid., referring to Philippine Long Distance Telephone Company, Inc.
(PLDT) vs. City of Davao]
11. Professional tax may be imposed by a
province or city but not by a municipality or barangay.
a. Transaction taxed: Exercise or practice of profession requiring
government licensure examination.
b. Tax rate: In Accordance with a taxing ordinance which should
not exceed P300.00.
c. Tax base: Reasonable classification by the sanggunian.
d. Exception: Payment to one province or city no longer subject
to any other national or local tax, license or fee for the practice of such
profession in any part of the Philippine professionals exclusively employed in
the government.
e. Date of payment: or on before January 31 or engaging in the
profession.
f. Place of payment: Province or city where the professional
practices his profession or where he maintains his principal office in case he
practices his profession in several places.
12. Requirements: Any individual or corporation
employing a person subject to professional tax shall require payment by that
person of the tax on his profession before employment and annually
thereafter.
Any person subject to the professional tax shall write in deeds,
receipts, prescriptions, reports, books of account, plans and designs,
surveys and maps, as the case may be, the number of the official receipt
issued to him.
Exemption: Professionals exclusively employed in the government
shall be exempt from payment. (Sec. 139, LGC)
NOTE: For the purpose of collecting the tax, the provincial or city
treasurer or his duly authorized representative shall require from such
professionals their current annual registration cards issued by competent
authority before accepting payment of their professional tax for the current
year. The PRC shall likewise require the professionals presentation of proof
of payment before registration of professionals or renewal of their licenses.
(last par., Art. 228, Rules and Regulations Implementing the Local
Government Code of 1991)
13. Who are the professionals who, if they are in
practice of their profession, are subject to professional tax ?
 73
SUGGESTED ANSWER: The professionals subject to the
professional tax are only those who have passed the bar examinations, or
any board or other examinations conducted by the Professional Regulation
Commission (PRC). for example, a lawyer who is also a Certified Public
Accountant (CPA) must pay the professional tax imposed on lawyers and
that fixed for CPAs, if he is to practice both professions. [Sec. 238 (f), Rule
XXX, Rules and Regulations Implementing the Local Government Code of
1991]
14. X City issued a notice of assessment against
ABC Condominium Corporation for unpaid business taxes.
The Condominium Corporation is a duly constituted
condominium corporation in accordance with the
Condominium Act which owns and holds title to the common
and limited common areas of the condominium. Its
membership comprises the unit owners and is authorized
under its By-Laws to collect regular assessments from its
members for operating expenses, capital expenditures on the
common areas and other special assessments as provided for
in the Master Deed with ?Declaration of Restrictions of the
Condominium.
ABC Condominium Corporation insists that the X City
Revenue Code and the Local Government Code do not contain
provisions upon which the assessment could be based.
Resolve the controversy.
SUGGESTED ANSWER: ABC is correct. Condominium
corporations are generally exempt from local business taxation under the
Local Government Code, irrespective of any local ordinance that seeks to
declare otherwise.
X City, is authorized under the Local Government Code, to impose a
tax on business, which is defined under the Code as trade or commercial
activity regularly engaged in as a means of livelihood or with a view to profit.
By its very nature a condominium corporation is not engaged in business,
and any profit that it derives is merely incidental, hence it may not be subject
to business taxes. (Yamane , etc. v. BA Lepanto Condominium
Corporation, G. R. No. 154993, October 25, 2005)
15. Authority of Local Government Units (LGUs)
such as the City of Manila to impose business taxes. Section
143 of the LGC, is 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 cities or municipalities such as the 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 percentage tax 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]. (The City of Manila, et al., v. Coca-Cola
Bottlers Philippines, Inc., G. R. No. 181845, August 4, 2009)
REAL PROPERTY TAXATION
1. The fundamental principles of real property taxation
are:
a. Appraisal at current and fair market value;
b. Classification for assessment on the basis of actual use;
c. Assessment on the basis of uniform classification;
d. Appraisal, assessment, levy and collection shall not be let to a
private person;
e. Appraisal and assessment shall be equitable.
NOTES AND COMMENTS: Real properties shall be appraised at the
current and fair market value prevailing in the locality where the property is
situated and classified for assessment purposes on the basis of its actual
use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R.
