Taxation law review notes

- Atty. Francis J. Sababan -

COVERAGE OF TAXATION LAW REVIEW Section 22-26 of the National Internal
Revenue Code
I. Basic Principles of a) Read in the commentaries or magic
Constitutional Limitations notes the different kinds of:
a) Due process clause which 1. Income Taxpayers
could be either 2. Income Taxes
substantive due process 3. Sources of Income sec. 42 of NIRC
and procedural due - Income Taxpayers
process clause a) Individuals
b) Equal protection clause b) Corporation
Read: c) Estates and Trusts –
 Ormoc Sugar -Individuals are classified
Central vs. City Treasurer  Resident Citizens sec. 23 (A),
22 SCRA 603 sec 24 (A) (a)
 Tiu vs. CA 301 SCRA 178  Non-Resident Citizens sec 23
c) Article III sec. 1 of the (B), 24 (A) (b) 22 (E)
1987 Constitution – non-  Overseas Contract Workers Sec.
impairment clause 23 (C), 24 (A) (b)
d) Article III sec. 5 – freedom  Resident Aliens Rev. Reg. sec 5,
of religion 23 (D), 24 (A) (c)
e) Article III sec. 20 – non-  Non-Resident Aliens Engaged in
payment of poll tax trade or business sections 25
f) Article VI sec. 28 par. 2 – (A) (1)
flexible tariff clause  Non-Resident Aliens Not
g) Article VI sec. 28 par. 3 – Engaged in trade or business
exemption from real sec. 25 (B)
property tax  Aliens Employed in Multi-
Read: National Corporations sec. 25
 Herrera vs. Quezon City 3 (C) and Rev. Reg. 12-2001
SCRA 186  Aliens Employed in Offshore
 Abra vs. Hernando 107 SCRA Banking Units sec 25 (D)
104  Aliens Employed in petroleum
 Abra Valley vs. Aquino 52 Service Contractors &
SCRA 106 Subcontractors sec. 25 (E)
 Philippine Lung Center vs. -Corporate Income Taxpayers
Quezon City 433 SCRA  Domestic Corporations sec. 23 (E),
119 and sec 27 of NIRC
h) Article VI sec. 28 par. 4 –  Resident Foreign Corporations sec.
qualified majority in tax 22 (H) and (28)A
exemption  Non-Resident Foreign Corporations
i) International double sec. 22 (1) and 28 (B)
taxation -Estates and Trusts sec. 60-66 of
 CIR vs. Johnson 309 SCRA NIRC
87
j) Doctrine of equitable recoupment Different Kinds of Income Tax
k) Doctrine of Set-off or 1. Net Income Tax secs. 24 (A), 25
compensation in taxation (A) (1), 26, 27 (A) (B) (C), 28 (A)
 Republic vs. Mambulao 4 SCRA 622 up to 3rd par. 31 and 32 (A)
 Domingo vs. 2. Gross Income Tax secs. 25 (B)
Garlitos 8 SCRA 443 first part and 28 (B) (1)
 Francia vs. IAC 162 SCRA 753 3. Final Income Taxes sec. 57 (A)
 Caltex vs. COA 208 SCRA 726 4. Minimum Corporate Income Tax
 Philex vs. CIR of 2% of the Gross Income secs.
294 SCRA 687 27 (E), 28 (A) (2)
5. Improperly Accumulated
II. Income Tax Law Earnings Tax of 10% of its

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 Taxation law review notes
- Atty. Francis J. Sababan -
taxable income sec. 29 NIRC Rev.
Reg. 2-2001
 Optional Corporate Income Tax of
15% of its gross income sections
27 (A) 4th to 10th par. And 28 A(1)
but only up to the 4th paragraph
-Proceed to section 42 and 23 of the
NIRC
 NDC vs. Comm 151 SCRA 472
 Comm. Vs. IAC 127 SCRA 9
-Then go to sec. 39 of NIRC
 Calazans vs. Comm. 144 SCRA
664 RR 7-2003
-Then proceed to sec. 24 (A), 25 (A)
(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),
28 (A) (6) and sec 51 (D)
-Then continue to sec 24 B 1, 25
B,C,D,E; 27 (D) (1)
-Then go to se. 24 (B) (2) sec. 73
 Comm. Vs. Manning 66 SCRA 14
 Anscor vs. Comm. 301 SCRA 152
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D)
(4); 28 (A) (7) (D); 32 B (7) (a)
- Then you go to sec. 24 C, 25A (3); 25
B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B
(5) (C) RA 7717 sec. 127 NIRC
- Then you go to sec. 24 D (1); 25 (A)
(3); 25 (B) last par. 27 (D) (5)
 China Bank vs. Court of Appeals 336
SCRA ___; RR 7-2003
-Upon reading sec. 24 (D) (2) read RR 13-
1999
-Upon reading sec. 27 (A) go to sec. 22 (B)
 Batangas vs. Collector 102 Phil. 822
 Evangelista vs. Collector 102 Phil 140
 Reyes vs. Comm. 24 SCRA 198
 Ona vs. Bautista 45 SCRA 74
 Obillos vs. Comm 139 SCRA 436
 Pascua vs. Comm. 166 SCRA 560
 Afisco vs. Comm. 302 SCRA 1
-Upon reading sec. 27 (C) of NIRC see RA
9337 then go to sec. 32 (B) (7) (b) of NIRC,
sec. 133 par (o) of LGC, sec. 154 of the
LGC.
 Pagcor vs. Basco 197 SCRA 52
 Mactan vs. Cebu 261 SCRA 667
 LRT vs. City of Manila 342 SCRA 692
-Proceed to sections 27 (D) (1), 27 (D) (2),
27 (D) (5) read RA 9337, 28 (A) (7) (b), 28
(B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28
(B) (5) (b)
 Marubeni vs. CIR 177 SCRA 500
 Proctor & Gamble vs. Comm 160 SCRA
560
 Same case Proctor and Gamble on the
Motion for Reconsideration 204 SCRA
377
 Wonder vs. Comm 160 SCRA 573
-Proceed to sec. 27(D) (5)
then sections 27 (E) and 28 (A) (2)
-Go to sec. 28 (A) (3) read RR 15-2002
-Go to sec. 28 (A) (4) see RA 9337
-Then see sec 28 (A) (5) see Marubeni vs.
Comm 177 SCRA 500
-Proceed to sec. 28(B) (5) (a) and sec 32
(B) (7) (a)
 Read Mitsubishi vs. Comm 181
SCRA 214
-Then go to sec. 29 and Rev. Reg. 2-2001
-Upon reading sec. 32 (B) 1 and 2, read
sec. 85 par (e), sec. 108A and sec. 123 of
the NIRC
-Proceed to sec. 33 read Rev. Reg. 3-98
-then go to sec. 34 (A) (1) (a) see
Aguinaldo vs. Comm. 112 SCRA 136, RR
10-2002
-Under Sec. 34 (B) read RR 13-2000
-Upon reading sec. 49 read Banas vs. CA
325 SCRA 259 and Filipina vs. Comm. 316
SCRA 480
-Upon reading sec. 60-66, read Ona vs.
Bautista 45 SCRA 74
III. Estate Tax
-Sections 84-97 see sec. 104
-Upon reading sec. 85 (B) read Vidal
de Roces vs. Posadas 58 Phil. 108
Dizon vs. Posadas 57 Phil 465
-Sec. 85 (G) compare with sec. 100
-sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos vs.
Sandiganbayan 273 SCRA 47
IV. Donors Tax Law
- Sections 98-104
- G and Cumulative methods of filing
donor’s tax returns sections 99 (A), 103
(A) (1) and RR 2-2003
- Sections 100 and 85 (9)
V. Value Added Tax
- Sections 105-115
-Read RA 9337
-Read ABAKADA vs Comm.
GR 168056, Sept. 1, 2005
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 Taxation law review notes
- Atty. Francis J. Sababan -
VI. Remedies Under the Internal  Iloilo Bottles vs. Iloilo City 164
Revenue Code SCRA 607
-Sections 202-229
-RR 12-99 VIII. Real Property Tax
 Phoenix vs Comm 14 SCRA 52 - Sections 197-294
 Basilan vs. Comm. 21 SCRA 17 - Sec. 235
 Yabut vs. Flojo 115 SCRA 278  LRT vs. Manila
 Union Shipping vs. Comm 185 SCRA 342 SCRA 692
547  Cebu City vs.
 Comm. vs. TMX 205 SCRA 184 Mactan 261 SCRA 667
 Comm. vs. Philamlife 244 SCRA
 Comm. vs. CA & BPI 301 SCRA 435 IX. Tariff & Customs Code
 BPI vs. Comm. 363 SCRA 840 - Special Customs Duty sec. 301-304
-Prescription sections 203 and 222 of of TCC
NIRC, sec. 194 of the LGC, sec. 270 of - Regukar Customs Duty sec. 104 of
the LGC, sec. 1603 of Tariff and TCC
Customs Code - RA 7631
-Protest sec. 228 of NIRC and RR 12-99
sec. 195 of LGC, 252 LGC, sec. 2313 of
Tariff & Customs Code and RA 7651 X. Court of Tax Appeals
- RA 1125 as amended by RA 9282
VII. Local Taxation
- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read Bulacan
vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-128
-Under sec. 133 (e) read Palma vs.
Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron
198 SCRA 82
-Under 133 (i) read First Holdings Co.
vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO
322 SCRA 805
-Under 137 read sec. 193 of LGC
 Misamis vs. Cagayan de Oro
181 SCRA 38
 Reyes vs. San Pablo City 305
SCRA 353
 Meralco vs. Laguna 306 SCRA
750
 PLDT vs. Davao City 363 SCRA
522

- Co-relate sec. 139 and 147 of LGC

- Under sec. 140 of the LGC see sec.
125 of the Internal Revenue Code
- Under sec. 150 of the LGC read the
following:
 Phil. Match vs. Cebu 81 SCRA 99
 Allied Thread vs. Manila 133
SCRA 338
 Sipocat vs. Shell 105 Phil. 1263