No. 154126, October 11, 2005)
2. The reasonable market value is determined by the
assessor in the form of a schedule of fair market values.
The schedule is then enacted by the local sanggunian.
3. Fair market value is the price at which a property
may be sold by a seller who is not compelled to sell and bought
by a buyer who is not compelled to buy, taking into consideration all
uses to which the property is adopted and might in reason be applied.
The criterion established by the statute contemplates a hypothetical
sale. Hence, the buyers need not be actual and existing purchasers. (Allied
 74
Banking Corporation, etc., v. Quezon City Government, et al., G. R. No.
154126, October 11, 2005 )
NOTES AND COMMENTS: In fixing the value of real property,
assessors have to consider all the circumstances and elements of value and
must exercise prudent discretion in reaching conclusions. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,
October 11, 2005)
Preparation of fair market values:
a. The city or municipal assessor shall prepare a schedule of fair
market values for the different classes of real property situated in their
respective Local Government Units for the enactment of an ordinance by the
sanggunian concerned; and
b. The schedule of fair market values shall be published in a
newspaper of general circulation in the province, city or municipality
concerned or the posting in the provincial capitol or other places as required
by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)
Proposed fair market values of real property in a local
government unit as well as the ordinance containing the schedule
must be published in full for three (3) consecutive days in a newspaper of
local circulation, where available, within ten (10) days of its approval, and
posted in at lease two (2) prominent places in the provincial capitol, city,
municipal or barangay hall for a minimum of three (3) consecutive weeks.
(Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)
4. Approaches in estimating the fair market value of
real property for real property tax purposes ?
a. Sales Analysis Approach. The sales price paid in actual
market transactions is considered by taking into account valid sales data
accumulated from among the Registrar of Deeds, notaries public,
appraisers, brokers, dealers, bank officials, and various sources stated
under the Local Government Code.
b. Income Capitalization Approach. The value of an income-
producing property is no more than the return derived from it. An analysis of
the income produced is necessary in order to estimate the sum which might
be invested in the purchase of the property.
c. Reproduction cost approach is a formal approach used
exclusively n appraising man-made improvements such as buildings and
other structures, based on such data as materials and labor costs to
reproduce a new replica of the improvement.
The assessor uses any or all of these approaches in analyzing the
data gathered to arrive at the estimated fair market value to be included in
the ordinance containing the schedule of fair market values. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,
October 11, 2005 citing Local Assessment Regulations No. 1-92)
5. An ordinance whereby the parcels of land sold,
ceded, transferred and conveyed for remuneratory
consideration after the effectivity of this revision shall be
subject to real estate tax based on the actual amount reflected
in the deed of conveyance or the current approved zonal
valuation of the Bureau of Internal Revenue prevailing at the
time of sale, cession, transfer and conveyance, whichever is
higher, as evidenced by the certificate of payment of the capital
gains tax issued therefore is INVALID being contrary to public
policy and for restraining trade for the following reasons:
a. It mandates an exclusive rule in determining the fair market
value and departs from the established procedures such as the sales
analysis approach, the income capitalization approach and the reproduction
approach provided under the rules implementing the statute. It unduly
interferes with the duties statutorily placed upon the local assessor by
completely dispensing with his analysis and discretion which the Local
Government Code and the regulations require to be exercised. An
ordinance that contravenes any statute is ultra vires and void.
b. The consideration approach in the ordinance is illegal since
the appraisal, assessment, levy and collection of real property tax shall not
be let to any private person, it will also completely destroy the fundamental
principle in real property taxation that real property shall be classified,
valued and assessed on the basis of its actual use regardless of where
located, whoever owns it, and whoever uses it. Allowing the parties to a
private sale to dictate the fair market value of the property will dispense with
the distinctions of actual use stated in the Local Government Code and in
the regulations.
c. The invalidity is not cured by the prhase whichever is higher
because an integral part of that system still permits valuing real property in
disregard of its actual use.
d. The ordinance would result to real property assessments more
than once every three (3) years and that is not the congressional intent as
shown in the provisions of the Local Government Code and the regulations.
Consequently, the real property tax burden should not be interpreted to
include those beyond what the Code or the regulations expressly clearly
state.
e. The proviso would provide a chilling effect on real property
owners or administrators to enter freely into contracts reflecting the
increasing value of real properties in accordance with prevailing market
conditions.
While the Local Government Code provides that the assessment of
real property shall not be increased once every three (3) years, the
 75
questioned proviso subjects the property to a higher assessment every time
a sales transaction is made. Real property owners would therefore
postpone sales until after the lapse of the three (3) year period, or if they do
so within the said period they shall be compelled to dispose of the property
at a price not exceeding the last prior conveyance in order to avoid a higher
tax assessment.
In the above two scenarios real property owners are effectively
prevented from obtaining the best price possible for their properties and
unduly hampers the equitable distribution of wealth. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11,
2005)
6. Examples of personal property under the civil
law that may be considered as real property for purposes of
taxes. Personal property under the civil law may be considered as real
property for purposes of taxes where the property is essential to the conduct
of the business.
a. Underground tanks are essential to the conduct of the
business of a gasoline station without which it would not be operational.
(Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296)
b. Light Rail Transit (LRT) improvements such as buildings,
carriageways, passenger terminals stations, and similar structures do not
form part of the public roads since the former are constructed over the latter
in such a way that the flow of vehicular traffic would not be impaired. The
carriageways and terminals serve a function different from the public roads.
Furthermore, they are not open to use by the general public hence not
exempt from real property taxes. Even granting that the national
government owns the carriageways and terminal stations, the property is not
exempt because their beneficial use has been granted to LRTA a taxable
entity. (Light Rail Transit Authority v. Central Board of Assessment Appeals, et al.,
G. R. No. 127316, October 12, 2000)
c. Barges on which were mounted gas turbine power plants
designated to generate electrical power, the fuel oil barges which supplied
fuel oil to the power plant barges, and the accessory equipment mounted on
the barges were subject to real property taxes.
Moreover, Article 415(9) of the Civil Code provides that [d]ocks and
structures which, though floating, are intended by their nature and object to
remain at a fixed place on a river, lake or coast are considered immovable
property by destination being intended by the owner for an industry or work
which may be carried on in a building or on a piece of land and which tend
directly to meet the needs of said industry or work. (FELS Energy, Inc., v.
Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case)
7. Unpaid realty taxes attach to the property and is
chargeable against the person who had actual or beneficial use
and possession of it regardless of whether or not he is the
owner. To impose the real property tax on the subsequent owner which
was neither the owner not the beneficial user of the property during the
designated periods would not only be contrary to law but also unjust.
Consequently, MERALCO the former owner/user of the property
was required to pay the tax instead of the new owner NAPOCOR. (Manila
Electric Company v. Barlis, G.R. No. 114231, May 18, 2001)
NOTES AND COMMENTS: The above May 18, 2001 decision was
set aside by the Supreme Court when it granted the petitioners second
motion for reconsideration on June 29, 2004. The author submits that the
above ruling in the May 18, 2001 decision is still valid, not on the basis of the
May 18, 2001 decision but in the light of pronouncements of the Supreme
Court in other cases. Thus, do not cite the doctrine as emanating from the
May 18, 2001 decision.
8. Secretary of Justice can take cognizance of a case
involving the constitutionality or legality of tax ordinances
where there are factual issues involved. (Figuerres v. Court of Appeals,
et al., G.R. No. 119172, March 25, 1999)
Taxpayer files appeal to the Secretary of Justice, within
30 days from effectivity thereof. In case the Secretary decides the
appeal, a period also of 30 days is allowed for an aggrieved party to go to
court. But if the Secretary does not act thereon, after the lapse of 60 days, a
party could already seek relief in court within 30 days from the lapse of the
60 day period.
These three separate periods are clearly given for compliance as a
prerequisite before seeking redress in a competent court. Such statutory
periods are set to prevent delays as well as enhance the orderly and speedy
discharge of judicial functions. For this reason the courts construe these
provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al.,
G.R. No. 118233, December 10, 1999)
9. Public hearings are mandatory prior to approval of
tax ordinance, but this still requires the taxpayer to adduce evidence to
show that no public hearings ever took place. (Reyes, et al., v. Court of
Appeals, et al., G.R. No. 118233, December 10, 1999) Public hearings are
required to be conducted prior to the enactment of an ordinance imposing
real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March
25, 1999)
10. The concurrent and simultaneous remedies
afforded local government units in enforcing collection of real
property taxes:
 76
a. Distraint of personal property;
b. Sale of delinquent real property, and
c. Collection of real property tax through ordinary court action.