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 Taxation law review notes
- Atty. Francis J. Sababan -
Rules in the Classroom:
1. do not be absent
 if you are absent, you have to
transcribe what happened in class when
you were out.
 The next meeting you attend class,
consider yourself a resident of balic-
balic, babalikbalikan ka sa recit.
 Exception: if you get married.
2. read the assignment. Wag zapote ang
aral.
3. holiday – make up class probably on a
Sunday
4. allowed to glance at your notes, wag
lang pahalata/garapal
5. materials:
 codal
 commentaries (any author will do)
 magic notes (Sababan Lecture and
Q&A)
 Book stand
Coverage of Taxation Law Review:
1. Basic Principles including Constitutional
Provisions
2. Income Tax
3. Estate Tax
4. Donor’s Tax
5. Remedies
6. Local Tax
7. Real Property Tax
8. Tariff and Customs Code
9. Court of Tax Appeals
10. VAT (although not part of the coverage
of the Bar Exams, questions have been
asked since 1999)
 Title 5,6 and 7 are always included in
the coverage
 No computations in the bar
 There are only 1 or 2 questions in the
Bar about Basic Principles
 What are the favorite topics in the Bar?
→ 12 questions on Income Tax
→ 8-10 questions on remedies
→ 8-10 questions allocated to the 7 topics
BASIC PRINCIPLES:
► Taxation is an inherent power of the
State.
Q: What do you mean by INHERENT?
A: The power to tax is not provided for in
the law, statute or constitution; it depends
on the existence of the state. No law or
legislation for the exercise of the power to
tax by the national government.
Q: Do local governments exercise this
inherent power?
A: No. Only the National Government
exercises the inherent power to impose
taxes.
Q: The taxing power of local governments
is a DELAGATED power. Delegated by
whom?
A: Delegated by Congress through law in
case of autonomous regions, and delegated
by the constitution in case of LGUs not
considered an autonomous region.
► Cities, provinces and municipalities →
power granted under Art. X Sec. 5&6 of the
Constitution
► Autonomous Regions → power conferred
by Congress through law. Art. X Sec. 20 #2
of the Constitution is a non-self-executing
provision. Thus the power is granted by
Congress because said provision requires an
enabling law.
► Article X, Section 5 is self-executing thus
the power is granted by the constitution.
CONSTITUTIONAL LIMITATIONS
Due Process Clause
Q: why is it a limitation to the power to tax?
A: The due process clause as a limitation to
the power to tax refers both to substantive
and procedural due process. Substantive
due process requires that a tax statute
must be within the constitutional authority
of Congress to pass and that it be
reasonable, fair and just.
Procedural due process, on the other
hand, requires notice and hearing or at
least the opportunity to be heard.
Ex: On Substantive Due Process- when
the Congress passes a law exempting the
13th month pay from tax but with the
concurrence only of the majority of the
quorum – law would be invalid because the
Constitution provides that any grant of tax
exemption shall be passed with the
concurrence of the majority of all the
members of the Congress.
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 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Does it follow that the adverse party
must always be notified?
A: No. As a rule, notice and hearing or the
opportunity to be heard is necessary only
when expressly required by law. Where
there is no such requirement, notice and
the opportunity to be heard are
dispensable.
Ex. Before Oct. 1, 1995, you can secure
a TRO without notifying the adverse party.
If you are a suspect in a criminal case, you
have the right to have an opportunity to be
heard (if there is a law).
Before July 1, 1998, no notice need
be given to a party declared in default. After
the amendment, the party declared in
default has to be notified of subsequent
proceedings albeit without the right to
participate therein.
In the case of a search warrant, the
person to be searched was not notified.
The person searched cannot claim that
there was a violation of due process
because there is no law requiring that the
person to be searched should be notified.
Regarding delinquent tax payers,
before levy, there must be notice.
REASON:
No provision of law requires notice to
the adverse party. If the adverse party is
notified, he may abscond. Thus, in
adversarial proceedings, in connection with
procedural due process, the adverse party
need not be notified all the time.
Equal Protection Clause
► As a rule, taxpayers of the same footing
are treated alike, both as to privileges
conferred and liabilities imposed.
Difference in treatment is allowed only
when based on substantial distinction.
Difference in treatment not based on
substantial distinction is frowned upon as
“class legislation.” This is violated when
taxpayers belonging to the same
classification are treated differently form
one another; and taxpayers belonging
different classifications are treated alike.
Requirements of Reasonable Classification:
1) There must be substantial
distinctions that make a real
difference.
2) It must be germane or relevant to
the purpose of the law.
3) The distinction or classification must
apply not only to the present but
also to future situations.
4) The distinction must apply to
persons, things and transactions
belonging to the same class.
Ex: In one case, a tax ordinance was
assailed on the ground that the ordinance
failed to distinguish a worker form casual,
permanent or temporary. The SC said that
the ordinance was invalid because of the
failure to state the said classification.
In PEOPLE v. CAYAT the Supreme Court
mandated the requisites for a valid
classification.
TIU v. COURT OF APPEALS (301 SCRA 278)
Q: what happened in the city of Olonggapo?
A: The Congress, with the approval of the
President, passed RA 7227, an act
creating the conversion of the military
bases into other productive uses.
Q: Who was the President at that time?
A: President Ramos
Q: What were signed?
A: RA 7227, EO 97 and EO 97-A
→ The first led to the creation of the
Subic Special Economic Zone (SSEZ).
The latter set the limitations and
boundaries of the application of the
incentives (no taxes, local and national,
shall be imposed within SSEZ. In lieu
thereof, 3% of the Gross Income shall be
remitted to the national gov’t) to those
operating their businesses within the
said area.
Q: Who are the petitioners and what was
their contention?
A: The petitioners are Filipino businessmen
who are operating their business outside
the secured area. The petitioners
contended that the law in question was
violative of their right to equal
protection of laws since they are also
Filipino businessmen.
H: The Supreme Court ruled that there
was no violation since the classification
was based on a substantial distinction.
The element invoked here is element
#1 that there must be substantial
distinction in the classification of
taxpayers on whom the tax will be
imposed.
The Court observed that those
foreign businessmen operating within
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 Taxation law review notes
- Atty. Francis J. Sababan -
the secured area have to give a larger
capital to operate in the secured area
(to spur economic growth and
guarantee employment).
ORMOC SUGAR CENTRAL vs. CIR
Q: What did the municipality of Ormoc do?
A: The City Council of Ormoc passed a
Municipal Ordinance No.4 imposing
upon any and all centrifugal sugar
milled at the Ormoc Sugar Central a
municipal tax on the net sale of the
same to the United States and other
foreign countries.
Q: Did the owner accept this imposition?
A: No. the tax due was paid under protest,
then filed a complaint against the City of
Ormoc.
H: The Supreme Court said there was a
violation of the equal protection clause.
The element invoked here was element
#3, that it must be applicable to both
present and future circumstances. The
Supreme Court said that one must go to
the provision itself, in the case at bar,
there was a violation of element #3
because the law was worded in such a
way that it only applies to Ormoc Sugar
Central alone and to the exclusion of all
other sugar centrals to be established in
the future.
TAKE NOTE: People vs. Cayat
Freedom of Religion
It Involves 3 Things:
1. freedom to choose religion
2. freedom to exercise one’s religion
3. prohibition upon the national
government to establish a national religion
Q: Which one limits the power to tax?
A: Prohibition upon the national
government to establish a national religion
because this will require a special
appropriation of money coming from the
national treasury which is funded by the
taxes paid by the people.
Non-impairment Clause
Q: What are the sources of obligation in the
Civil Code?
A: Law, Contracts, Quasi-Contracts, Delict,
Quasi-Delict.
Q: What is the obligation contemplated in
this limitation?
A: Those obligations arising from contracts.
General Rule: The power to tax is pursuant
to law, therefore, the obligation to pay
taxes is imposed by law, thus the non-
impairment clause does not apply.
► You have to determine first the source of
obligation:
1. If the law merely provides for the
fulfillment of the obligation then the law is
not the source of the obligation.
2. When the law merely recognizes or
acknowledges the existence of an obligation
created by an act which may constitute a
contract, quasi-contract, delict, and quasi-
delict, and its only purpose is to regulate
such obligation, then the act itself is the
source of the obligation, not the law.
When the law establishes the obligation
and also provides for its fulfillment, then the
law itself is the source of the obligation
Q: So, in what instance does the non-
impairment of contracts clause becomes a
limitation to the power to tax?
A: it is when the taxpayer enters into a
compromise agreement with the
government. In this instance, the obligation
to pay the tax is now based on the contract
between the taxpayer and the government
pursuant to their compromise agreement.
Take Note: the requirement for its
application: the parties are the government
and private individual.
Poll Tax
Q: What is a poll tax?
A: It is a tax of a fixed amount on
individuals residing within a particular
territory, whether citizens or not, without
regard to their property or to the occupation
in which they may be engaged.
It is a tax imposed on persons without
any qualifications. persons may be allowed
to pay even if they are not qualified as to
age or property ownership.
Example of Poll Tax: Community Tax
Certificate under Section 162 of the Local
Government Code.
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 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Why is it a limitation to the power to
tax?
A: It is a limitation to the power to tax
because Congress is prohibited from
passing a law penalizing with imprisonment
a person who does not pay poll tax. (funds
for sending a person to jail is taken from the
national treasury which is funded by the
taxes paid by the people)
Exemption from payment of Real
Estate Tax
Q: What is the requirement for exemption
from payment of real property tax under the
1935, 1973 and 1987 Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution –
Cemeteries, churches and parsonages or
convents appurtenant thereto, and all
lands, buildings and improvements used
EXCLUSIVELY for RELIGIOUS, CHARITABLE or
EDUCATIONAL purposes shall be exempt for
taxation.
Art. 8, Sec. 17 (3), 1973 Constitution –
charitable institutions, churches,
parsonages or convents appurtenant
thereto, mosque, and non-profit cemeteries,
and all lands, buildings, and improvements
ACTUALLY, DIRECTLY, and EXCLUSIVELY
used for RELIGIOUS and CHARITABLE
purposes shall be exempt from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution –
charitable institutions, churches, and
parsonages or convents appurtenant
thereto, mosque, non-profit cemeteries, and
all lands, buildings, and improvements
ACTUALLY, DIRECTLY and EXCLUSIVELY used
for RELIGIOUS, EDUCATIONAL and
CHARITABLE purposes shall be exempt from
taxation.
HERRERA v. QC-BOARD OF ASSESSMENT
(1935 Constitution)
Q: What is involved in this case?
A: A charitable institution, St.
Catherine’s Hospital. The hospital was
previously exempt from taxation until it
was reclassified and subsequently
assessed for the payment of real
property tax.
The contention of the respondent is
that the hospital was no longer a
charitable institution because it accepts
pay-patients, it also operates a school
for midwifery and nursing, and a
dormitory. Since it is not exclusively
used for charitable purposes it is not
exempt from taxation.
H: The Court ruled that petitioner is not
liable for the payment of real estate
taxes. It is a charitable institution, thus
exempt from the payment of such tax.
The hospital, schools and dormitory
are all exempt fro taxation because they
are incidental to the primary purpose of
the hospital.
NOTE: this arose during the 1935
Constitution.
“Exempted by virtue of incidental
purpose” was merely coined by the
Supreme Court. Thus, it does not apply to
other taxes except Real Estate Tax.
PROVINCE OF ABRA v. HERNANDO
Q: What is involved in this case?
A A religious institution was involved in
this case, the Roman Catholic Bishop of
Bangued, Inc. (bishop filed declaratory
relief after assessed for payment of tax).
The respondent judge granted the
exemption from taxes of said church
based only on the allegations of the
complaint without conducting a
hearing/trial. The assistant prosecutor
filed a complaint contending that
petitioner was deprived of its right to
due process.
SC: the Court ordered that the case be
remanded to the lower court for further
proceedings. The Court observed that the
cause action arose under the 1973
Constitution, not under the 1935
Constitution (note the difference). Tax
exemption is not presumed. It must be
strictly construed against the taxpayer and
liberally construed in favor of the
government.
ABRA VALLEY COLLEGE INC. v. AQUINO
Q: What is involved in this case?
A: An educational institution is involved
in this case. The ground floor of the
school was leased to Northern Marketing
Corp., a domestic corporation. The 2nd
floor thereof was used as the residence
of the school director and his family.
The Province of Abra now contends
that since the school is not exclusively
used for educational purposes, the
school is now liable to pay real estate
tax.
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 Taxation law review notes
- Atty. Francis J. Sababan -
H: The Court held that the school is
PARTIALLY liable for real estate tax.
1. Residence – exempt by virtue of
incidental purpose; justified because
it is necessary.
2. Commercial – not exempt because it
is not pursuant to the primary
purpose; not for educational
purposes.
Q: is the doctrine in the case of Herrera the
same with this case?
A: NO. in the Herrera case, the exemption
was granted to all the real property
(hospital, school and dorm). But in this
case, the Supreme Court made a
qualification. The Supreme Court said it
depends.
NOTE: both cases arose under the 1935
Constitution despite having been decided in
1988.
Q: At present, do we still apply the
exemption from tax by virtue of the
Doctrine of Incidental Purpose?
A: Not anymore. The cause of action in said
case arose under the 1935 Constitution and
it does not apply to the provisions of the
1987 Constitution.
PHILIPPINE LUNG CENTER v. QUEZON CITY
Q: What is involved in this case?
A: A charitable institution, a hospital. It
is provided in the charter of the Lung
Center of the Philippines is a charitable
institution. However, part of its building
was leased to private individuals and
the vacant portion of its lot was rented
out to Elliptical Orchids. Respondent
contends that since the hospital is not
used actually, directly, an d exclusively
for charitable purposes, it is liable to
pay real estate taxes.
H: The Supreme Court held that the
petitioner is liable to pay tax for those
parts leased to private individuals for
commercial purposes. For the part of the
hospital used for charitable purposes
(whether for pay or non-pay patients),
petitioner is exempt from payment of
real estate tax.
NOTE: petitioner contended that the profits
derived from the lease of its premises were
used for the operation of the hospital. The
Court held that the use of the profits does
not determine exemption, rather it is the
use of the property that determines
exemption.
The case of Herrera does not apply
because said case arose under the 1935
Constitution and the present case arose
under the 1987 Constitution. The
requirements for exemption are different. In
the 1935 Constitution, the property must be
EXCLUSIVELY used for religious, educational
or charitable purposes. Under the 1987
Constitution, the property must be used
ACTUALLY, DIRECTLY, and EXCLUSIVELY for
religious, educational and charitable
purposes.
Q: Was the doctrine laid down in Abra
Valley affirmed in the Lung Center case?
A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the 1935
Constitution. The Supreme Court reiterated
the ruling in the Abra Valley case which
arose under the 1935 Constitution. The
Supreme Court made a qualification, it held
that it depends on whether or not the use is
incidental to the primary purpose of the
institution.
NOTE: at present, “exemption from tax by
virtue of incidental purpose” is not
applicable to all taxes including real estate
tax.
COMM v. SC JOHNSON and SONS, INC.
Important :
1. international double taxation
2. importance of international tax
treaty
3. implication of most favored nation
clause
Q: What is the corporation involved in this
case?
A: A domestic corporation (DC).
SC Johnson and Sons, Inc. entered
into a license agreement with SC
Johnson and Sons U.S.A (Non-Resident
Foreign Corp, NRFC) whereby the former
was allowed to use the latter’s
trademark and facilities to manufacture
its products. In return, the DC will pay
the NRFC royalties as well as payment
of withholding tax.
A case for refund of overpaid
withholding tax was filed. Apparently,
the DC should have paid only 10%
under the most favored nation clause.
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- Atty. Francis J. Sababan -
H: The Supreme Court coined the term
International Double Taxation or
International Juridical Double Taxation.
Q: What prompted the SC to coin such
term?
A: Because a single income (tax
royalties paid by a DC) was subjected to
tax by two countries, the Philippines
income tax and the U.S. tax.
International Juridical Double
Taxation applies only to countries where
the tax liabilities of its nationals are
imposed on income derived from
sources coming from within and without.
Q: Is there an instance where
international double taxation does not
apply?
A: Yes. If it involves nationals of
countries wherein the tax liability is
imposed only from income derive from
sources within and not including those
derived from sources without.
(Ex: Switzerland)
→ The controversy in the case at bar
involves the income tax paid in the
Philippines.
After paying 25%, the US firm
discovered that they are entitled to 10%
under the most favored nation clause.
The question is: was the tax paid under
similar circumstances with that of the
RP-West Germany Treaty?
The CTA and Court of Appeals ruled
that it was paid under similar
circumstances. The phrase referred to
the royalties in payment of income tax.
The Supreme Court ruled that the lower
courts’ interpretation of the phrase was
erroneous. Rather, the phrase applies to
the application of matching credit.
Q: What is matching tax credit?
A: RP-Germany Treaty provides for that
20% of the tax paid in the Philippines
shall be credited to their tax due to be
paid in Germany.
The 10% does not apply because
there is no matching credit. Thus, there
is no similarity in the circumstances.
EQUITABLE RECOUPMENT AND
DOCTRINE OF SET-OFF
Equitable Recoupment
This doctrine provides that a claim for
refund barred by prescription may be
allowed to offset unsettled tax liabilities.
This is not allowed in this jurisdiction,
because of common law origin. If allowed,
both the collecting agency and the taxpayer
might be tempted to delay and neglect the
pursuit of their respective claims within the
period prescribed by law.
Q: What is the doctrine of Equitable
Recoupment?
A: When the claim for refund is barred by
prescription, the same is allowed to be
credited to unsettled tax liabilities.
(Sir gives an illustration found in page 3 of
magic notes)
Q: Is the rule absolute? Reason
A: Yes, the rule is absolute. The rationale
behind this is to prevent the taxpayer and
government official from being negligent in
the payment and collection of taxes.
(furthermore, you have to be honest for this
to work, hence, the government is
preventing corruption)
There is no exception at all otherwise,
the BIR would be flooded with so many
claims.
Set-of
Presupposes mutual obligation between
the parties. In taxation, the concept of set-
off arises where a taxpayer is liable to pay
tax but the government, for one reason or
another, is indebted to the said taxpayer.
Q: What do you mean by SET-OFF?
A: This presupposes mutual obligations
between the parties, and that they are
mutual creditors and debtors of each other.
In taxation, the concept of taxation arises
where a taxpayer is liable to pay taxes but
the government, for one reason or another,
is INDEBTED to said taxpayer.
REPUBLIC v. MAMBULAO LUMBER CO.
Q: What is the liability of Mambulao?
A: They are liable to pay forest charges
(under the old tax code).
NOTE: under our present tax code, the
NIRC, we do not have forest charges as
the same was abolished by President
Aquino.
Q: What did the lumber company do?
A: The lumber company claimed that
since the government did not use the
reforestation charges it paid for
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- Atty. Francis J. Sababan -
reforestation of the denuded land
covered by its license, the amount paid
should be reimbursed to them or at
least compensated or applied to their
liability to pay forest charges.
H: The Court ruled that the
reforestation charges paid is in the
nature of taxes.
The principle of compensation does
not apply in this case because the
parties are not mutually creditors and
debtors of each other. A claim for taxes
is not a debt, demand, contract or
judgment as is allowed to be set-off
under the statute of set-off which is
construed uniformly, in the light of
public policy, to exclude the remedy in
connection or any indebtedness of the
State or any municipality to one who is
liable for taxes. Neither are they a
proper subject for recoupment since
they do not arise out of contract or the
same transaction sued on.
General Rule: no set-off is admissible
against demands for taxes levied in general
or local governmental purposes.
Reason: Taxes are not in the nature of
contracts or debts between the taxpayer
and the government, but arises out of a
duty to, and are positive acts of the
government to the making and enforcing of
which, the consent of the individual is not
required.
Taxes cannot be the subject matter of
compensation.
DOMINGO v. GARLITOS
Q: What is being collected in this case?
A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes
anymore because the same was
abolished by Lolo Macoy.
Q: Who is the administratrix?
A: The surviving spouse.
Q: What did the surviving spouse do?
A: The surviving spouse suggested that
the compensation to which the
decedent was entitled to as an
employee of the Bureau of Lands be set-
off from the estate and inheritance
taxes imposed upon the estate of the
deceased.
H: Both the claim of the government for
estate and inheritance taxes and the
claim of the (intestate) for the services
rendered have already become overdue
hence demandable as well as fully
liquidated, compensation therefore
takes place by operation of law, in
accordance with Art. 1279 and 1290 of
the Civil Code and both debts are
extinguished to the concurrent amount.
Compelling Reason: Congress has
enacted RA 2700, allocating a certain
sum of money to the estate of the
deceased.
FRANCIA v. IAC
Q: This happened in what city?
A: Pasay City
Q: What is the tax being collected? Who is
collecting the same?
A: Payment for real estate taxes for the
property of Francia. It appears that
petitioner was delinquent in the
payment of his real estate tax liability.
The same is being collected by the
Treasurer of Pasay.
Q: What is the suggestion of petitioner?
A: Suggested that the just
compensation for the payment of his
expropriated property be set-off from his
unpaid real estate taxes. (the other part
of his property was sold at a public
auction)
H: The factual milieu of the case does
not justify legal compensation.
The Court has consistently ruled that
there can be no off-setting of taxes
against the claims that the taxpayer
may have against the government. A
taxpayer cannot refuse to pay a tax on
the ground that the government owes
him an amount.
Internal Revenue taxes cannot be
the subject of compensation because
the government and the taxpayer are
not mutually creditors and debtors of
each other, and a claim for taxes is not
a debt, demand, contract or judgment
as is allowed to be compensated or set-
off.
Furthermore, the payment of just
compensation was already deposited
with PNB Pasay, and the taxes were
collected by a local government, the
property was expropriated by the
national government. (diff parties, not
mutual creditors and debtors of each
other.)
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- Atty. Francis J. Sababan -
CALTEX PHIL v. COA
Q: What is being collected?
A: Caltex’s contribution to the Oil Price
Stabilization Fund (OPSF).
COA sent a letter to Caltex asking
the latter to settle its unremitted
collection stating that until the same is
paid, its claim for reimbursement from
the OPSF will be held in abeyance.
Q: Why is Caltex entitled to
reimbursement?
A: Because of the fluctuation of the oil
prices in the Middle East and Europe.
Caltex wanted to off-set its unremitted
collection from its reimbursements.
H: The Court did not allow the set-off,
and reiterated its ruling in the case of
Mambulao and Francia. Furthermore, RA
6952 expressly prohibits set-off from the
collection of contributions to the OPSF.
The Court likewise stated that Caltex
merely acted as agent of the
government in collecting contributions
for the OPSF because such is being
shouldered by the consumers when they
purchase petroleum products of oil
companies, such as Caltex.
Taxation is no longer envisioned as a
measure merely to raise revenues to
support the existence of the
government. Taxes may be levied for
regulatory purposes such as to provide
means for the rehabilitation and
stabilization of a threatened industry
which is vested with public interest, a
concern which is within the police power
of the State to address.
PHILEX MINING CORP v. COMM
The petitioner is liable for the payment
of excise taxes, which it wanted to be set-
off from its pending claim for a VAT Input
credit/refund.
The Court did not allow set-off. Taxes
cannot be the subject of compensation for
the simple reason that the government and
taxpayer are not mutual creditors and
debtors of each other. Taxes are not debts.
Furthermore, in the instant case, the
claim for VAT refund is still pending. The
collection of a tax cannot await the results
of a lawsuit against the government.
DOUBLE TAXATION
Double taxation is allowed because
there is no prohibition in the Constitution or
statute.
Obnoxious double taxation is the
synonym of double taxation.
Elements of Double Taxation:
1) Levied by the same taxing authority
2) For the same subject matter
3) For the same taxing period and
4) For the same purpose
There is no double taxation if the tax is
levied by the LGU and another by the
national government. The two (2) are
different taxing authorities.
LGUs are expressly prohibited by the
provisions of RA 7160 or the LGC of 1991
from levying tax upon: (1) the National
Government; (2) its agencies and
instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant to
the provisions of RA 8424 of the Tax Reform
Act of 1997, can levy tax upon GOCCs,
agencies and instrumentalities (Section 27
c)), although income received by the
Government form:
1) any public utility or
2) the exercise of any essential
governmental function
is exempt from tax.
KINDS OF INCOME TAXPAYERS
Q: Generally, how many kinds of income
taxpayers are there?
A: Under section 22A of NIRC, there are
three (3), namely:
1. individual;
2. corporate;
3. estate and trust.
I. INDIVIDUAL TAXPAYER
Q: How many kinds of individual taxpayers
are there?
A: There are seven (7). Namely:
1. Resident Citizen (§23A and 24A);
2. Nonresident Citizen (§23B and 24A);
3. OCW and Seaman (§23C and 24A);
4. Resident Alien (§22F, 23D and 24A);
5. Nonresident Alien Engaged in Trade
or Business (§22G, 23D and 25A)
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- Atty. Francis J. Sababan -
6. Nonresident Alien NOT Engaged in
Trade or Business (§22G, 23D and
25B)
7. Aliens Engaged in Multinational
Companies, Offshore Banking Units,
Petroleum Service Contractors
(§25C,D and E)
Resident Citizen (RC)
Q: How many types of RC?
A: There are two (2), namely:
1. RC residing in the Philippines; and
2. Filipino living abroad with no
intention to reside permanently
therein.
Q: If you are abroad, and you have the
intention to permanently reside therein, can
you still be considered a RC?
A: Yes. If such intention to permanently
reside therein was not manifested to the
Commissioner and the fact of your physical
presence therein, you may still be
considered a RC.
OCW and Seamen
OCW was used and not OFW in the
CTRP, because the classification shall cover
only those Filipino citizens working abroad
with a contract. TNTs are not covered.
A Filipino seaman is deemed to be an
OCW for purposes of taxation if he receives
compensation for services rendered abroad
as a member of the complement of a vessel
engaged exclusively in international trade.
Consequently, if he is not a member of
the complement or even if he is but the
vessel where he works is not exclusively
engaged in international trade, said seaman
is not deemed to be an OCW. He is either a
RC or a NRC depending on where he stays
most of the time during the taxable year.
If he stays in the Philippines most of the
time during the taxable year, he is
considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you
are not the one being referred to.
The importance of ascertaining whether
or not a seaman is a RC or a NRC, is that if
he is a RCm he is taxable on ALL income
derived from all sources within and without.
If he is a NRC, he is taxable only on income
derived form sources within the Philippines.
Q: What is the significance of using OCW?
A: It only covers Filipinos who works abroad
with a contract. It does not cover TNTs.
Q: What is the status of a TNT?
A: Since they are not covered by this
classification, they are considered RC
because they work abroad without a
contract and they have not manifested their
intention to permanently reside abroad.
(distinguish from an immigrant)
Requirements for a seaman to be
considered an OCW:
1. must be a member of the compliment of
a vessel;
2. the vessel must be exclusively engaged
in international trade or commerce.
Resident Alien (RA)
An individual whose residence is within
the Philippines and who is not a citizen
thereof.
Intention to reside permanently in the
Philippines is not a requirement on the part
of the alien.
The requirement under RR#2 is that he
is actually present in the Philippines, neither
a sojourner, a traveler, not a tourist.
Whether he’s a transient or not is
determined by his intent as to the nature
and length of his stay.
Q: Is the intention to permanently reside in
the Philippines necessary?
A: No, so long as he is not a sojourner,
tourist or a traveler.
Non-Resident Alien Engaged in
Trade or Business (NRAETB)
A foreigner not residing in the
Philippines but who is engaged in trade or
business here.
RR 2-98 has expanded the coverage of
the term, “engaged in trade or business” to
include the exercise of a profession.
Furthermore, by the express provision of the
law, a NRA who is neither a businessman
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- Atty. Francis J. Sababan -
nor a professional but who come to and
stays in the Philippines for an aggregate
period of more than 180 days during any
calendar year is deemed to a NRAETB in the
Philippines.
Q: How many types?
A: There are three (3) types, namely:
1. NRA engaged in trade or business
(25a1);
2. NRA who practices a profession
(Revenue Regulation 2-98);
3. foreigner who comes and stays in
the Philippines for an aggregate
period of MORE THAN 180 days
during any calendar year.
Q: What is the status of a Chinese who
stays here for 200 days in 2001?
A: NRAETB
Q: Suppose he stayed here for 100 days in
2000 and another 100 days in 2001?
A: He is not a NRAETB. To be considered as
such, he must stay for an aggregate period
of more than 180 days during a calendar
year.
Q: What is the income tax applicable to
said taxpayer?
A: Net Income Tax (NIT) on all its income
derived form sources within the Philippines.
Non-Resident Alien Not Engaged in
Trade or Business
Q: How many kinds?
A: Only one.
The reason why the NRANETB are
included in any income tax law is because
they may be deriving income form sources
within the Philippines.
They are subject to tax based on their
GROSS INCOME received form all sources
within the Philippines.
Aliens Employed by Regional or
Area Headquarters & Regional
Operating Headquarters of
Multinational Companies/ Aliens
Employed by Ofshore Banking
Units (Aliens Employed by MOP)
► Status: either a RA or NRA depending on
their stay here in the Philippines.
► Their status may either be RA or NRA
because Section 25 C and D does not
distinguish.
► Liable to pay 15% from Gross Income
received from their employer
► Income earned from all OTHER sources
shall be subject to the pertinent income tax,
as the case may be.
Aliens Employed in Multinational
and Ofshore Banking Units
Q: How are they classified?
A: If they derived income from other
sources aside from their employer, you may
classify them either as RA, NRAETB, or
NRANETB.
Aliens Employed in Petroleum
Service Contractors and
Subcontractors
► Status: ALWAYS NRA. If they derive
income from other sources, such income
shall be subject to the pertinent income tax,
as the case may be.
► Income derived or coming from their
employer shall be subject to a tax of 15% of
the gross.
II. CORPORATE TAXPAYER
1. Domestic Corporation (DC) – created
or organized under Philippine laws.
2. Resident Foreign Corporation (RFC) –
corporation created under foreign
law, and engaged in trade or
business.
3. Nonresident Foreign Corporation
(NRFC) – created under foreign law,
and NOT engaged in trade or
business.
Q: What are deemed corporations under
the NIRC?
A: The term corporation shall include
partnerships, no matter how created or
organized, joint stock companies, joint
accounts, associations, or insurance
companies, but DOES NOT includes general
professional partnerships and a joint
venture or consortium formed of the
purpose of undertaking construction
projects or operations pursuant to or
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 Taxation law review notes
- Atty. Francis J. Sababan -
engaging in petroleum, coal, geothermal or
consortium agreement under a service
contract with the Government.
1. Partnerships and others no matter
how created
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies
CIR v. COURT OF APPEALS
The phrase no “matter how created or
organized” was interpreted.
Even if the partnership was pursuant to
law or not, whether nonstick, nonprofit, it is
still deemed a corporation.
Reason: because of the possibility of
earning profits form sources within the
Philippines.
Q: Are partnerships always considered
corporations? Is there no exception?
A: General Rule: a partnership is a
corporation.
Exception: General Professional
Partnerships (GPP)
Q: What is a GPP?
A: It is a partnership formed by persons for
the sole purpose of exercising their
profession, no part of the income of which
in derived from any trade or business. (what
if a partner has other businesses not related
to the GPP? > read section 26 quoted
hereunder)
Two (2) Kinds of GPP formed for:
1) Exercise of a profession – not a
corporation; exempt from Corporate
Income Tax (CIT)
2) Exercise of a profession and
engaged in trade or business – a
corporation; subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a
corporation
exception: GPP
exception to the exception: if the GPP
derives income from other sources, it is
considered a corporation, thus liable to pay
corporate income tax.
Rule:
1. if the income is derived from other
sources and such income is subject to NET
INCOME TAX, it is not exempt and it is
considered a corporation.
2. if the income is derived from other
sources and such income is subject to FINAL
INCOME TAX, it is still EXEMPT and it is not
deemed a corporation. ( separate return for
this. It will not reflect in the GPP’s ITR)
» This is pursuant to the fact that FIT will
not reflect in the ITR of the GPP since the
withholding agent is liable for the payment
of the FIT.
Q: What is the importance of knowing
whether the corporation is exempt or not?
A: To determine their tax liability. This is
important to determine the tax liability of
the individual partners of the GPP.
► Section 26 (1st paragraph) provides: “a
GPP as such shall not be subject to the Net
Income Tax…” however, “…persons
engaging in business as partners in a GPP
shall be liable for income tax only in their
separate and individual capacities.”
In short, each partner will be paying NIT,
and the distributive shares they will be
receiving from the net income of the GPP
will be included in the gross income of the
partner.
Q: If the GPP is deemed a corporation, will
the partners have to pay for the income
tax?
A: No. as far as the share of the GPP is
concerned, it is considered a taxable
dividend which is subject to FIT.
Q: Is a joint venture a corporation?
A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do we
have?
A: Three, namely Corporation X, Y, and
X+Y. the joint venture has a separate and
distinct personality from the two
corporations.
Q: When is a joint venture not considered a
corporation?
A: It is not deemed a corporation when it is
formed for the purpose of undertaking a
(“construction?) project or engaging in
petroleum, gas, and other energy
operations pursuant to “?” or consortium
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- Atty. Francis J. Sababan -
agreement under a service contract with When a person who owns property dies,
the government. the following taxes are payable under the
provision of income tax law:
Domestic Corporation 1) Income Tax for Individuals – to cover
the period beginning January to
Is one created or organized in the the time of death.
Philippines or under its laws. 2) Estate Income Tax – if the property is
transferred to the heirs.
Taxable on all income derived from 3) If no partition is made, Individual or
sources within or without the Philippines. Corporate Income Tax, depending
on whether there is or there is no
Resident Foreign Corporation settlement of the estate. If there
is, depending on whether the
Foreign corporations engaged in trade settlement is judicial or
or business in the Philippines. extrajudicial.