11. Notice and publication, as well as the legal
requirements for a tax delinquency sale, are mandatory, and the
failure to comply therewith can invalidate the sale. The prescribed notices
must be sent to comply with the requirements of due process. (De Knecht, et
al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)
12. The reason behind the notice requirement is that tax
sales are administrative proceedings which are in personam in
nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA
314)
13. FELS Energy, Inc., had a contract to supply
NPC with the electricity generated by FELS power barges.
The contract also stated that NPC shall be responsible for all
real estate taxes and assessments. FELS then received an
assessment of real property taxes on its power barges from the
Provincial Assessor of Batangas. If filed a motion for
reconsideration with the Provincial Assessor.
a. Upon denial, FELS elevated the matter to the Local
Board of Assessment Appeals (LBAA), where it raised the
following issues:
1) Since NPC is tax-exempt then FELs should
also be tax-exempt because of its contract with NPC.
2) The power barges are not real property subject
to real property taxes.
b. Upon the other hand the Local Treasurer insists that
the assessment has attained a state of finality hence the appeal
to the LBAA should be dismissed.
Rule on the conflicting contentions.
SUGGESTED ANSWER:
a. All the contentions of FELS are without merit:
1) NPC is not the owner of the power barges nor the
operator of the power barges. The tax exemption privilege granted to
NPC cannot be extended to FELS. the covenant is between NPC
and FELs and does not bind a third person not privy to the contract
such as the Province of Batangas.
2) The Supreme Court of New York in Consolidated
Edison Company of New York, Inc., et al., v. The City of New York,
et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province
of Batangas, G. R. No. 168557, February 16, 2007 and companion
case, held that barges on which were mounted gas turbine power
plants designated to generate electrical power, the fuel oil barges
which supplied fuel oil to the power plant barges, and the accessory
equipment mounted on the barges were subject to real property
taxes.
Moreover, Article 415(9) of the Civil Code provides that
[d]ocks and structures which, though floating, are intended by their
nature and object to remain at a fixed place on a river, lake or coast
are considered immovable property by destination being intended by
the owner for an industry or work which may be carried on in a
building or on a piece of land and which tend directly to meet the
needs of said industry or work.
b. The Treasurer is correct. The procedure do not allow a motion
for reconsideration to be filed with the Provincial Assessor.
To allow the procedure would indeed invite corruption in the system
of appraisal and assessment. it conveniently courts a graft-prone situation
where values of real property ay be initially set unreasonably high, and then
subsequently reduced upon the request of a property owner. In the latter
instance, allusions of possible cover, illicit trade-off cannot be avoided, and
in fact can conveniently take place. Such occasion for mischief must be
prevented and excised from our system. (FELS Energy, Inc., v. Province of
Batangas, G. R. No. 168557, February 16, 2007 and companion case)
14. A special levy or special assessment is an
imposition by a province, a city, a municipality within the
Metropolitan Manila Area, a municipality or a barangay upon real
property specially benefited by a public works expenditure of the LGU to
recover not more than 60% of such expenditure.
15. If the ground for the protest is validity of the real
property tax ordinance and not the unreasonableness of the amount
collected the tax must be paid under protest, and the issue of legality may
be raised to the proper courts on certiorari without need of exhausting
administrative remedies.
16. If the ground for the protest is unreasonableness of
the amounts collected there is need to pay under protest and
administrative remedies must be resorted to before recourse to the proper
courts.
 77
17. Procedure for refund of real property taxes based on
unreasonableness or excessiveness of amounts collected.
a. Payment under protest at the time of payment or within thirty
(30) days thereafter, protest being lodged to the provincial, city or in the case
of a municipality within the Metro Manila Area the municipal treasurer.
b. The treasurer has a period of sixty (60) days from receipt of
the protest within to decide.
c. Within thirty (30) days from receipt of treasurers decision or if
the treasurer does not decide, within thirty (30) days from the expiration of
the sixty (60) period for the treasurer to decide, the taxpayer should file an
appeal with the Local Board of Assessment Appeals.
d. The Local Board of Assessment Appeals has 120 days from
receipt of the appeal within which to decide.
e. The adverse decision of the Local Board of Assessment
Appeals should be appealed within thirty (30) days from receipt to the
Central Board of Assessment Appeals.
f. The adverse decision of the Central Board of Assessment
Appeals shall be appealed to the Court of Tax Appeals (En Banc) by means
of a petition for review within thirty (30) days from receipt of the adverse
decision.
g. The decision of the CTA may be the subject of a motion for
reconsideration or new trial after which an appeal may be interposed by
means of a petition for review on certiorari directed to the Supreme Court on
pure questions of law within a period of fifteen (15) days from receipt
extendible for a period of thirty (30) days.
18. The entitlement to a tax refund does not necessarily
call for the automatic payment of the sum claimed. The amount
of the claim being a factual matter, it must still be proven in the normal
course and in accordance with the administrative procedure for obtaining a
refund of real property taxes, as provided under the Local Government
Code. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R.
No. 154126, September 15, 2006)
NOTES AND COMMENTS: In the above Allied Banking case, the
Supreme Court provided for the starting date of computing the two-year
prescriptive period within which to file the claim with the Treasurer, which is
from finality of the Decision. The procedure to be followed is that shown
below.
19. Procedure for refund of real property taxes based
on validity of the tax measure or solutio indebeti.
a. Payment under protest not required, claim must be directed to
the local treasurer, within two (2) years from the date the taxpayer is entitled
to such reduction or readjustment, who must decide within sixty (60) days
from receipt.
b. The denial by the local treasurer of the protest would fall within
the Regional Trial Courts original jurisdiction, the review being the initial
judicial cognizance of the matter. Despite the language of Section 195 of
the Local Government Code which states that the remedy of the taxpayer
whose protest is denied by the local treasurer is to appeal with the court of
competent jurisdiction, labeling the said review as an exercise of appellate
jurisdiction is inappropriate since the denial of the protest is not the
judgment or order of a lower court, but of a local government official.
(Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993,
October 25, 2005)
c. The decision of the Regional Trial Court should be appealed
by means of a petition for review directed to the Court of Tax Appeals
(Division).
d. The decision of the Court of Tax Appeals (Division) may be the
subject of a review by the Court of Tax Appeals (en banc).
e. The decision of the Court of Tax Appeals (en banc) may be
the subject of a petition for review on certiorari on pure questions of law
directed to the Supreme Court.
20. Charitable institutions, churches and
parsonages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings and improvements
that are actually, directly and exclusively used for religious,
charitable or educational purposes are exempt from taxation.
[Sec.28 (3) Article VI, 1987 Constitution]
21. The constitutional tax exemptions refer only to
real property that are actually, directly and exclusively used for religious,
charitable or educational purposes, and that the only constitutionally
recognized exemption from taxation of revenues are those earned by non-
profit, non-stock educational institutions which are actually, directly and
exclusively used for educational purposes. (Commissioner of Internal
Revenue v. Court of Appeals, et al., 298 SCRA 83)
The constitutional tax exemption covers property taxes only. What is
exempted is not the institution itself, those exempted from real estate taxes
are lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes. (Lung Center of the
Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
22. The 1935 Constitution stated that the lands,
buildings, and improvements are used exclusively but the

present Constitution requires that the lands, buildings and
improvements are actually, directly and exclusively used. The
change should not be ignored. Reliance on past decisions would have
sufficed were the words actually as well as :directly are not added. There
must be proof therefore of the actual and direct use to be exempt from
taxation. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.
144104, June 29, 2004)
23. The actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income
from the real property that is determinative of whether the property is used
for tax-exempt purposes.
If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purpose but is subject to taxation,. The
words dominant use or principal use cannot be substituted for the words
used exclusively without doing violence to the Constitution and the law.
Solely is synonymous with exclusively. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
24. Portions of the land of a charitable institution, such
as a hospital, leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from
real property taxes. On the other hand, the portion of the land occupied
by the hospital and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes. (Lung Center of
the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
25. As a general principle, a charitable institution does
not lose its character as such and its exemption from taxes
simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or receives
subsidies from the government. So long as the money received is
devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons
managing or operating the institution. (Lung Center of the Philippines v. Quezon
City, et al., etc., G. R. No. 144104, June 29, 2004)
26. Property that are exempt from the payment of
real property tax under the Local Government Code.