Taxable for income derived within the Judicial Settlement

Philippines.
1) During the pendency of the
Non-Resident Foreign Corporation settlement, the estate through the
executor, administrator, or heirs is
Foreign corporations not engaged in liable for the payment of ESTATE
trade or business in the Philippines. INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the judicial
Taxable for income derived within the settlement, when the decision of the
Philippines. court shall have become final and
executory, the heirs still do not
Both DC and RFC are liable for the divide the property, the following
payment of the following: possibilities may arise:
1) NIT – Net Income Tax a) If the heirs contribute to the
2) FIT – Final Income Tax estate money, property or
3) 10% income tax on corporations with industry with the intention to
properly accumulated earnings. divide the profits between and
4) MCIT (Minimum Corporate Income among themselves, an
Tax) of 2% of the Gross Income UNREGISTERED PARTNERSHIP is
5) Optional Corporate Income Tax of created and the estate becomes
15% of the Gross Income liable for payment of CIT
(Evangelista vs. Collector (102
A NRFC is liable for payment of the ff: Phil 140))
1) GIT- Gross Income Tax b) If the heirs without contributing
2) FIT – Final Income Tax money, property or industry to
improve the estate, simply divide
III. TRUST AND ESTATE the fruits thereof between and
among themselves, a CO-
Q: How many for each? OWNERSHIP is created and
A: Seven (7) kinds for each because the Individual Income Tax (IIC) is
trust or estate will be determined by the imposed on the income derived
status of the trustor, grantor, or creator, or by each of the heirs, payable in
of the decedent. their separate and individual
capacity (Pascual vs. COMM (165
The status of the estate is determined scra 560) and Obillos vs. COMM
by the status of the decedent at the time of (139 SCRA 436))
his death; so an estate, as an income
taxpayer can be a citizen or an alien. Extrajudicial Settlement and if NO
Settlement

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 Taxation law review notes
- Atty. Francis J. Sababan -
Some possibilities may arise. The GI
income tax liability depends on whether or - deductions
not the unregistered partnership or co- Net Income
ownership is created. x Tax Rate
Income Tax Due
Trust
Q: What is the rate?
Trusts can be created by will, by A: Individual: 32%
contract or by agreement. The status of a Corporation: 35%
trust depends upon the status of the
grantor or trustor or creator of the trust. NOTE: the formula allows for deduction,
Hence, a trust can also be a citizen or an personal exemptions and tax credit.
alien.
Q: What are the other terms for NIT?
Q: Where the trust earns income and such A: NIRC:
income is not passive, who among the a. taxable income
parties mentioned is liable for payment of b. gross income (wlang kasunod)
income tax thereon? → only income tax from improperly
A: The TRUST itself, through the trustee or accumulated earnings does not use this
fiduciary but only if the trust is irrevocable. term.
If it is revocable, or for the benefit of the
grantor, the liability for the payment of 1. CFA: “to be included in the gross
income tax devolves upon the trustor income”
himself in his capacity as individual 2. Revenue Regulations and Statutes:
taxpayer. a. ordinary way of paying income
tax;
b. normal way of paying income tax
KINDS OF INCOME TAX .

Q: How many kinds of income tax? Characteristics:

A: There are Six (6), namely:
1. Net Income Tax (NIT); Q: Who are not liable to pay NIT?
2. Gross Income Tax (GIT); A: 1. NRANETB (liable for GIT);
3. Final Income Tax (FIT); 2. NRFC (GIT also);
4. Minimum Corporate Income Tax of 3. With certain modifications, AEMOP, if
2% of the Gross Income (MCIT) they derive income from other
5. Income Tax on Improperly sources;
Accumulated Earnings subject to
10% of the Taxable Income; Q: Is the taxable net income subject to
6. Optional Corporate Income Tax of withholding tax?
15% on the Gross Income A: It is subject to withholding tax if the law
says so.
I. NET INCOME TAX
Q: What if the law is silent?
Q: what is the formula? A: If the law is silent, it is not subject to
A: Gross Income – Deductions and Personal withholding tax.
Exemptions = Taxable Income
Q: What is another term for withholding
Taxable Income x Tax Rate = Net tax?
Income A: It is also known as the creditable
withholding tax system under the income
Taxable Net Income – Tax Credit = tax law.
Taxable Net Income Due
Q: Do we have to determine if there is an
Net Income means Gross Income less actual gain or loss?
deductions and A: Yes because the formula for deductions,
Formula: etc.

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 Taxation law review notes
- Atty. Francis J. Sababan -
Q: If you fail to pay, will you be held liable?
A: Yes, you will be held liable.
II. GROSS INCOME TAX (GIT)
Q: What is the formula?
A: Gross Income x Rate
Q: How many taxpayers pay by way of the
gross?
A: There are two (2)
individual - NRANETB
corporation - NRFC
NOTE: the formula does not allow any
deduction, personal exemptions and tax
credit.
Characteristics:
► NRANETB and NRFC, though not
engaged in trade or business, are liable to
pay by way of the gross for any income
derived in the Philippines. While not
engaged in trade or business, there is a
possibility that they may earn income in the
Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax
because the persons liable are foreigners.
This rule is ABSOLUTE
NOTE: there are two (2) ways of paying
taxes depending on which side of the bench
you are.
III. FINAL INCOME TAX (FIT)
Q: What is the formula?
A: (Each Income) x (Particular Rate)
Unlike in the gross income tax where
you add all the income from all the sources
and multiply the sum thereof by the rate of
25% or 35%, as the case may be, in final
income tax, you cannot join all the income
in one group because each income has a
particular rate.
Q: What is the rate?
A: 35% as the case may be.
NOTE: like GIT, the formula does not allow
deductions, personal exemptions, and tax
credit.
Characteristics:
Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT
provided the requisites for its application
are present.
Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to
pay NIT or else there will be double
taxation.
NOTE: as time passed by, the number of FIT
increased.
► before 1979 – proceeds from the sale of
real property not exempt, it is subject to NIT
or GIT, as the case may be.
after 1979 – capital gains tax. Proceeds
from the sale of real property is exempt.
Q: If you fail to pay, will you be liable?
A: No. the withholding agent is liable to
pay FIT.
► Case of Juday, Richard and Regine
► For one to be liable for the payment of
NIT, the income must be derived on the
basis of an employer – employee
relationship.
Employer – Employee Relationship
(3 Cs):
1. contract;
2. control;
3. compensation;
► However, in the case of celebrities,
there is no employer – employee
relationship, they are merely receiving
royalties. Royalties are subject to final
withholding tax, thus the agent is liable to
pay. (so, distinguish nature of income,
whether royalty or compensation)
RULE:
1. for NIT, whether or not subject to
Creditable Withholding Tax (CWT),
the taxpayer is always liable if he
fails to pay.
2. for GIT and FIT, absolute liability to
pay is upon the withholding agent.
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- Atty. Francis J. Sababan -
Q: Why is it that the rate of withholding is A: Generally, only one kind, 15% FIT with
always lower, and why is it that the rate of respect to income derived from their
GIT and FIT is always equal? employer.
A:
1. NIT allows deductions; Income from other sources:
2. GIT and FIT do not allow deductions. 1. Determine the status of the AEMOP;
a. NIT
Q: Do you have to determine whether there b. FIT
is an actual loss or gain? 2. NRANETB
A: No need to determine because the a. GIT
formula does not allow deductions. Gain is b. FIT
presumed. No liability for final withholding
tax except for the sale of shares of stock. Q: What kind of income tax applies to DC?
(?) A: Only four (4) kinds will apply out of the
six (6)
IV. MINIMUM CORPORATE INCOME 1. NIT
TAX (MCIT) 2. FIT
3. MCIT
Q: What is the formula? 4. Improperly Accumulated Earnings
A: Gross Income x 2%
Q: May all of these be applied
Q: Who pays this tax? simultaneously?
A: DC and RFC only. A: No. only the NIT, FIT and Improperly
Accumulated Earnings be applied
Q: May it be applied simultaneous with simultaneously. NIT and MCIT cannot be
NIT? applied simultaneously. Only one will apply,
A: No. there must be a computation of the whichever is higher between the two.
NIT first then apply which ever is higher.
The MCIT is paid in lieu of the NIT. Q: What kind of tax will apply to NRFC?

Reason: to discourage corporations from A: Out of the six (6) kinds, only two (2) will
claiming too many deductions. apply:
1. GIT
V. OPTIONAL CORPORATE INCOME TAX 2. FIT

Q: Under what section is this found?
A: Section 27A 4th paragraph and Section
28 A(1) 4th paragraph.
Q: Is this applicable now?
A: No. this is not yet implemented.
Q: What is the significance of knowing the
classification of these taxpayers?
A:
1. to determine the kind of income tax
applicable to them;
2. to determine their tax liability.

Q: To what kind of taxpayer does this Q: Under Section 23, who are liable for
apply? income within and income without?
A: To DC and RFC. A: Only
1. RC
Q: What kind of taxes are applicable or 2. DC
imposed upon the 1st five individual
taxpayers? ► The rest of the taxpayers will be liable
A: Only two (2) kinds are applicable out of for income coming from sources within.
the six (6) kinds of income taxes.
1. NIT; ► Income from sources without, no
2. FIT; liability, therefore exempt.

Q: What kind of income tax will apply to NOTE: The income taxpayer is not a RC or a
AEMOP? DC. Determine if the income came from

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- Atty. Francis J. Sababan -
sources within or without to know the
taxpayer’s liability.
► If the facts are specific, do not qualify
your answer. Answers must be responsive
to the question.
Q: Is section 42 relevant to all the
taxpayers?
A: NO. SECTION 42 IS NOT MATERIAL TO
ALL taxpayers, particularly the RC and DC
because these two are liable for both
income within and without.
► Section 42 is applicable only to
taxpayers who are liable for income within,
the rest of the taxpayers are otherwise
exempt.
Q: Section 42(A)(1) provides for how many
kinds of interests?
A: It establishes two (2) kinds of interests,
namely:
1. interest derived from sources within
the Philippines.
2. interest on bonds, notes or other
interest bearing obligations of
residents, corporate or otherwise.
Q: What is the determining factor in order
to know if the income is from within?
A:
1. location if the bank is from within
the Philippines (pursuant to a
Revenue Reg.)
2. residence of the obligor (whether an
individual or a corp.) – contract of
loan with respect to the interest
earned thereon.
► For example the borrower is a NRAETB,
he borrowed money from a RA. The interest
earned by the loan will be considered as an
income without. RA is not liable to pay tax
since RA is liable only for income within,
therefore exempt from paying the tax.
NATIONAL DEVELOPMENT CO. v. CIR
F: The National Development Company
(NDC) entered into a contract with
several Japanese shipbuilding
companies for the construction of 12
ocean-going vessels. The contract was
made and executed in Tokyo.
The payments were initially in cash
and irrevocable letters of credit.
Subsequently, four promissory notes
were signed by NDC guaranteed by the
Government.
Later on, since no tax was withheld
from the interest on the amount due,
the BIR was collecting the amount from
NDC.
The NDC contended that the income
was not derived from sources within the
Philippines, and thus they are not liable
to withhold anything. NDC said that
since the contract was entered into and
was executed in Japan, it is an income
without.
H: The government’s right to levy and
collect income tax on interest received
by a foreign corporation not engaged in
trade or business within the Philippines
is not planted upon the condition that
the activity or labor and the sale from
which the income flowed had its situs in
the Philippines. Nothing in the law
(Section 42(1)) speaks of the act or
activity of nonresident corporations in
the Philippines, or place where the
contract is signed. The residence of the
obligor who pays the interest rather
than the physical location of the
securities, bonds or notes or the place of
payment is the determining factor of the
source of the income. Accordingly, if the
obligor is a resident of the Philippines,
the interest paid by him can have no
other source than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm,
becomes a stockholder of two corporations,
a DC and a RFC, and both corporations
declared dividends, what is the liability of
the Indonesian firm if the same received the
dividends?
A:
1. Dividends received from DC: the
Indonesian firm is liable to pay
taxes. NRFC, under the law, is liable
if the income is derived from sources
within. (Sec 42a)
2. Dividends received from RFC: the
Indonesian firm’s liability will depend
on amount of gross income from
sources within the Philippines.
The NRFC will be liable to pay income tax if
the following requisites are present:
1. at least 50% is income from sources
within;
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 Taxation law review notes
- Atty. Francis J. Sababan -
2. the 1st requisite is for the three (3)
preceding taxable years from the
time of declaration of the dividends.
► In the absence of any or both
requisites, the income will be considered
from sources without, thus exempting the
Indonesian firm from payment of income
tax.
Q: Same scenario, but this time the shares
of stock of the two corporations were being
disposed off. What is the tax liability of the
Indonesian firm?
A:
1. sale of shares of stock of DC: the
Indonesian firm will be liable for the
payment of taxes because the
income is from sources within.
2. sale of shares of stock of RFC: the
liability will depend on where the
shares of stock were sold. (mejo
Malabo sa notes, please be guided
accordingly)
Q: Filipino Executive, assigned to Hong
Kong, receiving two salaries, one from the
Philippines, the other from HK. The
performance of the job was in HK. Is he
liable for both salaries?
A: No, he is not liable for the two incomes.
His status is an OCW (note facts: working in
HK under contract). The compensation he
received is not subject to tax pursuant to
Section 42(c). Compensation for labor or
personal services performed in the
Philippines is considered an income within.
When it comes to services, it is the place
where the same is rendered which is
controlling. In the case at bar, the services
were rendered abroad, thus it is an income
derived from sources without, irrespective
of the place of payment.
Q: Suppose a DC hired a NRFC to advertise
its products abroad. What is the liability of
the NRFC? Will there be a withholding tax
imposed?
A: The income is derived from sources
without since the services in this case were
performed abroad. As such, the NRFC is not
liable and therefore exempt from the
payment of tax. If the NRFC is not subject to
NIT, then it is not also subject to
withholding tax.
Q: What is the controlling factor?
A: The controlling factor is the place where
the services were performed and not where
the compensation therefore was received.
RENTALS AND ROYALTIES
►income from sources within
Q: Granted by who?
A: NRFC
Q: Suppose you are the franchise holder,
how much is the withholding?
A: 35% (GIT)
Q: if the franchise is granted by RFC, how
much is the withholding?
A: 10% (NIT) and in some cases 15%
Section 42(4) MEMORIZE FOR RECIT
(CEKSTTM)
a. right of, or the right to use
copyright, patents, etc
b. industrial, commercial,
scientific equipment
c. supply of knowledge
d. supply of services by
nonresident
e. supply of technical assistance
f. supply of technical advice
g. right to use: motion picture
films, etc.
Q: What is the rule as regards the sale of
real property?
A: Gains, profits, and income from the sale
of real property located within the
Philippines considered income within.
Q: What about the sale of personal
property, what is the rule?
A: Determine first if the property is
produced or merely purchased.
1. it the property is manufactured in
the Philippines and sold abroad, or
vice-versa, it is an income partly
within and partly without.
2. if the property is purchased,
considered derived entirely from the
sources within the country where it
is sold.
EXCEPTION: shares of stock of domestic
corporation, it is an income within wherever
it is sold.
COMMISSIONER v. IAC
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- Atty. Francis J. Sababan -
Q: What is the issue here?
A: They cannot determine if the business
expense was incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is
not sure, will you disallow the
deduction?
A: No. determine it pro rata.
Formula: GI from within
GI from without
Example: 100,000
1,000,000
= 10%
► Hence, 10% is the ratable share in the
deduction. If the deduction being asked
is 100,000 not all of it will be allowed.
Only 10,000 or 10% of 100,000 will be
allowed as deduction.
CAPITAL GAINS AND LOSSES
Section 39
Q: What is capital asset?
A: Capital asset is an asset held by a
taxpayer which is not an ordinary asset.
The following are ordinary assets:
1. stock in trade of the taxpayer or
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;
2. property held by the taxpayer
primarily for sale to customers in the
ordinary course of trade or business;
3. property used in trade or business of
a character which is subject to the
allowance for depreciation provided
in subsection 1.
4. real property used in trade or
business of the taxpayer.
All other property not mentioned in the
foregoing are considered capital assets.
Q: What is a capital gain? What is a capital
loss?
A: Capital gains are gains incurred or
received from transactions involving
property which are capital assets. Capital
losses are losses incurred from transactions
involving capital assets.
Q: What is ordinary gain? Ordinary loss?
A: Ordinary gains are those received from
transactions involving ordinary assets.
Capital losses are losses incurred in
transactions involving ordinary assets.
Q: What is the relevance of making a
distinction?
A: It is relevant because Section 39B,C,
and D apply to capital assets only.
1. time when property was held (39B)
(holding period applies only to
individuals);
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)
I. CAPITAL ASSETS
Q: What is the holding period?
A: If capital asset is sold or exchanged by
an individual taxpayer, only a certain
percentage of the gain is subject to income
tax.
It is the length of time or the duration of
the period by which the taxpayer held the
asset.
Q: What is the requirement?
A:
1. the taxpayer must be an individual.
Section 39B states “in case of a
taxpayer, other than a corporation..”
2. property is capital in nature.
Q: What is the term?
A: 100% if the capital asset has been held
for not more than 12 months; (short term)
50% if the capital asset has been held
for more than 12 months. (long term)
NOTE: the holding period applies to both
gains and losses.
Q: Do you include capital gains in your ITR?
A: General rule: yes, include in ITR.
EXCEPT:
1. gains in sales of shares of stock not
traded in stock exchange(section
24);
2. capital gains from sale of real
property(section 24).
Q: When will the holding period not apply?
A:
1. property is an ordinary asset
2. taxpayer is a corporation
3. sale of real property considered as
ordinary asset
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II. LIMITATION ON CAPITAL LOSSES
►synonymous to 34D & loss capital rule
► this applies to individual and corporate
taxpayer
Q: What is the loss limitation rule?
A: Pursuant to Section 39 C, losses from
sales or exchange of capital assets may be
deducted only from capital gains, but losses
from the sale or exchange of ordinary
assets may be deducted from capital or
ordinary gains. (applies to individual and
corporation)
Q: In connection with 34 D, Losses in
Allowable Deduction, what is the rationale
behind this rule?
A: If it is otherwise, it will run counter with
the rule that the loss should always be
connected with the trade or business,
capital losses are losses not connected to
the trade or business, thus it is not
deductible
Q: what is your remedy?
A: 39 D, net capital loss carry-over
Q: What is the rationale in allowing ordinary
loss to be deducted from either the
capital gains or ordinary gains?
A: It is already included in ITR, the gross
income less deductions hence it already
carries with it the deduction
TAKE NOTE: Normally if the loss is an
ordinary loss there is no carry over.
Except: a. 34D3
b. if the loss is more than GI
III. NET CAPITAL LOSS CARRY-OVER
Q: What are the requirements?
A:
1. taxpayer is an individual;
2. paid in the immediately succeeding
year;
3. applies only to short term capital
gain;
4. capital loss should not exceed net
income in the year that it was
incurred.
Q: How does net capital loss carry-over
differ from net operating loss carry-over
under Section 34 D (3)?
A: Under the net capital loss carry-over
rule, the capital loss can be carried over in
the immediate succeeding year. In net
operating loss carry-over rule, capital loss
can be carried over to the next three (3)
succeeding calendar year following the year
when the loss was incurred.
NOTE: only 15% of the loss will be carried
over, if the loss is greater than the gains.
► In net operating loss carry-over there is
an exception to the 3 year carry-over
period. In case of mines other than oil and
gas wells, the period is up to 5 years.
Q: What is a short sale?
A: Sale of property by which the taxpayer
cannot come into the possession of the
property. EX: shares
CALAZANS v. CIR
F: The taxpayer inherited the property
fro her father and at the tie of the
inheritance it was considered a capital
asset. In order to liquidate the
inheritance, the taxpayer decided to
develop the land to facilitate the sale of
the lots.
I: Was the property converted to
ordinary asset?
H: The conversion from capital asset to
ordinary asset is allowed because
Section 39 is silent.
Q: Are you allowed to convert ordinary
asset to capital asset?
A: General rule: it is not allowed. Read
Revenue Regulation 7-2003
The case at bar still applies despite of
the issuance of said Revenue Regulation.
Q: What is the conversion prohibited in the
Revenue Regulation?
A: Conversion of real estate property.
Q: What is the rationale?
A: Section 24 D – final income tax of 6% if
the real estate is capital asset. If it is an
ordinary asset, it will be subject to income
tax of 32% for individual taxpayer, and 35%
if the taxpayer is a corporation.
Q: What are the properties involve in the RR
7-2003?
A: 1. those property for sale by the realtors
2. real property use in trade or business
not necessary realtors
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- Atty. Francis J. Sababan -
Q: That is the conversion allowed by the Q: What about Non Resident foreign
Revenue Regulation? Is there an instance Corporation and Non Resident Alien not
when an ordinary asset may be converted engaged in Trade or Business?
to capital asset? A: Not Subject to Net Income Tax but they
A: Yes, provided that the property is an are liable for Gross Income tax.
asset other the real property, and it has
been idle for two (2) years. Q: Do legally married husband and wife
need to file separately or jointly?
SECTION 24 A: It depends if:
TAX ON INDIVIDUALS 1. Pure compensation income- separate
2. Not Pure compensation income- joint
Q: What is the tax mentioned in section
24? Passive Income
A: NIT Interest, Royalties, prizes and Other
winnings
Q: What is taxable income?
A: (memorize section 31) it is the pertinent Interest
items of gross income specified in the NIRC,
less the deductions and/or personal and Q: Bank Interest, what is the requirement?
additional exemptions, if any, authorized for A: The bank must be located in the Phils.
such types of income by the NIRC or other because the income must be derived from
laws. It refers to NIT because it allows sources w/in.
deductions.
Q: Do you include this in your ITR?
Q: What do you mean by the phrase “other A: No! because it is subject already to FIT.
than B, C, and D”? The bank is the one liable for the payment
A: It means that if the elements of passive of this.
income are present, the taxpayer has to
pay FIT. NOTE: Liability for NIT, GIT, and MCIT will
depend on the elements present.
Q: Who are the taxpayers mentioned in
section 24? Q: Who are liable for bank interest?
A: A:
1. RC 1. RC }
2. NRC 2. NRC} Sec. 24 B1
3. OCW 3. RA }
4. RA 4. NRAETB
5. NRANETB Sec. 25 (25%)
► Additionally, under Section 25, NRAETB 6. AEMOP
7. DC
Q: What is the tax liability of NRAETB? 8. RFC
A: Section 25(1) NRAETB is subject to 9. NRFC
income tax in the same manner as
those individuals mentioned in Section 24. Q: What is the rate of interest?
A: FIT of 20%
Q: What about Domestic Corporations?
A: Q: Is there a lower rate?
1. Sec. 27 A,B, and C A: 7 ½ % if under EFCDS
2. Sec. 26- GPP is not subject to income
tax. Q: What if the depositor is non resident
alien?
Q: What about Resident Foreign A:
Corporations? -W/in – FIT
A: Sec 28(l) it is subject to 35% Net Income - W/out- exempt
Tax
Q: What is the rule on pre- termination?

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- Atty. Francis J. Sababan -
A: If it is pre terminated before 5th year a
FIT shall be imposed on the entire income Q: When can we apply NIT in Prizes?
and shall be deducted and withheld by the A: 1. When the taxpayer is RC, RFC and
depositary bank from the proceeds of the DC
long term deposit based on the remaining 2. For DC and RC it must be derived
maturity thereof from income abroad RFC it must be
a. 4 yrs to less than 5 yrs – 5% derived from income w/in
b. 3 yrs to less than 4 yrs- 12% 3. amount is more than P10,000
c. Less than 3 yrs- 20%
NOTE: If the prize is derived from sources
Q: Does it apply to all individuals? w/in but it is below P 10,000 it is not subject
A: No! It does not apply to 10 NRFC and to tax. If derived from sources abroad, most
NRA and NRAETB because they are liable to of them are exempt except for RC and DC
GIT. who are liable w/in and w/out.

NOTE: if the depositary is a Non resident it Q; Is it possible for RC and DC to pay MCIT?
is exempt A: Yes if MCIT is higher than NIT.

► Resident citizen is liable to pay tax for Winnings

bank interest earned abroad (NIT)
Q: Do we apply the P10, 000 req.?
Q: If the money earns interest in abroad A: No, we do not apply it only applies to
who is liable? prizes. It must not pertain to illegal
A: RC and DC only by NIT, the rest are gambling.
exempt. No FIT abroad because we do not
have withholding agent abroad. ► Thus, the only requirement is it must be
derived from income w/in.
Q: MCIT applies to DC and RFC in relation
to bank interest? Q: Who are liable? (FIT)
A: If the bank interest is derived abroad, A:
RFC is exempt but DC is liable. 1. RC
Impose NIT if it is higher than the MCIT, 2. NRC
otherwise apply MCIT if it’s higher than the 3. OCW
NIT 4. RA
5. NRAETB
Prizes 6. AEMOP (RA, NRAETB)

Requirements: Not liable to FIT?

1. Prizes must be derived from sources 1 NRANETB- GIT
w/in the Phils. 2 AEMOP (NRANETB- GIT)
2. it must be more than P 10,000 3 DC- law is silent NIT
4 RFC- law is silent
Q: Who are liable? (FIT) 5 NRFC- GIT
A:
1. RC Q: When does NIT apply to winnings?
2. NRC A:
3. OCW 1. If Taxpayer is DC or RC
4. RA 2. Income is derived abroad
5. NRAETB 3. Taxpayer is RFC and income w/in.
6. AEMOP (RC, NRAETB)
NOTE: If income abroad, most TP are
Not Liable exempt except DC and RC
1. NRANETB- liable for GIT at 25 %
2. AEMPOP (NRANETB- GIT) Q: MCIT applies when?
3. DC- NIT 27 D is silent A: It is higher than the NIT
4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT Royalties

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 Taxation law review notes
- Atty. Francis J. Sababan -
H: For stock Dividends to be exempt it
Requirement: must come from the profit of the
► The income is from w/in corporation.

► Rate? 20%. Lower rate? 10% on books, Stock Dividends → it is the transfer of the
literary works and musical compositions. surplus profit from the authorized capital
stocks.
Q: You are a writer for Snoop Dogg are you
liable for FIT? What if for April Boy? Q: Assuming that there are 5 Incorporators,
A: Liable for NIT if Income abroad like a the Corporation has a P5 M Authorized
writer for Snoop. While FIT if for April Boy. Capital stock. It distributed 1 M stock
dividends, is it taxable?
Q: Who are liable (FIT)? A: NO, the dividends did not go to the
A: Stock holder but to the Auth Capital Stock.
1. RC Only cash and Prop Stock go to the Stock
2. NRC holder.
3. OCW
4. RA ► Sec 24 B does not mention stock
5. NRAETB dividends because it is not subject to FIT
6. AEMOP (RC, NRAETB) but it is subject to NIT under Section 73.

Not Liable? Q: Is there an exception when stock

1. NRANETB dividends are not taxable?
2. AEMOP A: YES, if the shares of stocks are cancelled
3. DC and redeemed meaning it was reacquired
4. RFC by the corp.
5. NRFC
ANSCOR CASE
NOTE: Lower rate of 10% applies to all →the stockholders cannot escape the
except NRANETB payment of taxes

Q: When do we apply NIT to Royalties? Requirement:

A: Gen Rule- the dividends must be distributed
1. TP is RC or DC by a DC.
2. Income is from w/out Except- Regular operating- always a foreign
3. TP is RF and income is w/in corp.

► If income is from sources abroad all are ► What rate: 10% FIT
exempt except RC and DC
Q: Who are liable?
Dividends A:
1. RC
► Confined with cash and/or property 2. NRC
dividends. 3. OCW
4. RA
Q: What are dividends? 5. NRAETB
A: Any distribution made by Corporation to 6. AEMOP (RC, NRAETB)
its stockholders outside of its earnings or
profits and payable to its stockholders Not liable?
whether in money or in property (Sec. 73) 1. NRANETB
2. AEMOP
COMM. vs. MANNING 3. DC
Q: Where did it come from? 4. RFC
A: shares come from another shareholder 5. NRFC
Q: What are the dividends included?
A: Sec. 24 refers to cash or property ► Shares of association and partnership is
dividend taxable

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- Atty. Francis J. Sababan -
Q: Determine the tax liability of the
following?
A:
1. DC a Stockholder of DC= Exempt
2. RFC stockholder of DC= Exempt also
3. DC stockholder of RF= Liable for NIT.
Capital Gains From Sale of Shares of
Stock Not Traded (§24C)
1. Subj to FIT
2. Determine whether there is a loss or
a gain because the tax is impose
upon the net capital gains realized
from the sale, barter, or exchange or
other disposition of the shares of
stock in a domestic corp.
3. It is uniformly imposed on all
taxpayer
4. not subj to w/holding tax.
Requirements:
1. Shares of stock of a DC
2. It must be capital asset
3. must not be traded in the stock
market
► 25 R last part: Capital Gains realized by
NRANETB in the Phils. from the sale of
shares of stock in any DC and real prop
shall be subj. to the income tax prescribed
under Sub sec (c) and (d) of Sec. 24.
► SEC. 24 B 1&2: If the elements are
present NRANETB and NRFC are liable to
pay GIT.
Except: under 24 C for NRANETB. What do
you mean by the phrase “ the provisions of
39 notwithstanding”?
► It refers to the holding period. When it
comes to capital gains from sale of shares
of stock not traded and capital gains from
the sale of real prop. The holding period
does not apply because the basis will be
those provided in 24 C & D and not under
39B (GSP or FMV)
ELEMENT #1 The share is a share in DC
Q: What if the share is from foreign corp?
A: Determine the income considered. If
income w/in read Sec. 42 (E)
► If the shares sold are that of a foreign
corp it is subj to the ff rules:
a. sold in the Phils= its income w/in
b. sold in abroad= w/out
c. Shares of stock in a Dc is always
considered an income w/in regardless
where it was sold.
Q: Shares of Foreign Corp sold in Phils.
Who’s liable? What tax?
A: Not subj to FIT because one of the
elements is not present . Shares not being
that of a DC.
Hence: a) RC, NRC, OCW, NRAETB,
AEMOP (RA, NRAETB) will pay NIT. DC and
RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign Corporation sold
abroad?
A: It will be considered an income w/out.
Thus:
most of them will be exempt
except RC and DC liable to pay NIT
ELEMENT # 2 NOT TRADED OR SOLD IN
THE STOCK MARKET
► if sold in the stock market- it is not subj
to FIT
► if sold in the stock market, it will be subj
to percentage tax, in lieu of NIT.
ELEMENT # 3 It must be a capital
asset.
Q: When is it considered an ordinary asset?
A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary
course of trade or business
2. to all other assets, it will be
considered a capital asset
NOTE: if all elements are present it will be
subj to FIT
If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT
except NRFC and NRANETB
2. Ordinary assets of foreign corporations
a. Income within if sold in the Phils:
most will pay except NRANETB
and NRFC
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 Taxation law review notes
- Atty. Francis J. Sababan -
b. Income w/out if sold abroad: most
will be exempt except RC and DC
MCIT
Q: When is a RFC subj to NIT?
A:
1. Sale of shares of stock of a Foreign
corp in the Phil.
2. sale of shares of stock of DC which
are ordinary asset
► DC and RFC are subj to MCIT which may
be imposed if the NIT is lower than the
MCIT2% MCIT will be imposed if MCIT is
higher than NIT.
Capital Gains From Sale of Real
Property (§24D)
► In 39 B the holding period does not
apply because the basis of income tax is
the gross selling price (GSP) or the Fair
market value (FMV) whichever is higher- 6%
FIT
Requirements:
1. The real prop must be sold w/in the
Phils and located in the Phils.
2. It must be a capital asset
3. The seller must be an individual,
estate or trust or a DC
► RFC not liable for FIT but liable to pay
NIT if all the elements are present.
► NRFC liable to pay GIT and not FIT
► NRANETB liable to pay FIT are all
elements are present.
ELEMENT # 3 The real prop must be a
capital asset
Q: When considered a capital asset?
A: Read R.R. 7- 2003
Q: Ordinary asset- shall refer to all real
property specifically excluded from the
definition of capital asset under Sec. 39
A: Other property not mentioned are
capital asset.
Q: What if all the elements are not present?
A:
most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT
Q: May a RC be liable to pay NIT even if all
the elements are present?
A: YES, disposition made to the Govt. Thus,
the taxpayer has the option of paying 32%
NIT or 6% FIT
Q: Which is more advantageous?
A: It depends determine first if there’s a
loss or a gain.
If there’s a gain choose to be taxed at
6% FIT. In this case the gain is always
presumed.
If there’s a loss choose to be taxed at
32% because losses may be considered an
allowable deduction .
Other transactions are covered:
1. sale
2. barter
3. exchange
4. other disposition
NOTE: If the prop is under mortgage
contract and the mortgagee is a bank or
financial inst, the FIT does not apply
because the property is not yet transferred
because there’s a period of redemption
If after a year the mortgagor failed to
redeem the property that is the only time
that the FIT will apply because there’s now
a change of ownership. If redeemed w/in 1
yr period FIT will not apply because there’s
no change of ownership.
If the mortgagee is an individual the FIT
is imposed whether or not there is a
transfer of ownership.
Exceptions (§24(D2))
Q: What if the prop being sold was a movie
house, can he claim for the exception?
A: the prop covered by the exemption is a
residential lot
Q: Who can claim the exemption?
A: Only the taxpayer mentioned in Sec. 24
Requirements:
1. The purpose of the seller is to
acquire new residential real prop
2. the privilege must be availed of w/in
18 mos. From the sale
3. Comm. must be informed w/in 30
days from the date of sale with the
intention to avail of the exemption
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 Taxation law review notes
- Atty. Francis J. Sababan -
4. the adjusted basis or historical cost 1. It is a private school or hospital
of the residence sold shall be carried 2. it is stock corp
over to the new residence. 3. it is non profit
5. the privilege must be availed only 4. that gross income from unrelated
once every 10 yrs business, trade or activity must not
6. Certification of the brgy. Capt where exceed50% of its total gross income
the taxpayer resides that indeed the derived by such educational inst or
prop sold is the principal residence hospital from all sources
of the tax payer (RR 13- 99) 5. has permit to operate from DECS,
TESDA, or CHED
Q: What if the property is worth 10 M and it
was sold only for 2M, what will happen to Q: What do you mean by unrelated trade
the unused portion or profit? business or activity?
A: If the proceeds are not fully utilized, the A: It means any trade, Business, or activity
portions of the gain is subj to FIT which is not substantially related to the
exercise or performance by such entity of
SEC. 27A RATES OF INCOME TAX its primary purpose or performance

Q: How many income taxes are paid by a Q: May a school or hospital be exempt from
DC? paying tax? What are the req?
A: A:
1. NIT 1. It must be non- stock and non- profit
2. MCIT 2. the assets property and revenues
3. FIT must be used actually, directly, and
4. 10%Improperly Accumulated exclusively fro the primary purpose
Earnings
5. Optional corporate income tax of Q: Under what law? Is it the constitution or
15% of the gross the NIRC which provides fro the exemption?
A: It is under Sec. 30 of NIRC and not
► DC liable for five, but the optional is not under Sec.4 Art. 14 of the Constitution. The
yet applicable so only 4. provision of the NIRC is the specific law
which prevails over the Constitution which
Q: How many can be applied is the general law.
simultaneously? A: ONLY 3 → exempt from all taxes and custom
1. NIT, FIT and 10% IAE duties
2. MCIT, FIT, 10% IAE
Q: What about exemption from real
SEC. 27 (B) PROPRIETARY property tax?
EDUCATIONAL INST. & HOSP. A: Art. 6 Sec. 28 of the Constitution:
charitable institution churches, ….and all
Who are the taxpayers? lands buildings, actually directly and
1. Non- Profit Proprietary Educl. Inst exclusively used for religious, charitable,
and and educational purposes shall be exempt
2. Non Profit Proprietary Hospital from taxation.
→ Not Sec. 4 of Art. 14 of the
Q: What if the school or hospital is non Constitution.
profit only, is it exempt?
A: No, subject to 10% on their taxable Q: You donated a property to a school will
income except those covered by subsection you be liable for donor’s tax?
(D) A: not liable if it falls under Sec. 101 (3) of
PROVIDED that gross income from the NIRC
unrelated business, trade or activity must
not exceed 50% of its total gross income REQ. FOR EXEMPTION TO DONORS TAX:
derived by such educational inst or hospital 1. it must be non-stock, non-profit
from all sources educational inst.

Requirements:

28
 Taxation law review notes
- Atty. Francis J. Sababan -
2. not more than 30% of the prop donated
shall be used by such donee for admin
purposes.
3. paying no dividends
4. governed by trustees who don’t receive
any compensation
5. devoting all its income to the
accomplishment and promotion of the
purposes stated in its Articles of
Incorporation
Q: What about exemption from VAT?
A: Sec. 109 (m) of R-VAT
Q: What about exemption fro Loc Gov
Code?
A: If its non-stock, non-profit educational
inst. It may be exempted from local
taxation.
Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the Consti.
SEC. 23: GOCC, AGENCIES, INST of the
GOVT.
GEN RULE: Subj to tax.
EXCEPTIONS:
1. GSIS
2. SSS
3. PHIC
4. PCSO
► PAGCOR no longer included.
Q: If the GOCC is not one of those
enumerated does it follow all of its income
is automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived
from any public utility or from the exercise
of essential government function accruing
to the Govt of the Phils or to any political
subd. Are therefore exempt from income
tax.
Therefore, even if the GOCC is one of
those enumerated under Sec. 27 it may still
be exempt under Sec. 32 b7b if its
performing governmental function
NOTE: Pagcor vs. Basco case
Q: What is the difference between Sec. 27
C and 32 b7b?
A:
1. Sec 27 C exempts those enumerated
without any qualification.
2. Sec. 32b7b qualification must concur
before it may be exempted.
Q: Can the government impose tax on
itself?
A: It depends on who the taxing authority
is. If the taxing authority is the National
Govt. as a rule, YES.
Exceptions
1. those entities enumerated under §27 C
2. those GOCC falling under §32b7b
If the taxing authority is the local
government units, as a rule NO. LGU’s are
expressly prohibited from levying tax
against: (Sec 133(o)
1. National Govt.
2. Its agencies and instrumentalities
3. local government units
Exception: Sec 154 of LGC says that LGU’s
may fix rate for the operation of public
utilities owned and maintained by the
within their jurisdiction.
PAL CASE July 20 2006
H: The SC used 133 (o)an exception to
pay tax, real estate tax, imposed by City
of PAranaque on NAIA. The SC said that
the airport is not an agency or GOCC but
mere instrumentality of the Govt.
This is Gross ignorance of the law
Sec. 133 (o) is for local taxation not real
property taxation which is the one
involved in the present case.
NOTE: Mactan- Cebu Airport case
SEC. 27 D(1)
Q: How many possible incomes were
mentioned?
A: Two (2): bank interest and royalties
REQ:
1. Bank interest must be received by a
Domestic Corp
2. Royalties derived from sources within
Q: When it comes to bank interest, what is
the difference if the taxpayer is an
individual or corporation?
A: If individual, they may be exempt from
the payment of interest in case of long term
deposit except NRANETB
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 Taxation law review notes
- Atty. Francis J. Sababan -
If DC, they are not exempt from long A: Non Residents whether individual or
tem deposit. Corporations

Q: What about royalties? Q: Derived from whom?

A: If individual, have a lower rate of 10%on A: Depositary Bank under EFCDS
books, other literary and musical
compositions. DC have no lower preferential NOTE: Sec. 24 B Nonresident exempt from
rate. bank interest under EFCDS

SEC 27 D2: CAPITAL GAINS FROM SALE
OF SHARES NOT TRADED
SEC 27 D3: EFCDS
Q: What is the expanded foreign currency?
A: It is a bank authorized by the BSP to
transact business in the Philippine Currency
as well as acceptable foreign currency or
both.
Q: What is the difference between 24 b1
from 27 D3
A: In 24 B1, NR is exempt only from bank
interst derived from EFCDS while 27D3
exempts NR from any income from
transactions with depositary bank under
EFCDS
SEC. 27 D(4)- Inter-corporate dividends-
exempt

Q: What is the tax to be paid? 27 D5 Capital Gains from sale of Real

A: Normally it is NIT because it is subj Prop.
under Sec 27 D3 and 28 A
Q: What is the tax?
Q: Who is the income earner? A: 6% FIT
A: Depositary banks
Q: What is the difference if the seller is an
Q: Exempt from what kind of transaction? individual and a DC?
A: From foreign currency transaction. If it A: Individual can sell all kinds of real
involves foreign currency transaction it is property
not exempt but subject to 35 % NIT DC can only dispose land and/or
buildings.
Q: Who are the other parties?
A: SEC 27 (E) MCIT
1. Off shore banking units
2. branches of foreign banks Q: Applicable to whom?
3. local commercial bank A: DC and RFC
4. Other depositary banks under EFCDS
5. Non- residents Q: Can it be applied simultaneously with
NIT?
► if the above enumeration are the A: NO, imposed in lieu of the NIT,
parties, then depositary bank will be whichever is higher.
exempt from paying the NIT
Q: What is the Rationale?
Foreign Currency Loan A: to prevent corporations from claiming
too many deductions
Q: Who is the lender? Borrower?
A: Lender- EFCDS Q: When will it be imposed?
Borrower- RC A:
1. On the 4th year immediately ff
EXEMPT the year in which such corp
Offshore banking units commenced its business.
Other depositary banks under EFCDS 2. When the MCIT is higher than the
NIT
► exemption of NR from EFCDS:
Q: What is the carry over rule?
Q: Who is the income earner? A: Sec 27 E2 states the carry over rule.