78
a. Real property owned by the Republic of the Philippines or any
of its political subdivisions except when the beneficial use thereof has been
granted to a taxable person for a consideration or otherwise;
b. Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries, and all
lands, buildings and improvements actually, directly and exclusively used for
religious, charitable and educational purposes;
c. Machineries and equipment, actually, directly and exclusively
used by local water districts; and government owned and controlled
corporations engaged in the supply and distribution of water and generation
and transmission of electric power;
d. Real property owned by duly registered cooperatives;
e. Machinery and equipment used for pollution control and
environmental protection.
27. Manila International Airport Authority (MIAA)
it is not a government owned or controlled corporation but an
instrumentality of the government that is exempt from
taxation.
It is not a stock corporation because its capital is not divided into
shares, neither is it a non-stock corporation because there are no
members. It is instead an instrumentality of the government upon which
the local governments are not allowed to levy taxes, fees or other
charges.
An instrumentality refers to any agency of the National
Government, not integrated within the department framework vested with
special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. This term includes regulatory
agencies chartered institutions and government-owned or controlled
corporations. [Sec. 2 (10), Introductory Provisions, Administrative Code
of 1987] It is an instrumentality exercising not only governmental but also
corporate powers. It exercises governmental powers of eminent domain,
police power authority, and levying of fees and charges.
Finally, the airport lands and buildings are property owned by the
government that are devoted to public use and are properties of the public
domain. (Manila International Airport Authority v. City of Pasay, et al., G. R. No.
163072, April 2, 2009)
28. A telecommunications company was granted by
Congress on July 20, 1992, after the effectivity of the Local
Government Code on January 1, 1992, a legislative franchise
with tax exemption privileges which partly reads, The
 79
grantee, its successors or assigns shall be liable to pay the Quezon City, et al., v. Bayan Telecommunications, Inc., G. R. No.
same taxes on their real estate, buildings and personal 162015, March 6, 2006)
property, exclusive of this franchise, as other persons or
corporations are now or hereafter may be required by law to 29. The owner operator of a BOT and not the
pay. This provision existed in the companys franchise prior ultimate owner is subject to real property taxes. Consistent with
the BOT concept and as implemented, BPPC the owner-manager-
to the effectivity of the Local Government Code. A City then operator of the project is the actual user of its machineries and
enacted an ordinance in 1993 imposing a real property on all equipment. BPPCs ownership and use of the machineries and
real properties located within the city limits, and withdrawing equipment are actual, direct, and immediate, while NAPOCORs is
all tax exemptions previously granted. Among properties contingent and, at this stage of the BOT Agreement, not sufficient to
covered are those owned by the company from which the City support its claim for tax exemption. (National Power Corporation v. Central
Board of Assessment Appeals, et al., G, R. No. 171470, January 30, 2009)
is now collecting P43 million. The properties of the company
were then scheduled by the City for sale at public auction.
The company then filed a petition for the issuance of a
writ of prohibition claiming exemption under its legislative
franchise. The City defended its position raising the
following:
a. There was no exhaustion of administrative ADVANCE CONGRATULATIONS
AND SEE YOU IN COURT
remedies because the matter should have first been filed
before the Local Board of Assessment Appeals;
b. The companys properties are exempt from tax
under its franchise.
Resolve the issues raised.
SUGGESTED ANSWERS:
a. There is no need to exhaust administrative remedies as the
appeal to the LBAA is not a speedy and adequate remedy within the law.
This is so because the properties are already scheduled for auction sale.
Furthermore one of the recognized exceptions to the rule on
exhaustion is that if the issue is purely legal in character which is so in this
case.
b. The properties are exempt from taxation. The grant of taxing
powers to local governments under the Constitution and the Local
Government Code does not affect the power of Congress to grant tax
exemptions.
The term exclusive of this franchise is interpreted to mean
properties actually, directly and exclusively used in the radio or
telecommunications business. The subsequent piece of legislation which
reiterated the phrase exclusive of this franchise found in the previous tax
exemption grant to the company is an express and real intention on the
part of Congress to once against remove from the LGCs delegated taxing
power, all of the companys properties that are actually, directly and
exclusively used in the pursuit of its franchise. (The City Government of