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 Taxation law review notes
- Atty. Francis J. Sababan -
► In order to avail: only in the year where
the MCIT is greater than the NIT.
Sec 28 A1
Q: What Kinds of taxes are paid by the
RFC?
A: NIT
MCIT
Sec. 28 B2 MCIT on RFC
► same with Sec. 27
Sec. 28 A3- INTL CARRIER
Kind:
1. Air carrier
2. ships
► An intl. carrier doing business in the
Phils. shall pay 2 ½ % on its Gross Phil
Billings (GPB)
Q: Is 28 A3 the Gen. rule or the Exception?
A: It is the general rule because it is under
28 A3
► GPB is in the nature of FIT, applies only
if all the requirements are present.
► RFC will be liable for NIT, hence a RFC
engaged in common carriage does not pay
GPB but NIT
► Income without: EXEMPT
International Carrier:
► GPB refers to the amount of revenue
derived from: carriage of persons, excess
baggage, cargo and mail originating from
the Phils in a continuous and uninterrupted
flight, irrespective of the place of sale or
issue and the place of payment of the
tickets or passage document.
REQ:
1. Originating from the Phils.
2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale or
issue and the place of the payment
of tickets or passage document.
Q: Do you consider landing rights to
determine liability? (RR 15-2002)
A:
1. If originates from the Phils and has
landing rights- ONLINE- RFC
2. No landing rights- OFFLINE- NRFC
Q: If there are stopovers, is it still
uninterrupted?
A: YES, provided that the stopover does
not exceed 48 hrs.
Q: When will the place of sale of tickets
matter as to the taxpayers liability?
A: The place of tickets is material only if
the two other elements are not present to
be able to know if its subj to NIT or exempt.
Revalidated, exchanged or indorsed
tickets
REQ:
1. The passenger boards a plane in a
port or point in the Phils.
2. The tickets must be revalidated,
exchanged, or indorsed to another
airline.
Q: What if it’s the same airline but different
plane?
A: GPB does not apply, it must be to
another airline
Q: What if it did not originate from the
Phils.?
A: Determine if its income within or
without.
if ticket was purchased in the Phils. it is
income within hence apply NIT
if purchased outside, it is income
without, hence exempt
Transshipment
REQ:
flight originates from the Phils
transshipment of passenger takes place
at any port outside the Phils.
the passenger transferred on another
airline
Q: How do you apply GPB?
A: Only the aliquot portion of the cost of
the ticket corresponding to the leg flown
from the Phils to the point of transshipment
shall from part of the GPB.
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 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Is it liable for the whole flight?
A: Transactions of Non Residents:
From the Phils to the point of 1. Income earner: Non- Residents
transshipment, it is income w/in 2. Lender: OBU’s
From transshipment to final destination,
its income w/out- EXEMPT NOTE: Non resident exempt from
transactions with OBU’s and EFCDS
International Shipping
SEC. 28 A5 TAX ON BRANCH PROFITS,
► GPB means gross revenue whether from REMITTANCES
passenger, cargo, mail ► profits based on the total profits applied
or earmarked fro remittance remitted by a
branch to its head office
REQ: ► Subj to 15% tax
it must originate from the Phils.
up to final destination Except: those activities which are registered
- regardless of the place of sale or with PEZA
payments of passenger or freight
documents NOTE: Interests, Dividends, Rents, Royalties
including remuneration for technical
Sec28 A(4) OFF SHORE BANKING UNITS sevices, salaries, wages, premiums,
annuities, emoluments, or casual gains,
OBU’s profits, income and capital gains
1. only acceptable foreign currencies received by a foreign corporation during
2. always a foreign corporation (subj to each taxable year from all sources
NIT) except #3 within shall not be treated as branch
3. Exempt if income is derived by the profits UNLESS the same are effectively
OBU from EFCDS connected with the conduct of its trade
4. Parties: or business.
a) local commercial banks
b) Foreign bank branch Branch Profit Remittance
c) Non Residents
d) OBU in the Phils. Two ways to receive income (FC)
1. Branch
Difference with EFCDS: 2. Subsidiaries
EFCDS
1. Acceptable foreign currency, Phil. NOTE:
Currency or both 1. When a FC establishes branch, it is
2. Can be a domestic or foreign always a FC
corporation 2. When a FC establishes DC, it is a
3. Exempt if income derived by DC or RFC
RFC from EFCDS
4. Parties: Q; It is in addition to NIT- Why?
a) local commercial banks A: NIT because it is RFC
b) Foreign bank branch
c) Non Residents Q; What kind of tax is imposed under 28
d) OBU in the Phils A5? A: 15% FIT
e) Other banks under EFCDS
Q: How do you apply the rate?
FOREIGN CURRENCY LOAN A: multiplied to the total profit applied or
earmarked for remittance w/o deductions
► 10% FIT
If: Lender- OBU It applies for branches that are:
Borrower- Resident Citizen 1. the profit remitted is effectively
EXCEPT: connected with the conduct of its
1. OBU trade or business in the Phils.
2. Local Commercial Banks 2. One not registered with PEZA

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 Taxation law review notes
- Atty. Francis J. Sababan -
MARUBENI CASE
F: A branch was established with AG&P,
there was investment with AG&P
Q: Did the petitioner participate with the
negotiation?
A: NO
Q: What did the petitioner pay?
A: 15% Branch Profit Remittance Tax
(BPRT)
10% Intercorporate Dividends
Q: What’s the issue?
A: Petitioner maintains that there was
overpayment of taxes, thus the same
was asking for a refund of tax
erroneously paid.
Q: Is is subj to FIT?
A: NO, exempt if petitioner is RFC
H: -not correct to pay 15%
To be liable for BPRT
1. It is a RFC
2. Branch did not participate
negotiations
SEC. 28 A6a
► Regional or area headquarters (Sec. 22
DD) shall not be subject to tax exempt from
income tax if the requisites are present.
Q: What are the requisites?
A:
1. the HQ do not earn or derive income
from the Phils.
2. Acts only as supervisory,
communications, coordinating centre
for their affiliates, subsidiary or
branches in the Asia- Pacific Region
and other foreign markets.
SEC. 28 A6b
► Regional Operating HQ are taxable and
liable to pay 10% taxable income.
► Regional Operating HQ is a branch
established in the Phils by a multinational
company engaged in any of the services:
1. Gen. Administration and Planning
2. Business Planning and Coordination
3. Sourcing and procurement of Raw
materials and components.
4. Corporate Finance and Advisory
Services
5. Marketing Control and sales
promotion
6. Training and personal management
7. logistic services
8. research and development services
and product development
9. technical support and maintenance
10. data processing and communication
and business development
Rationale: Why liable? Because the claim
for exemption of resident airlines shall
be minimized
SEC. 28A7a Interests and Royalties:
► 20%FIT
► Interests under EFCDS= 7 ½ %
Sec. 28A7b Income derived under
in EFCDS
1. Income derived from foreign currency
transactions with:
a) Non Residents
b) OBU
c) Local commercial bank
d) Foreign bank branches
e) Other depository bank under the
EFCDS
► As a Gen Rule: the above transaction is
Exempt
EXCEPTION: Income from such transaction
as may be specified by the secretary of
Finance, upon recommendation by the
Monetary Board to be subject to regular
income tax payable by any banks.
2. Interest income from foreign currency
loans
► granted by depository bank under said
EFCDS to others shall be subject to 10% FIT
Exempt if granted to:
1. Other OBU in the Phils, and
2. Other depository bank under the
EFCDS
» SEC. 28 A7c: Capital Gains from
Shares of Stocks not Traded in the
Stock exchange
» 5% or 10% as the case maybe
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 Taxation law review notes
- Atty. Francis J. Sababan -
securities or from interest on
SEC 28A7d: INTERCORPORATE deposits in banks by:
DIVIDENDS a) Foreign govt.
b) Financing inst owned controlled
► DC- RFC= EXEMPT, not subj to tax or enjoying, refinancing from
foreign govt; and
SEC 28 B1 c) Inter nation or Regional financial
inst established by foreign govt.
Q: What kind of tax?
A: 35% GIT on the ff income COMMISIONER OF INTERNAL REV. vs.
1. Interest MITSUBISHI METAL CORP. (180 SCRA 214)
2. Dividends F: Atlas Mining entered into a Loan and
3. Rents Sales Contract with Mitsubishi Metal
4. Royalties Corp. ( A Japanese Corp.) for the
5. Salaries purposes of projected expansion of the
6. Premiums( except reinsurance productivity capacity of the former’s
premiums) mines in Cebu. The contract provides
7. annuities that Mitsibushi will extend a loan to
8. emoluments Atlas in the amount 20 M dollar, so that
9. Other fixed and determinable Gains, Atlas will be able install a new
profits and income. concentrator for copper production.
-Mitsubishi to comply with its
SEC 28 B2 Non Resident obligation, applied for a loan from
Cinematographic film owner, lessor or Export- Import Bank of Japan (Exim
distributor Bank) and from consortium of Japanese
banks.
► liable for 25% GIT Pursuant to the contract Atlas paid
interst to Mitsubishi where the
SEC 28 B3 Non Resident owner or corresponding 15% tax thereon was
lessor of Vessels chartered by withheld and only remitted to the Govt.
Philippine Nationals. Subsequently Mitsubishi filed a claim
for tax credit requesting that the same
► liable for 4 ½ GIT be used as payment for its existing
liabilities despite having executed a
Elements: waiver and disclaimer of its interest in
1. Chartered to Filipino Citizens or favor of Atlas earlier on. It is the
Corporations contention of Mitsubishi that it was the
2. Approved by MARINA mere agent of Exim Bank which is a
financing inst owned and controlled by
SEC. B(4) Non Resident Owner or the Japanese Govt.
Lessor of Aircraft, Machiniries, and The status of Eximbank as a
other Equipments. government controlled inst became the
basis of the claim fro exemption by
► liable for 7 1/2 % GIT Mitsubishi for the payment of interest on
loans.
SEC 28 b5a Interest on Foreign Loans I: WON Mitsubishi is a mere agent of
Eximbank
► Must be read with Sec. 32 B7a H: NO. The contract between the parties
does not contain any direct reference to
Interest on Foreign Loans, if the lender is Exim Bank, it is strictly between
1. NRFC liable to 20% FIT Mitsubishi as creditor and Atlas as the
2. Foreign Govt. Exempt because it is seller of copper. The bank has nothing to
an exclusion (Sec 32 b7a: income do with the sale of copper to Mitsubishi.
derived by a foreign gov’t from Atlas and Mitsubishi had reciprocal
investments in the Phils on loans, obligations- Mitsubishi in order to fulfill
stocks, bond, and other domestic its obligations had to obtain a loan, in its
independent capacity with Exim bank.

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 Taxation law review notes
- Atty. Francis J. Sababan -
Laws granting exemption from tax are
construed strictly against the taxpayer
and liberally in favor of the taxing
authority.
SEC. 28 D5 b INTERCORPORATE
DIVIDENDS:
► FIT 15% imposed on the amount of cash
and or prop dividends received from a
domestic corporation.
SUBJ TO THE CONDITION: the country where
the NRFC is domiciled allows a credit
against the tax due from the NRFC taxes
deemed paid or deemed to have been paid
in the Phils.
Gen rule: 35 % FIT
Exception: 15% under the “tax deemed
paid rule/ reciprocity rule/ tax sparring rule”
JHONSONS CASE
2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for
income within and income without
2nd : countries liable only for income within.
MARUBENI Case: 2 Issues
1. Is the payment of 10% FIT correct?
- No because it was a branch and RFC but
still Marubeni was NRFC under the old law
which is liable to pay 35%, but SC said
liable only to 25% because of the tax treaty
► You cannot refund right away → 15%
BPRT and 10% Inter-corporate Dividends tax
has different basis
In P&G who are involved
- DC (P&G Phil) and NRFC (P&G US)
- DC declares dividends to NRFC
- 35% was withheld and remitted to the
BIR
What did they discover? (after paying)
- they discovered that they are liable only
for 15% so they have a refund of 20%
Q: In the 1st case did the SC allowed the
refund?
A: NO, denial anchored on 2 grounds:
1. One claiming for refund was not the
proper party
2. There was a showing or proof as to
the existence of the “tax deemed
paid” rule
Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
1. Income tax is FIT: the withholding
agent is the proper party because he
is liable to pay said taxes
2. actual proof of payment not
necessary, what is necessary is the
law of the domicile of the country
providing fro tax credit equal to 20%
of the tax deemed paid.
Q: What is the rate if the law is silent?
A: 35% FIT
► The rate will only be 15% if there’s a law
recognizing the same but this refers to the
case of those belonging to the first
category.
WANDER CASE
Q: Who are the parties?
A: DC(Wander) and FC (Glaxo)- they
belong to different categories
The BIR tried to collect 35% because
the law is totally silent about the tax
credit
H: The SC said that the tax should be 15%
which applies 2 instances:
1. Foreign law do not provide for tax
credit- 35%
2. law provides but the law is silent-
15%
3. law is silent because there is no law-
15%
4. law is silent because there’s no law
because the subj matter is not
taxable- 15%
SEC. 29 IAET
Q: What is the rate?
A: 10% of the gross income (taxable
income)
► It is imposed upon the improperly
accumulated taxable income of the
corporation
Q: Applies to what Corp?
A: to DC only under RR 2- 2001( classified
as closely held corporations)
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 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel the
corporation to declare dividends.
Q: Why?
A: because if profits are distributed to the
shareholders, they will be liable for the
payment of Dividends tax. Now, if the
profits are undistributed the shareholders
will not incur liability on taxes with respect
to the undistributed profits of the Corp.
- In a way it is in the form of deterrent to
the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the
earnings distributed to them.
Q: What is taxable income?
A: SEC. 31 defines taxable income as the
pertinent items of gross income specified in
this Code, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by this
Code or other special law
Q: When not liable to pay IAET?
A: There are 2 groups of DC exempt from
payment of IAET (RR2-2001)
A) Corporations failure to declare dividends
because of reasonable needs of business
► reasonable needs means are construed
to mean immediate needs of the business
including reasonable anticipated needs
Q: What constitutes reasonable
accumulation of the corporation’s earnings?
Examples?
A:
1. allowance for the increase in the
accumulation of earnings up to
100% of the paid- up capital of the
corporation.
2. earnings reserved for the definite
corporate expansion projects or
programs approved by the Board
3. Earnings reserved fro buildings,
plants, or equipment, acquisition
approved by the Board
4. Earnings reserved for compliance
with any loan agreement or pre-
existing obligations
5. Earnings required by law or other
applicable statutes to be retained.
6. In case of subsidiaries of foreign
corporation, all undistributed
earnings or profits intended or
reserved for investments
NOTE: the corporations belonging in the 1 st
group are normally liable but they can show
that the accumulation of earnings is
justified for reasonable needs of business,
they incur no liability and exempt from
payments of the same.
B) Corporations which are exempt whether
or not it is for reasonable needs of the
business:
1. Banks, and other non- bank financial
intermediaries.
2. Insurance companies
3. Publicly- held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non- taxable joint- ventures
7. Enterprises registered with
a) PEZA
b) Bases Conversion Devt Act of
1992 (RA 9227)
c) Special Economic Zone declared by
law
Q: What is a closely- held corporations?
A: Those corporation at least 50% in value
of the outstanding capital stock or at least
50% of the total combined voting power all
classes of stock entitled to vote is owned
directly, or indirectly by or for not more
than 20 individuals
NOTE: Publicly held Corp. has more than 20
shareholders
Q: What is the time for paying this tax?
A: Calendar Year: Jan 25, 2005- Dec 31,
2005. Today is 2006. You have 1 year to
declare after the close of the taxable year.
2006 is the grace period. You will pay on
January 2007.
Q: If you’re not mentioned to be exempted,
will you still be liable?
A: No, if you invoke adjustments
SEC 30. EXEEMPTIONS FROM TAX ON
CORPORATIONS
► Determine the Corporations’ exemptions
under Sec. 30 27 C and 22B.
1. Sec 30, the corporations shall not be
taxed under this title (tax on income)
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 Taxation law review notes
- Atty. Francis J. Sababan -
in respect to income receive by them
as such.
2. Sec 27, the corporations enumerated
are always exempt. Thus exemption
is unconditional
3. Sec 22B GPP, as a general rule is not
a corporation
4. except if it earns income from other
business
► Joint Venture w/ service contract w/
government not a corporation, otherwise, it
is liable.
Assignment: Sec. 35
August 21, 2006 – Midterms
August 14, 2006
Q: What is the reason for not including the
corporations exempt under section 27C and
Section 22B under Section 30?
A: Because there is an exemption which
does not apply to all exempt corporation.
The exemption under Section 30 is not
absolute while the exemption under Section
27 C is absolute and without any conditions.
In addition, Section 22B provides that a
joint venture is generally taxable unless it
has a service contract with the government,
a generally taxable corporation cannot be
joined with the group as generally not
taxable corporation. General Professional
Partnership is exempt but the exemption is
not the same as provided by Section 30.
TAKE NOTE: Las Paragraph of Section 30.
► exemption to the exemption: income of
whatever kind and character of the
foregoing organizations from:
1. any of their properties, real or
personal;
2. any activities conducted for profit
► regardless of the disposition of said
income, shall be subject to tax.
Q: Enumerate the exempt corporations
under Section 30; What is the requirement?
A:
1. Labor, agricultural or horticultural
organization not organized
principally for profit;
2. Mutual savings bank not having a
capital stock represented by shares,
and cooperative bank without capital
stock organized and operated for
mutual purpose and without profit;
3. a beneficiary society, order or
association, operating for the
exclusive benefit of the members
such as fraternal organization
operating under lodge system.
(lodge system: operating world wide)
or a mutual old association or a non-
stock corporation:
a. organized by employees;
b. providing for the payment of life,
sickness, accident or other exclusive
benefits to its employees and their
dependents;
4. Cemetery (a) company owned and
(b) operated exclusively for the
benefit of its members;
5. Non-stock corporation or association
organized and operated exclusively
for Religious, Charitable, Scientific,
Artistic or Cultural purposes, or for
the Rehabilitation of Veterans
(RCSACR), no part of its net income
or asset shall belong ot or inure to
the benefit of any member,
organizer, officer, or any specific
person;
6. Business league, chamber of
commerce, or Board of trade, (a) not
organized for profit and (b) no part
of the net income of which inures to
the benefit of any stock holder or
individual;
7. Civil league or organization not
organized for profit but operated
exclusively for the promotion of
social welfare.
CIR vs. YMCA
Q: What is the basis of Manila BIR for the
imposition of the tax?
A: last paragraph of Section 30, because
YMCA was conducting an activity for
profit.
F: the CTA and the CA invoked the doctrine
laid down in Herrera and Abra Valley
case which involves an exemption from
the payment of Real property Tax.
H: The SC revised the ruling. YMCVA is
liable to pay income tax applying the
last paragraph of Section 30.
YMCA Is exempt from the payment
of property tax, but not to income tax on
rentals from its property.
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- Atty. Francis J. Sababan -
The tax code specifically mandates
that the income of exempt organizations
(under section 30) from any of their
properties, real or personal, shall be
subject to tax, including the rent income
of the YMCA from its real prop.
8. a non-stock and non profit
educational institution;
9. gov’t educational institution;
10. Farmer’s or other mutual typhoon or
fire insurance company, mutual
ditch or irrigation company, or like
organization of a purely local
character, the income of which
consists solely of assessment, dues
and fees, collected from members
for the sole purpose of meeting its
expenses;
11. Farmer’s, fruit grower’s or like
association organized and operated
as a sales agent for the purpose of
marketing the products of its
members and turning back to them
the proceeds of sales, less the
necessary selling expenses on the
basis of the quantity of produce
finished by them.
TAKE NOTE: income of sales agent is
exempt.
Section 31: TAXABLE INCOME
CHAPTER VI: COMPUTATION OF GROSS
INCOME
SECTION 32: GROSS INCOME
Q: What is the tax treatment? Are these
taxable income? Are these included in the
gross income? Is it included in the ITR? Is it
subject to NIT?
A: Sec. 32 A answers the questions.
Q: What is the income tax referred to here?
A: NIT. The section refers only to the
payment of NIT. It speaks of the NIT.
Q: If the is mentioned under Section 32 A,
does it follow that it is automatically
included in the GIT?
A: No, Section 32 A states “Except when
otherwise provided in this title”
Q: What are the income that are not
included, not subject to NIT?
A:
1. Income that are subject to FIT.
2. Income that are considered an
exclusion; and
3. Income that are exempt.
Q: When do you not apply Sec. 32 A?
A: it applies to all except:
1. NRANETB
2. NRFC
» they do not pay NIT, they pay by way of
GIT.
Q: What are included in the Gross income?
A:
1. Compensation for services in
whatever form paid including but nor
limited to fees, salaries, wages,
commissions, and similar items. [Sec.
32 A (1)]
Q: What is compensation?
A: all remuneration for services performed
by an employee for his employer under an
employer-employee relationship.
TAKE NOTE: compensation is included in
the ITR if the taxpayer is not liable for NIT.
Thus, if subject to NIT, included in the ITR.
Q: Is there an instance where the salaries
of a RC is not included in the ITR?
A: Yes, if the salary is subject to FIT, like
when the RC is employed in Multinational,
offshore banking, and petroleum
companies.
2. Gross Income derived from the
conduct of trade or business or the
exercise of a profession; [Sec. 32 A (2)]
Q: What is the income tax here?
A: NIT, included in the ITR.
3. Gains derived from dealings in
property. [Sec. 32 A (3)]
Q: Did the law distinguished?
A: No, the law did not distinguished
between real and personal property.
TAKE NOTE:
1. Sale of real property
2. Sale of shares of stock (personal prop.)
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 Taxation law review notes
- Atty. Francis J. Sababan -
A: Liable from income w/in and w/out and
► if the elements are present, subject to the rest are exempt.
FIT. Thus, it is not included in the ITR, the 1. RC
withholding agent will be responsible for 2. DC
this.
7. Dividends. [Sec. 32 A (7)]
Q: Income form the sale of property, do
you include this in the ITR? Q: What kind of dividends?
A: it depends A: one that does not constitute a passive
a. if subject to FIT, not included. income.
Withholding agent accomplish the forms
→ subject to FIT if the following TAKE NOTE:
elements are present: 1. DC individual taxpayer = FIT
1. it is a capital asset; 2. DC – DC & RFC = EXEMPT
2. located in the Phil.: and 3. DC – NRFC = FWT
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR. ► only dividends issued by a FC to an
→ Elements are not present, like when individual taxpayer (RC OR RA) is included
the real prop. is an ordinary asset or when it in the computation of the gross income.
is capital asset if the taxpayer is RFC. Thus, included in the ITR.

TAKE NOTE: R-R 17-2003 8. Annuities. [Sec. 32 A (8)]

► Real property sale subject to FWT, the Q: What kind of annuities?

buyer accomplishes the ITR. A: annuities which are not exempt from tax
are included in the computation of the gross
4. interest; [Sec. 32 A (4)] income. (included in the ITR)

Q: What interest is being referred to here?

A: interest which is included in the
computation of gross income is interest
earned from lending money and interest
from bank deposit which does not
constitute passive income.
Bank interest from sources, without or
abroad.
Q: Bank interest from Solid Bank, is it
included in the ITR?
A: No, because it is included or considered
an income within, thus subject to FIT. Thus,
not included in the ITR.
5. Rents. [Sec. 32 A (5)]
9. Prizes and Winnings [Sec. 32 A (9)]
Q: What kind of prizes and winnings?
A:
a. those that does not constitute
passive income; and
b. those that are not considered as an
exclusion. Thus, exempt.
Passive Income
1. Prizes – derived from sources within
and over 10,000.00
2. Winnings – derived from sources
within.

► subject to NIT, included in the ITR. Exempt:

a. winnings: PCSO and Lotto winnings.
6. Royalties; [Sec. 32 A (6)] b. prizes:

Q: What is being referred to here? ► those primarily for recognition of

A: royalties which does not constitute (1)religious, (2)charitable, (3)scientific,
passive income. Royalties derived from (4)educational, (5)artistic, (6)literary,
income without. – subject to NIT. Thus not (7)civic achievement are exempt
included in the ITR. PROVIDED:
1. the recipient was selected without
Q: Who are the taxpayers? any action on his part to enter the
contest or proceedings; and

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- Atty. Francis J. Sababan -
2. the recipient is not required to render
substantial future services as a
condition to receiving the prize or
award.
► prizes and awards granted to athletes
are also exempted provided:
1. local or international sports
competition or tournament;
2. held in the Philippines or abroad;
and
3. sanctioned by the national sports
association.
Q: When is a prize subject to NIT?
A: 1. when derived from income without;
2. when less than 10,000.00;
3. when the income earner is a DC or
RC.
Q: When is winning subject to NIT?
A: 1. When derived from income without;
2. when the income earner is a DC or
RC.
10. Pensions [Sec. 32 A (10)]
Q: What kind of pension?
A: Included in the gross income if not
exempt
» never subject to fit (?)
11. Partner’s distributive share from
the net income of the general
professional partnership (GPP).
Q: What is being referred to?
A: GPP exempt from payment of corporate
income tax
► shares of partners subject to NIT – Sec.
26
SEC 32 B EXCLUSIONS FROM GROSS
INCOME
Q: What do you mean by exclusions? Are
these exempt from income tax?
A: these are not included in the gross
income, THUS, exempt.
TAKE NOTE: Exemptions, exclusions,
deductions, have the same characteristics
→ all tax do not apply.
1. Life insurance [Sec. 31 B (1)]
Q: What is the requirement?
A: only one requirement for exemption:
that the proceeds of the life insurance be
payable upon the death of the insured.
Q: Does it matter who the beneficiary is or
paid in a lump sun or single sum?
A: No. it does not matter.
Exception: amounts held by the insurer
under an agreement to pay interest
thereon, the interest payment shall be
included in the gross income.
2. Amount received by insured as
return of premium [Sec. 32 B (2)]
Q: if the insurance is payable within a
certain time, say 10 years and thereafter
the insured did not die, how much will be
excluded?
A: only the amount received by the insured
as a return of the premiums.
Ex. 1 M – 100 thousand = capital
It is exempt (100K)
900K is taxable.
Q: Why is it excluded?
A: because the amount received merely
represents a return of capital.
Q: is this subject to Estate Tax under Sec.
85 E? do we have the same requirement?
A: no, the requirement for exemption is not
the same under Section 85 E.
3. Proceeds of life insurance:
decedent insured himself, inclusion
or exclusion will depend on who the
beneficiary is.
a. the beneficiary is the estate.
» subject to Estate tax, included in the
gross estate regardless of whether or
not the designation of the beneficiary is
revocable or irrevocable.
b. the beneficiary is a third person other
than the estate.
b.1 Revocable Designation → subject to
estate tax, included in the gross estate.
Reason: because of the insured’s power
to modify or change the beneficiary.
b.2 Irrevocable Designation → not
subject to Estate tax, not included in the
gross estate.
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 Taxation law review notes
- Atty. Francis J. Sababan -
Reason: the insured loses the power to
control, modify and change the
beneficiary.
Q: Is it subject to VAT?
A: 1. Non-life insurance – yes, subject to
VAT under 108 (A).
2. Life insurance – NO, subject to
percentage tax under Sec. 123 of the Tax
Code.
4. Gifts, Bequest and Devises [Sec.
32 B (3)]
Q: Why is the donee exempt from income
tax?
A: Because the law classify it as an
exclusion, not important to know whether
property is real or personal.
What is exempted is the “value of
property acquired by gift, bequest or
devise”
TAKE NOTE:
A. GIFTS are excluded because they are
subject to donor’s tax.
B. BEQUEST and DEVISE are excluded
because they are subject to ESTATE tax.
Q: what is included in the gross income?
A: income from such property.
► gift, bequest, devise or descent of
income from any property in case of
transfers of divided interest.
5. Compensation for injuries or
sickness [Sec. 32 B (4)]
Q: is this the same as those provided under
the workmen’s compensation act (wca)?
A: YES. There are 3 groups:
a. Health or accident insurance or those
under workmen’s compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and
sickness.
Q: What does injury include?
A: The term injury includes death, even if
not injured, if the person dies this will be
available.
Q: when will the damages recovered be
exempt?
A: General Rule: all damages awarded are
tax exempt.
Exception: damages representing loss of
income.
Q: Why is it considered an exclusion?
A: because this is just an indemnification
for the injuries or damages suffered.
6. Income exempt under a treaty
[Sec. 32 B (5)]
Q: What is excluded?
A: income of any kind required by treaty
binding upon the Phil. Government.
7. Retirement benefits, pensions,
gratuities [Sec. 32 B (6)]
Q: Why do we need to distinguish
retirement pay, separation pay and terminal
leave pay?
A: because they have different
requirements for exemption.
Q: What is retirement pay?
A: the sum of money received upon
reaching the maximum age of employment.
a. Under RA4917 (with Retirement Plan)
1. the private benefit plan is approved
by the BIR (RR2-98);
2. the retiring official or employee has
been in the service of the same
employer for the last 10 years;
3. he is at least 50 years old at the time
of retirement; and
4. the official or employee avails
himself/herself of the benefit only
once.
b. Under RA7641 (without retirement plan)
1. the retiring official employee is at
least 60 years old but not more than
65 years old;
2. the employee or official must have
served the company for at least 5
years;
» entitled to 15 days salary and ½ of the
13th month pay for every year of service.
TAKE NOTE: the retirement benefits under
RA4917 and RA7641 are exempt from
income tax provided the requirements are
present.
SEC. 32 B(6)(c)
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 Taxation law review notes
- Atty. Francis J. Sababan -
► retirement benefits given by foreign
government, foreign corporation, public as Examples:
well as private to RC, NRC, RA residing 1. registration – CBA provides
permanently in the Philippines - exempt separation pay, within the control =
without further qualifications – automatic included.
exclusions. 2. installation of labor saving devises or
bankruptcy – beyond the control =
SEC. 32 B(6)(d,e,f) excluded.

► retirement benefits given by the Q: What is terminal leave pay?

Philippine Gov’t through the GSIS, SSS and
PVAO are exempt without further
qualifications = automatic exclusions.
August 21, 2006.
- midterms 6-8 pm until sec 32 B(6) NIRC.
August 28, 2006.
ANSWERS = MIDTERMS
► Gross Income include both capital and
ordinary gains, Sec. 31 says gross income-
deductions, that which is ordinary loss.
- may be deducted from capital gains and
ordinary gains.
Q: What is separation pay?
A: on given when one is terminated from
the service because of (1) illness, (2)death,
(3) physical incapacity or injury, or (4)
causes beyond the control of the employee.
A: the accumulated vacation leave and sick
leave benefits converted to cash or money
to be given either every year or upon
retirement or separation.
Terminal Leave Pay granted upon retirement
or separation:
» uder PD220, TLP in the Gov’t or in
the Private Sector shall be exempt from
income tax if given or granted upon
retirement or separation.
TLP granted on a yearly basis:
1. employee in the private sector:
a. accumulated sick leave – subject
to income tax.
b. Accumulated vacation leave: if
more than 10 days (meaning 11
pataas) – subject to income tax;
»If 10 days or less – exempt.
2. Gov’t Employee:
» governing law: EO 291 of Pres. Estrada,
RMC 16-2000.

Q: Are there any requirement for Rule: Gov’t workers (both officers or non-
separation pay granted by foreign gov’t or officers) granted TLP on a yearly basis →
corp? exempt from income tax.
A: None, the separation pay granted by the → there is no qualification as to vacation or
aforementioned institutions are exempt sick leave.
without further qualifications (“other similar
benefits”). ► Take Note of 3 cases.
» be reminded of EO 291, Sec. 2. 78.2
Q: is separation pay an exclusion, par. 97, RR2-98, RR16-200 (3).
therefore, exempt?
A: No. Case of Zialcita
GENERAL RULE: Separation pay not ► retired from DOJ, contention: TLP should
exempt (?) be exempt from income tax pursuant to the
Exception: old law.
1. Automatic exclusions, thus exempt if SC: on a different ground – TLP is exempt
due to: because it is similar to Retirement pay, thus
a. illness exempt but the ruling’s application is
b. death limited only to DOJ employees.
c. physical incapacity or injury.
Borromeo case:
2. Conditional exclusion ► Same as the Zialcita case
a. causes beyond the control of the Issues: WON the TLP is subject to income
employee- excluded tax and WON COLA and RATA are included?
b. within employee’s control – included. SC: RULED TLP is Exempt!

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- Atty. Francis J. Sababan -
Modified: the rule applies not only to DOJ TAKE NOTE: if plain foreign corp., subject to
officers but also to CSC commissioners. FIT 20%.

COMMISSIONER v. CASTAÑEDA EXAMPLES of exclusions:

- Castañeda –DFA officer in Phil. Embassy in a. Brunei Gov’t earns interest by
England. depositing money in Makati Bank –
1. TLP is exempt. Exclusion.
2. Ruling applies to DFA officers. b. SMC- Stock dividends to 3. Brunei Gov’t.
exclusion
Q: Does the rule or decision applies to c. Income derived by the Gov’t or its
Gov’t officials only? political subdivisions (Sec. 32 B (7) (b)
A: No. PD220: Exemption applies to both a. exercise of public utility
private and public sectors(?) b. exercise of any essential gov’t
it does not matter if TLP is vacation or function.
sick leave. » accruing to the gov’t.
d prizes and awards (Sec. 32 B 7 c)
RR2-98, Sec. 2.78.1 par. (a)(7) » primarily for religious, charitable,
» JAN, 1998 – the rule applies to both scientific, educational, artistic, literary
private and public sectors. or civic achievements:
1. recipient was selected without any
EO291 (SEPT., 2000) action on his part to enter the
» Officer in gov’t receiving TLP is always contest or proceedings;
exempt whether or not vacation or sick 2. the recipient was not required to
leave is granted. render substantial future services as
a condition to receive the prize or
Modified RR2-98: award.
» TLP will only apply to private sectors
» if granted on a yearly basis – may be D. prizes and awards in sports (Sec. 32B 7
subject to tax: VACATION LEAVE d)
1. MORE THAN 10 DAYS = TAXABLE 1. granted to athletes;
2. LESS THAN 10 DAYS = EXEMPT 2. local or int’l competitions;
3. held here or abroad;
8. Miscellaneous items (Sec. 32 B 4. sanctioned by the nat’l sports
(7) associations.
(a) income derived by foreign Gov’t
[Sec. 32 B (7) (a)] E. 13th month pay and other benefits (Sec.
32B 7 e)
Q: What kind of income?
A: Q: Do you include Christmas bonus in your
1. investments in: ITR?
a. loans A: No, because the law says 13th month pay
b. stocks and “other benefits”/”similar benefits” –
c. bonds xmas bonus is included in the category.
d. other domestic securities
2. interest from deposits in Banks in the Q: Who can increase the 30,000 limit?
Philippines. A: The Sec. of Finance.

Q: Who are income earners? Q: Applicable to whom?

A: A:
1. foreign government 1. gov’t; and
2. financing institutions owned, 2. Private institutions.
controlled or enjoying re-financing
from foreign gov’ts; and F. GSIS, SSS, Medicare and other
3. int’l or regional financial institutions contributions (Sec. 32 B 7 f)
established by foreign gov’ts ► must be deducted from the GI not NIT
(established in the Philippines) because it is an exclusion.

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- Atty. Francis J. Sababan -
-creditable withholding tax is an exclusion- 2. For those enumerated under A, all you
must be deducted first from the GI before have to prove is that it is incurred during
you compute the NIT. Otherwise, you are the taxable year.
including in the GI something that is
excluded from the same. Feb. 12, 2007 (Sec. 34 A, Expenses)

G. Gains from the Sale of bonds, Q: Did the law define what is reasonable?
debentures, or other Certificate of A: No. for salaries and wages all that is
indebtedness. (Sec. 32 B 7 g) required by law is for it to be reasonable.

Q: Why 5 years? - for other forms of compensation, there

A: certificate of indebtedness is similar to
Bank Interest in a long term deposit.
- Sec. 32 B 7 g is similar or the same as 24
B in long term deposit.
H. Gains from redemption of shares in
mutual fund (Sec. 32 B 7 h)
1. Fiscal Year – means an accounting period
of 12 months ending on the last day of any
month other than December.
2. Calendar year – a period of 12 months
beginning on January and ending on
December.
Q: Business expense incurred in February
2006, is it possible to include it for April
2006?
A: yes, it is possible or it is possible if fiscal
year is employed, if it falls under the fiscal
year and all the elements are present.
- related to trade or business.
REASON: Capital loss has no connection to
the trade or business.
must be services actually rendered.
AGUINLDO Case
F: involves a corporation engaged in selling
fish nets, and the corporation have a land
sold through a broker.
►there was substantial profits gained from
the sale of a land which was sold by a
broker. The profit was in turn given to the
workers as special bonus.
►the corporation claimed the bonus as a
deduction.
ISSUE: Should the deduction be allowed?
H: The SC did not allow the deduction, for
other forms of compensation, it must be
made or given for services actually
rendered.
►in this case, it was proven that the sale
was not made by the employees, no effort
or services actually rendered by them
because the sale was made through a
broker.
►

Q: Reasonable Travel Expenses, What is the

TAKE NOTE: requirement?
► for taxpayers liable for income within A:
and without (RC & DC)), they can claim 1. Travel must be in pursuit of business,
deduction for expenses incurred within trade or profession.
and without. 2. Travel expense while away from
► for taxpayers who are liable only for home.
income within, they can claim a
deduction for expenses incurred within Q: Is there a travel expense which was not
the Philippines. in pursuit of business?
A: yes, those which are considered as fringe
Sec. 34 A EXPENSES benefits (FB), expenses for foreign travel is
considered a FB only if it is not in pursuit of
1. For those business expenses not the trade or business.
enumerated under A. You need to prove
that it is an ordinary and necessary Q: can you claim it under Sec. 34 A (1)(a)
expense. (ii)?

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 Taxation law review notes
- Atty. Francis J. Sababan -
A: No, you can claim it under Sec. 34 A (1)
(a)(i) last paragraph.
Q: Reasonable Allowances for rentals for
meralco bills, requirements?
A:
1. required as a condition for the
continued use or possession, for the
purpose of the trade, business or
possession of the property.
2. taxpayer has not taken any title or no
equity other than a lessor.
Q: Reasonable allowance for entertainment,
amusement and recreation expenses, what
is the requirement?
A:
1. connected with the development,
management, and operation of the
trade (DOM);
2. Does not exceed the limits or ceiling
set by the Secretary of Finance; and
3. Not contrary to law, morals, good
customs, public policy or public order.
Q: How about bribe, kickbacks, and other
similar payments
A: even without this provisions, kickbacks
will not pass the requirement of (i) ordinary
and (ii) necessary hence not deductible
EXPENSES ALLOWABLE TO PRIVATE
EDUCATIONAL INSTITUTION
Q: Why only private educational institution
is mentioned and no other taxpayers?
A: it refers to section 27 for Private
Educational Institution given to the
educational institution.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for capital outlays not
deductible as business expense
EXCEPTION: Private Educ. Institution can
claim it under Sec. 34 A (2)
BUSINESS EXPENSE vs. ALLOWANCE
FOR DEPRECIATION
BUSINESS EXPENSE
1. No carry-over
2. can be claimed for one year only.
3. if the amount of capital outlay is
substantial, it cannot accommodate all of
the expenses incurred.
ALLOWANCE FOR DEPRECIATION
1. There is carry over
2. you can claim it for a longer period
depending on the life span of the property.
3. it can accommodate all of the expenses
incurred.
 taxpayer’s allowable deduction for
interest expense shall be deducted by an
amount equal to 42% (RR 10-2000) of the
interest income subject to FIT.
Q: Who claims this deduction?
A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
►interest on debt - when one borrows
money to finance his business interest in
connection with the taxpayer’s profession
trade or business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2
a)
►a borrower or taxpayer can claim the
interest paid in advance as itemized
deduction when he filed his income tax
return (ITR) depending on whether or not
the principal obligation has been paid.
1. if the entire amount or entire principal
obligation has been paid – the entire
amount of interest can be claimed as
itemized deduction.
2. if only ½ of the obligation had been paid,
then the entire amount of ½ of that interest
can be claimed as a deduction.
3. if no payment had been paid on the
principal obligation, the advance interest
paid cannot be claimed as a deduction on
the years that it was paid.
REQUIREMENTS FOR REDISCOUNTING OF
PAPERS:
1. incurred within the taxable year.
2. individual taxpayer reporting income on a
cash basis.
 No deduction shall be allowed in respect
to the following interest:
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1. if within the taxable year an individual
taxpayer reporting income on the cash
basis incurs an indebtedness on which an
interest is paid in advance or through
discount or otherwise.
2. if both taxpayer and the person to whom
the payments has been made or is to be
made are persons specified under Sec. 36
(B):
a. member of a family
b. bet. an individual and a corp., more than
50% in advance of the outstanding stock of
which is owned directly or indirectly by or
for such individual;
c. Bet. 2 corp., more than 50% in value of
the outstanding stock of each of which is
owned, directly or indirectly, by or for the
same individual.
d. bet. the grantor and a fiduciary of any
trust;
e. bet. 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. bet. a fiduciary of trust and a beneficiary
of such trust.
Q: Who are not allowed to claim interest
under sec 36 B?
A: interest incurred between related
parties.
Q: What if half-brother?
A: not allowed to claim deduction for
interest.
TAKE NOTE: interest incurred from the
exploration of petroleum refers not just in
interest incurred on loan of money but also
interest incurred for installment payments.
Q: Who are related parties?
A: individuals and corporations.
OPTIONAL TREATMENT OF INTEREST
EXPENSE:
1. interest incurred to acquire property used
in trade, business or exercise of profession
can be claimed a an itemize deduction…
a. on interest; or
b. depreciation (as capital
expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in a
bank so that it will warn interest. (RR13-
2000)
ILLUSTRATION:
1. loan of 1M from a bank with an interest of
20%
2. 20% of 1M is Php200,000 but you cannot
claim this whole amount as a deduction.
3. when you deposited the 1M in the bank,
it earned a bank interest subject to FIT
worth Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
5. Php200K-4,200= Php195,800/ this is the
amount you can claim as a deduction.
34 C TAXES:
REQUISITES:
1. taxes must paid or incurred within the
taxable year
2. it must be incurred in connection with
trade or business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7
Q: Where should it be deducted?
A:
1. if claimed as a deduction, it should be
deducted from the gross income;
2. if claimed as a tax credit, it should be
deducted from the Net Income Tax due
(bottom of the formula)
MERCURY DRUG CASE
- Discount of senior citizens
SC: discount claimed by senior citizens shall
create a tax credit and must be deducted at
the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
►tax deduction is allowed if the taxes were
paid or incurred within the taxable year and
it must be connected to the trade, business
or profession of the tax payer.
Q: Who are entitled to claim it?
A: those liable to pay NIT. (Tax credit only
for NIT)
Q: What is a tax credit?
A: refers to the taxpayer’s right to deduct
from the income tax due the amount of
tax the taxpayer paid to foreign country,
subject to limitations.
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- Atty. Francis J. Sababan -
►if the taxpayer did not signify in his return
Q: What is the tax credit being referred to his intention to avail himself of the benefit
under 34 C (3)? of tax credit for taxes paid to foreign
A: credit against taxes for taxes of foreign country.
country. ►taxes incurred not related to the trade or
business, you have the option to:
Q: What are the other tax credit under the a. claim it as tax credit; or
code? b. claim it as a deduction
A: ►law gives you this privilege.
1. RA 6452 – selling goods and commodities
to senior citizens, the discount claimed is Q: When is taxes not allowed as a
treated as a tax credit. deduction?
2. income tax paid to foreign country. A: Sec. 34 C (1)
3. Input tax on Vat 1. Income tax;
4. Creditable w/holding tax system under 2. Income tax imposed by authority of
NIT any foreign country;
5. Tax credit certificate. 3. Estate and Donor’ tax; and
4. taxes assessed against local benefits
Q: Who are allowed to claim it? of a kind tending to increase the value of
A: RC and DC only. the property.

Q: suppose you paid the 100K NIT to US,

can you claim as a deduction the whole
100K? what is the formula? Q: Who are not allowed to claim
deductions?
►same procedure for (1) income tax paid to A: Under 34 C (3) - NRC, NRA; and N/RFC
foreign country; (2) estate tax paid to
foreign country; and (3) Donor’s tax paid to TAKE NOTE:
foreign country. 1. NRAE and NFC – allowed deduction only if
and to the extent that they are connected
A: Formula: with income from sources within the Phils.
STEP 1 2. Taxes that had been allowed as deduction
but are later in refunded should be treated
GI from sources w/in as part of the gross income during the year
NIT: _____________________ that it is received (34 1 last paragraph)
GI from entire world
Q: Which would you choose? Tax credit or
STEP 2 deduction?
A: tax credit because it is deducted from
Quotient x RATE = amount w/c can be the taxable income while deductions are
claimed as a deduction deducted from the GI.

A: you cannot claim the whole 100K, you FORMULA: GI-DEDUCTION = NET INCOME x
can only claim the product of the quotient RATE = TAXABLE NET INCOME – TAX
times the rate CREDIT)

TAKE NOTE: deduct at the bottom of the 34 D LOSSES

formula ( sa computation ng GI)
Q: Suppose you are a RC, you pay NIT to
US, will you be able to claim it as a tax
deduction?
A: 1. generally, you can claim it as tax
credit.
2. you can claim under Sec. 34 C (1) b
Q: Is always a requirement that it is
incurred in pursuit of trade, bus. or
profession?
A: No. Sec. 34 D(1) provides for 2 kinds of
losses:
a. incurred in pursuit of trade, bus. or
profession;
b. property connected with t,b,p, if the
loss arises from fire, storms, shipwrecks

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- Atty. Francis J. Sababan -
or other casualties or from robbery, B. CAPITAL LOSS – NET CAPITAL LOSS
theft or embezzlement (arising from CARRY OVER ( # 2 above)
natural calamity).

NET CAPITAL LOSS NET OPERATING

Q: What is the requirement? CARRY-OVER LOSS CARRY-
A: OVER
1. Loss actually sustained during the
taxable year 1. taxpayers is an 1. taxpayer may be
2. Not compensated for by insurance or individual only not an individual or
other forms of indemnity. corporation. corp;
3. Not claimed as a deduction for estate
tax purposes. 2. involves net 2. losses incurred
capital loss or connected with T
Q: This is your itemized deduction which or B;
can be claimed as a deduction from?
A: Gross income 3. carry-over as loss 3. Business losses
from sale of capital not previously off-
TAKE NOTE: asset in the next set as a deduction
► The itemized deduction of losses, succeeding year from the GI carried
however, is not confined to section 34B. it is over as such for
also found under section 86A (1) (e) which the next 3
also pertains to deductions available under consecutive years;
the estate tax law. 4. can only be 4. can be deducted
►Losses within six (6) months after the deducted from from capital gains
death of the decedent can be claimed as capital gains. and/or ordinary
itemized deduction of losses under Section gains.
34B. However, may be claimed as
deduction under estate tax return provided
that the same are not claimed as itemized
deduction of losses under Section 34B. NET OPERATING LOSS CARRY
REQUIREMENTS:
Q: How many carry-overs do we have under 1.Net operating loss of the business or
the Code? enterprise incurred w/in the taxable year
A: 3. Namely: 2. not previously off-set as a deduction from
1. Section 27 E (32) Carry forward of the GI
excess minimum Tax 3. carried over as a deduction from the GI
2. Section 39 D Net Capital Loss Carry- for the next 3 consecutive taxable years
over immediately following the year of such loss.
3. Section 39 D 3 Net Operating Loss
Carry-Over. Q: Can the period be extended?
A: yes, for mines other than oil and gas
KINDS OF LOSSES AND THEIR CARRY- well.
OVERS: 1. net operating loss w/out the benefit
incentives provided by law;
A. ORDINARY LOSS – NOLCO ( #3 above) 2. incurred in any of the first 10 years of
operation.
Q: Why is there a need for a carry over 3. carried over as a deduction from the
under Sec. 34 D # when you can claim the GI for the next 5 years following such loss.
loss from both capital and ordinary loss? 4. no substantial change in the
A: if the loss exceeds the income for the ownership of the business or enterprise.
taxable year, you cannot deduct the entire
amount of loss from your income for that Q: What is the limit?
year so the excess may be deducted for the A: 75% of the nominal value of outstanding
taxable year following the loss. shares is held by or on behalf of the same
persons/ corporation

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- Atty. Francis J. Sababan -
► individual no problem, problem lies with charged off, meaning cancelled in the books
corporations or enterprises. of account.

Q: Do you need to file an action before you

ABANDONMENT LOSSES can claim?
A: No, all you have to do is prove that you
1. contract area where petroleum did exert effort to claim or recover the
operations are undertaken is partially or same.
wholly abandoned;
► all (1) accumulated exploration and (2) Q: What cannot be deducted as bad debts?
development expenditures pertaining A:
thereto shall be allowed as a deduction. 1. debts not incurred in connection
with the trade, business and profession
2. a producing well is subsequently of taxpayer.
abandoned: 2. transactions, mered into between
►unamortized cost and undepreciated cost parties mentioned under Section 36 (B)
of equipment directly used therein shall be namely.
allowed as a deduction in the years it was a) between members of the family
abandoned. b) between an individual who owns
more than 30% of outstanding
TAKE NOTE: capital stock of a corporation
1. if abandoned well is reentered and and that corporation
production is resumed; or c) between two (2) corporations more
2. if equipment or facilities are restored into that 50% of the outstanding capital
service in the year of resumption or stock of which is owned by or for the
restoration and shall amortized or same individual
depreciated. d) between a grantor and fiduciary of
any trust
Q: What is the Tax benefit rule? e) between two (2) fiduciaries of two
A: Last Par. of Sec. 34 E (1): recovery of bad (2) trusts who has the same
debts previously allowed as deduction in grantor
the preceding year shall be included as part f) between a fiduciary of a trust and
of the gross income in the year of recovery above fiduciary of such trust
to the extent of the income tax benefits of
said deduction. SECURITIES BECOMING WORTHLESS
1. ascertained to be worthless and
Q: What is a Bad Debt? charged off within the taxable year
A: Bad debts shall refer to those debts 2. capital asset
resulting from the worthlessness or 3. taxpayer, other than a Bank or trust
incollectibility in whole or in part of company incorporated under Phil. Laws
amounts due the taxpayer by others, 4. substantial part of business is the
arising from money lent or from receipt of deposit
uncollectible amounts of income from goods 5. considered as a loss from the sale of
sold and services rendered. capital assets on the last day of such
taxable year
CHINA BANK VS. CA
► bad debts can only be claimed if 34 F DEPRECIATION
pursuant to a contract of loan
- no bad debts for loss of instruments. Q: What is depreciation?
A: It is the gradual dimension in the service
Q: Who claims it? or useful value of tangible property due
A: a. creditor from exhaustion, wear and tear and normal
b.money lender obsolescence.

Q: What year can it be claimed?

A: can be claimed in the year it was Q: What kind of property is involved?
actually sit ascertained to be worthless and A: 1. Real property except parcel of land

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2. Personal Property years between five (5) years and the
expected life.
REQUISITES:
1. depreciation deduction must be REQUIREMENTS:
reasonable 1. depreciation is allowed as a deduction
2. for the exhaustion, wear and tear, from 61; and
including reasonable allowance for 2. contractor notifies the Commissioner at
obsolescence the beginning of the depreciation period
3. property used in the trade of business which depreciation rate shall be used.

Q: What do you mean by “reasonable DEPRECIATION DEDUCTIBLE BY NRAETB OR

allowance”? RFC
A: it shall include, but not limited to, an ► reasonable allowance for the
allowance computed in accordance with deterioration of property
rules and regulations prescribed by the
Secretary of Finance, upon recommendation 1. arising out of its use or
of the Commissioner, under any of the employment
following methods: 2. or non-use in the business,
1.Straight-line method trade or profession
2.Declining balance method 3. property is located in the
3.Sum-of-the-year-digital method; and Philippines
4.any other method which may be
prescribed by the Secretary of Finance 34 G DEPLETION OF OIL and GAS
upon recommendation of the WELLS and MINES
Commissioner ► only deduction which is a not self
executing deduction
DEPRECIATION OF PROPERTIES USED
IN PETROLEUM OPERATIONS Q: What is depletion?
A: the exhaustion wear and tear of natural
1. properties directly related to production resources as in mines, oil, and gas wells
of petroleum ►the natural resources called “wasting
2. allowed under (1) straight line or (2) assets”
declining balance method
3. useful life of properties used or related DEPRECIATION vs DEPLETION
to production of petroleum shall be ten
(10) years or such shorter life as 1.involves 1. involves natural
may be permitted by the property resources
Commissioner. 2. ordinary wear 2. ordinary wear
4. for property not used directly in the and tear of and tear of natural
production of petroleum (1) depreciated equipments resources
under the straight line method, and
useful life is only five (5) years TAKE NOTE:
►Equipment used in mining operation is
DEPRECIATION OF PROPERTIES USED deductible in depreciation
IN MINING OPERATIONS
Q: Method for computing depletion?
ALLOWANCE FOR DEPRECIATION: A: cost depletion method
1.all properties used in mining operations
other than petroleum operations shall be Q: to whom allowed?
computed as follows: A: only mining entities owning economic
a. if the expected life is ten (10) years or interest in mineral deposits
less – normal rate of depreciation ►Economic interest: capital investments in
mineral deposits

b. if the expected life is more than ten (10)

years – depreciated over any number of 34H CHARITABLE & OTHER
CONTRIBUTIONS

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Q: If the Donor is a pure compensation
TAKE NOTE: income earner and he donates P100,000 to
1.unique because deducted from the the church, can he claim it as a deduction?
taxable net income and not from the gross A: No. pure compensation income earner
income can only claim a deduction under Sec 34 M
►second step of the formula deduction
Q: If Donee is the Philippine Government,
Q: Who is claiming the deduction? what is the requirement?
A: the donor A: it must be made exclusively for public
purposes
Q: Who are the Donees?
A: 1.Government of the Philippines or any Q: What if the Donee is a province?
of its agencies or any political subdivision A: there must be a qualification that it is for
thereof exclusively for public purpose public purpose
2. Accredited Domestic corporation or
association organized and operated Q: If the Donee is a Domestic Corporation,
exclusively for religions, lion, charitable, what is the requirement?
scientific, youth and sports A: no part of its income inures to the
development, cultural or educational benefit of any private shareholder or
purposes or for the rehabilitation of individual
veterans, or to social welfare institution,
or to non government organization and Q: What are those contributions which can
no part of its net income inures to the be deductible in full?
benefit of any private stock holder or A: 1.Donations to the Government – no
individual conflict with partial (different
requirement)
Q: How many kinds of deduction? ►Partial donated for exclusively public
A: Two (2) kinds: purposes
1.partial deduction ►Full, used in undertaking priority
►10% of taxable income in case of activities of NEDA
an individual
►5% of taxable income in case of 2.Donations to certain Foreign
corporations Institutions or International
2. full /total deduction Organizations
►in compliance with agreement, treaties
Q: Which of the two kinds is the General or commitment entered into by the
Rule? Philippine Government and such donees
A: General Rule: Partial deduction
Exception: Total /Full deduction 3.Donations to Accredited Non
government organizations Non
Q: Suppose Mr. A made a cash donation of government organization, non profit
P1M. How much can he claim as a domestic corporation
deduction?
A: First determine the taxable income of Mr REQUIREMENTS:
A since he is an individual, he can only 1. organized and operated exclusively for
deduct 10% of his taxable income. scientific, research, educational, character
building and youth and sport development,
Q: What if the Donee is not one of those health, social welfare, cultural or charitable
mentioned under the law, can he claim a purposes or a combination thereof
deduction? 2. no part of the net income of which inures
A: No. to the benefit of any private individual
3. uses the contributions directly for the
TAKE NOTE: Donee is never an individual. active conduct of the activities constituting
the purpose or function for which it is
organized and operated

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4. annual administrative expense does not
exceed 30% of the total expenses and
5. in case of dissolution, the assets of which
would be distributed to:
a) another non profit domestic
corporation organized for similar
purpose or purposes
b) to the state for public purpose
c) distributed by the court to another
organization to be used in such a
manner which would accomplish the
general purpose for within the dissolve
organization was organized
34I RESEARCH AND DEVELOPMENT
►In the old law, this is not allowed as a
deduction. To remedy this, they felt that
those should be a separate deduction for
research and development.
REQUISITES:
►tax payer may treat research and
development expenditures as ordinary and
necessary expenses provided:
1. it is paid or incurred during the taxable
year
2. incurred in connection with trade,
business or profession; and
3. not chargeable to capital account.
Q: Treated as such when?
A: during the taxable year it is paid or
incurred
AMORTIZATION OF CERTAIN RESEARCH AND
DEVELOPMENT EXPENDITURES
►at the election of the taxpayer, the
following shall or may be treated as
deferred expenses:
a. paid or incurred by the taxpayer in
connection with his trade, business or
profession;
b. not treated as expenses under par 1
and
c. chargeable to capital account but not
chargeable to property of a character
which is subject to depreciation or
depletion
Q: How to compute taxable income:
A: deferred expenses shall be allowed as
deduction ratably distributed over a period
of not less than 10 months as may be
elected by the taxpayer (beginning with the
month the
taxpayer first realizes benefits from
expenditures.)
►the election or option may be exercised
for any taxable year after the effectivity of
the code but not later than the time
prescribed by law for filing the return for
such taxable year.
LIMITATION ON DEDUCTION
Q: When not deductible?
A: 1.Any expenditure for the
(1) acquisition or improvement of land
or (2) for the improvement of property to
be used in connection with research and
development of a character which is
subject to depreciation and depletion
and office site
2. Any expenditure paid or incurred for
the purpose of undermining the
existence, location, extent or quality of
any deposit of one or other mineral
including oil or gas.
► not for mineral exploration
34 J PENSION TRUST
Q: Claimed by Whom?
A: the employer
Q; What is a Pension Trust contribution?
A: a deduction applicable only to employer
on account of its contribution to a private
pension plan for the benefit of its employee
deduction is purely business in character.
Q: Requisites?
A:
1.the employer must have established a
pension or retirement plan to provide for
the payment or reasonable pension of his
employees
2. pension plan must be reasonable and
actually sound;
3. it must be funded by the employer
4. the amount contributed must no longer
be subject to his control or disposition
5. the amount has not yet been allowed as
a deduction and
6. the amount has or is apportioned in
equal parts over a period of 10 consecutive
years beginning with the year in which the
transfer or payment is made.
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34 K ADDITIONAL REQUIREMENTS FOR
DEDUCTIBILITY OF CERTAIN PAYMENTS
Q: Who can avail of this deduction?
►allowed as a deduction only if shown that A: 1.individual taxpayer earning purely
the tax required to be deducted and compensation income during the year;
withheld there from has been paid to the 2. individual taxpayer availing itemized
BIR in accordance with Section 58 and or optional standard deduction; and
Section 81 3. individual taxpayer earning both
compensation income and income from
34 L OPTIONAL STANDARD DEDUCTION business

KINDS OF DEDUCTIONS: SECTION 35 ALLOWANCE FOR

1.Itemized deduction PERSONAL EXEMPTION FOR
2.Optional Standard Deduction INDIVIDUAL TAXPAYER
3.Personal /Additional Deduction
Q: When do we apply this?
OPTIONAL STANDARD DEDUCTION: A: apply if individual taxpayer is paying by
►can be availed of by an individual who way of NIT
may elect a standard deduction in an
amount not exceeding 10% of his gross Q; Who are taxpayer?
income A: those mentioned under Section 24 (A)
► may apply in lieu of the other 1. RC
deductions under Section 34 2. NRC
►the taxpayer must signify in his return his 3. OCW
intention to elect the optional standard 4. RA
deduction, otherwise, he shall be ►all can claim both personal and
considered as having availed of the additional exemption
itemized deduction.
Q: Why not include NRAETB? Can the latter
Q: Who can claim this deduction? claim any exemption?
A: all individual taxpayers except non A: NRAETB is not included because Section
resident alien not engaged in trade or 35 A refers to Section 24 A
business (NRANETB) ►NRAETB can claim personal deductions
Reason: he is not liable to pay by way of the but not additional exemptions pursuant to
NIT, thus, follows he cannot claim this Sec 35 D
deduction because he is liable to pay by
way of GIT. REQUIREMENTS:
1.NRAETB should file a true and accurate
TAKE NOTE: return
►can co-exist with personal and / or 2. the amount to be claimed as personal
additional exemption exemptions should not exceed the
amount provided for under Philippine
34 M PREMIUM PAYMENTS ON HEALTH Laws
AND /OR HOSPITALIZATION INSURANCE
OF AN INDIVIDUAL TAXPAYER TAKE NOTE:
► for (1) Health and /insurance AEMOP: can be a RA or NRAETB
(2) Hospitalization
BASIC PERSONAL EXEMPTIONS:
REQUIREMENTS:
1. amount of premiums, paid by taxpayer 1. Single individual; or individual judicially
for himself and members of his family, decreed as legally separated with no
2. amount of premiums should not exceed qualified dependents.
(1) P2,400 per family or (2) P200 a ► 20, 000
month
3. gross income of the family for the 2. For head of the family – can be single or
taxable year is not more than P250,000 legally separated with qualified dependents.
► 25, 000

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3. For each married individual – if only one
of the spouse, earns or derives gross
income, only such spouse can claim the
personal exemption.
►32, 000
Q: Who is the “head of the family”?
A: 1.unmarried or legally separated man or
woman
2. With (1) one or both parties or
(2) With one or more brothers and
sisters
(3) with one or more legitimate,
recognized, natural or legally adopted
children
3. living with and dependents upon him
for their chief support
4. whose such brother or sisters or
children are
(1) not more than 11 years old and
(2) not gainfully employed,
(3) unmarried
5. OR, regardless of age, the same are
incapable of self support because of
mental or physical defect.
Q: Why do we have to determine who the
head of the family is?
A: only legally separated individuals can
claim additional exemptions if they have
qualified dependents.
TAKE NOTE:
►R.A. 7432 and RR 2-98: a senior citizen
can also be a dependent.
Q: Can a widower claim exemptions?
A: exemptions must be strictly construed,
widower not included in the list under
Section 35 A – but can claim under sec
35B
►widower, married or used to be married
MARRIED INDIVIDUALS
►each legally married individuals can claim
the personal exemption. Husband and wife
= P64,000
Q: Who are allowed to claim?
A: Normally , it is the husband who claims
unless he executes a waiver that the
wife will claim the same (RR2-98)
Additional Exemptions: (35B)
-additional exemption of P8,000 for each
dependent not execeeding four (4)
Q: Who can claim the same?
A: 1.Married couples: only one of the
spouses can claim it;
2.legally separated individuals: can be
claimed by the spouse who has custody
of the child or children
►the additional exemption claimed by
both shall not exceed the maximum
additional exemption herein allowed.
Q: Define “dependents”
A: legitimate, illegitimate or legally adopted
child chiefly dependent upon and living
with the taxpayer if such dependent is (1)
not more than 21 years of age, (2)
unmarried, and (3) not gainfully employed
or (4) if such dependent, regardless of age
is incapable of self support because of
mental or physical defect.
Q: What if widower has illegitimate
children, can claim additional
exemption?
A: can claim, can be considered as head of
the family w/ dependent
Q: What if the children are temporarily
away from the parents?
A: still considered living with parents, can
claim exemption
CHANGE OF STATUS: (SEC 35 C)
Q: Reckoning Period?
A: end of the year or close of such year
when such change of status
occurred.
TAKE NOTE:
►always choose the higher amount of
exemption if you are filing a return covering
the period within which the change of
status occurred
1. if the taxpayer should (1) marry or (2)
have additional dependents during the
taxable year, he may claim the
corresponding exemption in full for the year.
Illustration:
1.Single Jan 1, 2005
2.Married June 1, 2005 – on April 15, 2006 –
status: legally married can claim P 32,000
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- Atty. Francis J. Sababan -
2. if the taxpayer should die during the 1. covering the life of any officer or
taxable year, estate can claim personal employee or any person financially
exemption. invested in any trade of business
carried on by the taxpayer.
Illustration 2. taxpayer is directly or indirectly the
1.Jan. 25, 2005 taxpayer married w/ one beneficiary under such policy.
child
can claim on April 15, 2006 LOSSES FROM SALES OR EXCHANGES
P32,000+ OF PROPERTY (between related parties)
P8,000 } P40,000
1) between family members
► In this case, as if the change of status
occurred at the close of taxable year. If Q: Who is considered the “family of the
taxpayer’s spouse or child dies within the taxpayer?”
taxable year or the dependent’s became (1) A: a. brothers and sister (whole is ½
gainfully employed (2) got married or (3) blood)
became 21 as if the change as status b. spouses
occurred at the close of taxable year. c. ancestors
Illustration: d. lineal descendants
1. Taxpayer’s tragic story wife died Jan. 25, Q: are uncles or nieces included?
2005 and child died the next day then A: no
another child eloped and get married.
2. Taxpayer despite the tragedy can claim
ton of money on April 15, 2006.
P 32,000 IN DONOR’S TAX
P 16,000 (8,000 per child) ►Relatives includes relatives by
48,000 consanguinity within the 4th civil code.
Nephew is a stranger and relative ang
Section 36. Items not Deductible nephew.

36 A. General Rule: In computing net 2) individual and corporations

income, no deduction shall be allowed: Gen. Rule: NO DEDUCTION
(1) Personal, living or family expenses – not Except: distribution in liquidation or
related to trade or business less than 50% of the outstanding
(2) Section 36 A (2) and Section 36 A (3) capital stock
General Rule: No deductions allowed for
1. Any amount paid out for new buildings 3) Two corporations
or for permanent improvements, or 4) Grantor or Fiduciary
betterments, made to increase the value 5) Two fiduciaries of two trust
of any property or estate 6) Fiduciary and beneficiary of trust
2. Any amount expanded in restoring
property or in making good the Sec. 37 Special provisions regarding
exhaustion thereof for which an allowance deductions of insurance companies.
is or has been made.
Exceptions: Codal Provisions
1. Option granted to Private Section 38: Losses From Wash Sales of
Educational Institution to deduct the Stock or Securities
same as capital outlays.
TAKE NOTE: Q: What is a wash sale?
►Amount paid for new buildings, can be A: It is a sales or other disposition of stock
deducted if it involves intangible drilling securities where substantially identical
and development cost incurred in securities are purchased within 61 days,
petroleum operations (Sec 34 6 (A) beginning 30 days before the sale and
ending 30 days after the sale.
PREMIUMS PAID ON LIFE INSURANCE
POLICY : Q: What period?

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A: 61 day period beginning 30 days before
and ending 30 days after the sale
Q: Jan 20 you purchased share of stock, and
disposed of the same on Feb 5, 2005. Is
this a wash sale?
A: No
Q: If it is a loss in wash sale, happens?
A: General Rule: (Sec 131 RR No. 2)
gains from wash sale are taxable but
losses are non-deductible
Exception:
►unless claim is made by a dealer in stock
or securities and with respect to a
transaction made in the ordinary course of
the business of such dealer
Q: Reason why losses in wash sale cannot
be deducted?
A: 1. to avoid too much speculation
in the market
2. taxpayer not telling the truth,
because he may say he incurred
a loss instead of a gain
Section 40. Determination of Amount
and Recognition of Gain or Loss
GENERAL RULE: This is totally
irrelevant if the income is subject to fit.
In fit gain is presumed.
EXCEPT: sale of shares of stock where
you have to determine actual gain or
loss
Q: When is there a gain?
A: excess of the amount realized over the
basis or adjusted basis for determining
gain. (amount realized from the sale or
other disposition of property)
Q: When is there a loss?
A: the amount realized is not in excess of B
or AB
Illustration: 1987 Bar (Juan dela Cruz
sold jewelry for 300,000 ) contract of
sale
►amount realized is 300,000
Q: What will be the basis of the gain?
A: Sec. 40 B (1), property was acquired
by purchase
►Cost: purchase price + expenses
Q: If there is a gain, is the whole gain
subject to income tax?
A: it depends
►if ordinary asset = 100% is subject to
income tax
►if capital assets
a. short term(less than 12 months) :
100% taxable
b. long term (more than 12 months):
50% taxable
Q: suppose property sold is a parcel of land
will the rule be the same?
A: No, and it depends
►ordinary asset: apply the cost
►capital asset: 6% FMV or selling price
which ever is higher
Q: Do we apply the holding period?
A: No, holding period does not apply to the
sale of real property. This is an absolute
rule:
►If realty is ordinary – holding period
does not apply.
►If realty is capital asset – 6% FMV or
selling price applies.
►Holding period applies only to sale of
personal property which is a capital asset
except sale of shares of stocks.
►Holding period also do not apply to
corporations.
Q: If the property is acquired through
inheritance, what is the basis?
A: Sec 40 B (2) fair market value or price
as of the date of acquisition.
Q: Suppose it was a sale of personal
property, do we apply the same
principles?
A: No.
Q: What if it involves a sale of real
property?
A: Apply the same principles
Suppose it was a result of swindling,
theft, robbery or estafa, do we apply
the same principles?
A: Law is silent, take note of the old CIA
ruling on this one
Q: Feb 14, 2006, your GG gave you a
jewelry in Sept your GG breaks up with
you. GG request the jewelry be returned
but you already sold it for P200,000.
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Will the entire P200,000 be included in
gross income?
A: Basis: (1) same as if it would be in the
hands of the Donor (FMV as of date of
acquisition); or (2) last owner who did
not acquire the same by gift (cost)
Q: If it involves a parcel of land?
A: apply the same rules Section 40 B (4)
what is the basis?
1. Property was acquired for less
than an adequate consideration
in money or moneys worth: the
basis would be the amount paid
by the transferee for the
property.
Q: Section 40 B (5) what is the basis? A: 40
C (5)
► if the property was acquired in a
transaction where gain or loss is not
recognized (pursuant to a merger or
consolidation plan)
a. corporation, party to a merger or
consolidation, exchanges property
solely for stocks in another
corporation, also a party to the
merger or consolidation
b. is a party to the merger or
consolidation, solely for the stocks
of another corporation also a party
to the merger or consolidation, or
c. Security holder of a corporation,
party to a merger or consolidation,
exchanges his securities solely for
stock or security in another
corporation, also a party to the
merger or consolidation. – person
transfers property to corporation to
gain control
40 C EXCHANGE OF PROPERTY
GENERAL RULE: In sale or exchange of
property, the control amount of gain or loss
shall be recognized.
1. gain is taxable
2. losses are deductible
Exception: If permanent to a merger or
consolidation plan, no gain or loss shall
be recognized
1. gain is exempt
2. losses are not deductible
REQUISITES:
1. the transaction involves a contract
of exchange
2. the parties are members of the
merger or consolidation
3. the subject matter is only limited or
confined with the one provided for
by law
►Merger and Consolidation in corporation
code and tax code are not the same.
►Sec 40 (2) (a)
►a corporation which is a party to a
merger or consolidation, exchanges
property solely for stock in a corporation
which is a party to the merger or
consolidation
Illustration:
Transferor gives 1M
Transferee gives 700,000 = not
taxble gain P300,000
►If other property received by transferee
(40 C (3) (a) TRANSFEREE
►if the party receives not just the
subject matter permitted to be received:
lie if the party receives money and /or
property, the gain, if any, but not the
loss, shall be recognized (meaning
taxable) but in an amount not in excess
of the sum of the money and the FMV of
such other property received.
(40 C (3) (b) TRANSFEROR
1.Transferor corporation receives money
and / or property, distributes it pursuant to
the merger or consolidation plan
►no gain to the corporation shall be
recognized
2. Transferor corporation receives money
and / or property, does not distribute it
pursuant to the merger or consolidation
plan
►the gain shall be recognized but in an
amount not in excess of the sum of such
money and the FMV of such other property
so received.
Q: What is the rule?
A: 40 C (3) (a)
1. gain taxable
2. loss not deductible
►40 C (3) (b)
It depends on how distributed:
1. pursuant to the merger or
consolidation plan:
►gain exempt
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►loss not deductible
2. not pursuant to merger
consolidation plan:
►gain taxable
►loss not deductible.
Sec 40 C (1) (b)
►a shareholder exchanges stock in a
corporation which is a party to a merger
or consolidation, solely for the stock of
another corporation which is a party to
the merger or consolidation
Sec 40 C (2) (c)
► a security holder of a corporation
which is a party to the merger or
consolidation, exchanges his securities
in such corporation, solely for stock
securities in another corporation.
►The rule is similar in 40 C (3), (a), (b) and
(c) although different property are involve,
that is why the last paragraph of 40 C is a
separate paragraph.
►Therefore, Sec 40 C (3) (a,b,c) the rule is
1. gain exempt
2. loss not deductible
40c last paragraph
► the transferee becomes a stockholder,
parties are not members of the merger
►the individual wants to be a
shareholder but does not want to
purchase shares but willing to give up
property as a result of the exchange ,
the person gains control of the
corporation
►The rule is:
a. gain is exempt
b. loss not deductible
Requisites:
1. There is A contract of
exchange where property was
transferred by the person in
exchange of stock or unit of
participation in a corporation.
2. As a result, the person alone
or together with others (not
exceeding of 4 persons) gains
control of the corporation.
Q: What is control?
A: ownership of stocks in a corporation
or possessing at least 51% of total voting
power.
Sec 40 B (5)
►non applicability of income tax is only
temporary
Reason : Basis will be 40 C (5)
1. 40 C (5) (a) Transferor
►basis of stock or securities received by
the transferor: same as the basis of the
property, stock or securities exchanged:
►decreased by the (1) money and (2)
FMV of the property received; and
►increased by (a) amount treated as
dividend and (b) amount of gain
recognized
2. 40 C (5) (b) Transferee
►as it would be in the hands of
transferor increased by the amount of
gain recognized.
Sec 40 (c) (4) Assumption of
Liability
1. Taxpayer, in connection with the
exchanges described – receives
securities or stocks permitted (no
gains recognized) – it is sole
consideration of the same – the
other party assumes liability of the
same – the acquisition of liability not
treated as money and / or other
property – the exchange still falls
within the exceptions.
2. If amount of liabilities assumed +
amount of liabilities to which
property is subjected to exceeds -
adjusted basis of the property
transferred – the excess shall be
considered a gain from the sale of a
capital asset or of property which is
not a capital asset, as the case may
be.
SECTION 41 INVENTORIES
Purpose: Change of inventory to determine
clearly the income of any taxpayer/ to
reflect the true income.
Limitation:
1. once every 3 years
2. approval of the secretary of finance
Section 43 Accounting Periods
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1. Fiscal year
2. use of calendar year Q: Calendar to calendar, correct?
a. no annual accounting A: not correct statement
b. does not keep books of account
c. individuals Section 47 (A)
Taxpayer: Corporation
►Use of method as in the opinion of the 1. Fiscal to calendar
commissioner clearly reflects the income: ► separate final or adjusted return shall
1. no accounting method has been be made for the period between the so
employed close of the last fiscal year for which the
2. the method does not clearly reflect return was made and (2) the following
the income Dec 31.

Sec 44 Period in which items of Gross 2. Calendar to Fiscal

Income included and Sec 45 Period for
which Deductions and Credit Taken
►Under Sec 44 amount of all items of
gross income shall be included in the
gross income for the taxable year in
which they are received by the taxpayer
►Under Sec 45 deductions shall be
taken for the taxable year in which “paid
or accrued” or “paid or incurred.”
►Sec 44 and Sec 45 are mentioned in the
code because of the death of the person.
Illustration:
Facts: taxpayer dies in the middle of the
year
January 1, 2006 – June 15, 2006
►June 26, 2006 to Dec 31, 2006 the
estate is the taxpayer
►So the income and deductions from Jan
1 to June 25,, included in the
computation
Section 46 Change of Accounting
Period
Q: Who is the taxpayer?
A: corporation (taxpayer other than
individual)
Q: What kinds of accounting period?
A: 1.fiscal year
2. calendar year
Q: Changes contemplated?
A: 1. fiscal to calendar
2. calendar to fiscal
3. fiscal to another fiscal
►with the approval of the
Commissioner, net income shall be
computed on the basis of the new
accounting period.
►separate final or adjusted return shall
be made for the period between the
close of the last calendar year and the
date designated as the close of the
fiscal year.
3. Fiscal to fiscal
►separate final or adjusted return shall
be made for the period between the
close of the former fiscal year and the
date designated as the close of the new
fiscal year.
►File return indicating the change in
accounting method
Section 48 Accounting for Long Term
Contracts
Q: Who are the professionals involved?
A: applies to architects and engineers
Q: What is a long term contract?
A: it means building, installation or
construction contracts covering a period in
excess of one (1) year.
Q: Basis of income?
A: a. persons whose gross income is
derived in whole or in part from such
contract shall report such income upon
the basis of percentage of consumption.
b. the return shall be accompanied by a
certificate of architects or engineers
showing the percentage of completion
c. deduction of expenditures made
during the taxable year, on account of
the contract is allowed
Section 49 Installment Basis
►contemplates a seller of the property

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Q: Is it important to know if the property is and deduction of several corporations
personal or real? having the same interest.
A: Yes Q: Same interest?
A: stockholders substantially the same
Q: Sale of Real Property is it important to
know if it is a casual sale or regular Q: Limitations?
sale? A: None
A: No ►That is why it is a great source of
corruption
Requirement: The initial payments do not
exceed 25% of the selling price. Section 51 Individual Returns
Who are required to file? (ITR)
Q: If the initial payment exceeds 25% what 1. RC
do you call it? 2. NRC
A: called deferred sale 3. RA
4. NRAETB – sources within
Q: Consequence?
A: you must pay the whole amount of the Q: Who is not mentioned in Sec 51 but
tax liable to pay by way of NIT?
A: OCW/ seaman
Q: Sale of Personal Property, is it important
to know if it is a casual or regular sale? Exception:
A: Yes RC OR ALIENS: engaged in trade or practice
of profession in Phil. Shall file ITR regardless
Casual Sale has Requirements: of the amount of gross income.
1. selling price exceeds P1,000
2. initial payment not exceeding Q: If OFW is exempt from filing a return,
25% selling price what is he required to file?
A: Information Return
►Regular sale no requirements
Case of Bañas Q: who are not required to file a return?
1. subject matter A:
2. sold by way a. an individual whose gross income
3. agreement does not exceed his total personal
4. cash deposit and additional exemptions for
5. post dated promissory notes dependents
(installments) b. worker (compensation income
3. 1st installment promissory note was earners) regardless of the amount of
disconnected compensation shall not required to
4. 2nd installment exchanged with cash file ITR because the management
- these two exceeds the selling price files it. (RR 3-2002)
5. you only compute cash c. individuals whose sole income is
subject to FIT
H: Initial payment exceeds 25% installment d. individuals who are exempt from
basis is not applicable income tax

RR 2; Section 175: In payment by way of Exception: IT

installment promissory note, bills of 1. the management files an incorrect
exchange and checks will not be considered return
in computing the 25% initial downpayment. 2. the employee has two or more
employer

Section 50 Allocation of Income and 51 A (3)

Deductions
►tremendous power of the A: not required to file ITR may be required
Commissioner to allocate the income to file information return

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51 B - Where to file?
1. authorized agent bank
2. revenue district officer
3. collection agent
4. duly authorized treasurer of the city
or municipality where taxpayer resides
or has principal place of business
5. office of commissioner – if no legal
residence or place of business in Phil
51 C
Q: When to file?
A: filed on or before the 15th day of April
each year
51 C (1) – NIT Payers using CY
►two days provided (calendar)
1. on April 15; or
2. before April 15 (January, Feb or March)
► not December because the calendar year
is not yet over
Fiscal year: 15th day of the 4th month
following the close of the fiscal year.
51 C (2) individuals subject to tax on
capital gains
Exception: General Rules Sec 58
1. Sale of shares of stocks
►return filed within 30 days after each
transaction and
►Final consolidated return on or before
April 15
2.Sale of Real Property
►return filed within 30 days following each
sale
51 D Husband and Wife
1. Pure compensation income earner –
separate return RR 3-2000 – pure
compensation income earner regardless of
amount of income not file ITR.
2. Not pure compensation: joint return
51 E. Return of Parent to Include
Income of Children
► unmarried minor receives income from
property received from living parent –
included in the parent’s ITR.
Exception:
1.Donor’s tax has been paid
2.Property exempt from donor’s tax
51 F. Persons Under Disability
Q: Who makes the return?
A:
1.duly authorized agent
2. duly authorized representatives
3. guardians
4.other persons charged with the care
of his person or property
►both incapacitated taxpayer and agent
will be liable for:
1.erroneous return
2. false or fraudulent return
51 G Signature Presumed Correct
► prima facie evidence the return was
actually signed by the taxpayer
Section 52 Corporation Return
►go back to Sec 51 A (2)
General Rule: Sec 58 Final Income
Tax
►return and creditable withholding tax
return is filed monthly
Exception: Sale of Shares of Stocks
(Sec 51 A (2)) Sale of Real Property
►RR -17-2003: Sale of Real Property
subject to final withholding tax, the
buyer is deemed the agent.
Sale of Shares of Stocks
Q: Reasons for filing Final Income tax or
Final Consolidated Return?
A: Reasons:
1. FIT whose actual determination of
gain or loss
2. in connection with Sec 24 C the
basis of the tax is not the gross
income but the net capital gains
realized.
In connection with Sec 40:
►actual determination of loss or gain
►file a return within 30 days from date of
transaction
TAKE NOTE: In all other income subject to
FIT, the gains are presumed
INCOME OF MINORS
Q: Minor below 18: Will it be included in the
Minor’s ITR?
A: it depends
1. income from property received from
parents ► included in parent’s ITR
Except:
a.Donor’s tax paid
b.Property exempt from donor’s tax
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2. income from minor’s own industry Section 53 Extension of Time to File

►Minor’s ITR accomplished by guardian Returns
or parents
Q: To whom granted?
Q: if the individual is exempt from income A: Corporations
tax, can be required to file a return? Grounds: Meritorious case
A: General Rule: No ►subject to the provisions of Sec 56
Exceptions: Time Extension
1.engaged in trade or business; or
2.exercise of profession – Sec 51 A (2) Section 54 Returns or Receivers,
Trustees in Bankruptcy or Assignees
SEC 52 CORPORATION RETURNS ►the aforementioned persons shall
A.Requirements make returns of net income as and for
Taxpayer: DC or RFC (except NRFC) such corporation in the same manner
ITR Filed: 1. TRUE AND ACCURATE and form as such organization is
a. quarterly income tax return required to make.
b. final or adjusted income tax return
Section 55 Returns of General
Filed by: Professional Partnership
1.President; ► file a return of its income setting forth
2.Vice President 1. items of gross income and of
3. Other principal officer deductions allowed by this title (Title
►ITR must be sworn by such officer and the II – Tax on Income)
treasurer or assistant treasurer 2. Names of partners
3. Taxpayer identification number (TIN)
B. Taxable Year 4. address of partners
1. fiscal; or 2. calendar 5. shares of each partners
► corporation cannot change accounting
method employed without the approval or ►GPP is exempt from corporate income tax
prior approval of the commissioner (Sec 47)
Q: Why is the GPP obliged to file a return?
C. Return of Corporation Contemplatory A: to determine the shares of each partners
Dissolution or Recognition
1.Within 30 days after: Section 56 Payment and Assessment of
a. the adoption by the corporation of a Income Tax for Individuals and
resolution or plan for its dissolution; or Corporations
b. liquidation of the whole or any part of
its capital stock, including a corporation A. Payment of Tax
which has been notified of possible
involuntary dissolution by the SEC; or Q: Who pays the tax of tramp vessels?
c. for its reorganization A: 1.the shipping agents and or the
husbanding agent
2.Render a correct return verified under 2.in their absence, the captains thereof
oath setting form: ►those people are required to file a return
a. forms of the resolution or plan; and pay the tax due before departure
b. such other information prescribed
Q: What is the effect of failure to file the
3.Secure a tax clearance from the BIR and return and pay the tax due?
file it with the SEC A: 1.Bureau of Customs may hold the
vessel and prevent its departure until:
a. proof of payment of tax is
4.Thereafter, SEC issued a Certificate of presented; or
Dissolution or Reorganization. b. a sufficient bond is filed to answer
for the tax due.
D. Sale of Stocks – ITR
look at the previous notes about it Installment Payments

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Tax due: more than P2,000 3 INSTANCES CONTEMPLATED
Taxpayer: individuals only (other than 1. file the return and pay the tax
corporation) 2. file the return but not pay the tax
Elect to pay the tax in two (2) equal 3. not file the return and not pay the tax
installments
Section 57 Withholding of Tax at
a. 1st installment: paid at the time the Source
return is filed
b. 2nd installment on or before July 15 A. Withholding of Taxes
following the close of the calendar ►subject to the Rules and Regulations the
year Section of Finance may promulgate, upon
recommendation of commissioner:
Q: What is the effect of non payment on the Require the filing up of certain income tax
date fixed? return by certain income payees.
A: The whole amount of tax unpaid
becomes due and demandable together Q: Enumeration is all about what?
with the delinquency penalties. A; Enumer ation about Final Income Tax
Except: Gross Income Tax
Payment of capital gains tax : 1. 25 B (NRANETB)
Q: Paid when? 2. 28 B (NRFC)
A: on the date the return is filed
Avail exemption for capital gains: B. Withholding of Creditable Tax at Source
a. no payments shall be required; ►The Sec. of Finance, upon
b. if you fail to qualify for exemption – recommendation of the commissioner
tax due shall immediately become require the withholding of a tax on the
due and payable and subject to items of income payable to natural or
penalties juridical persons, residing in the Phil,
c.seller pays tax – submit intention or by payor-corporation/ person… the
proof of intent within six (6) months same shall be credited against the
from the registration of document income tax liability of the taxpayer for
transferring the taxable year. At the rate of not
Q: when is the real property entitled to less than 1% but not more than 32%
refund? thereof.
A: upon verification of compliance with
the requirements for exemption. Q: What is the maximum?
A: Maximum: now 35% pursuant to RA
►Report gains on installments under Sec 9337
49 – tax due from each installment Q: When will you allow withholding beyond
payment shall be paid within 30 days 15%?
from the receipt of such payments. A:
►No registration of document For NIT 15% is the maximum
transferring real property 1. FIT – the amount of withholding is
1. without a certification from totally
commissioner or his duly authorize 2. GIT - equal to the amount of tax
representative that
a. transfer has been reported Tax Free Covenant Bond
b. tax has been paid ►the bonds, mortgages, deeds of trust or
other similar obligations of
B. Assessment and Payment of Deficiency
Tax DC or RFC
► Return is filed, the commissioner ►contains a contract or provision where the
examiner and assess the correct amount of obligor (debtor) agrees to pay the tax
tax imposed herein
►tax deficiency discovered shall be paid ►normally between the creditor and debtor
upon notice and demand from the
commissioner. Q: Who pays the tax?

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A: Creditor pays the tax by virtue of an
agreement the debtor assumes the liability
and the creditor is now free from payment
of tax before it can transfer the property to
the buyer.
Section 58 Returns and Payment of
Taxes Withheld at Source
A. Quarterly Returns and Payment of Taxes
Withheld at Source
1. covered by a return and paid to:
a. authorized agent bank
b. revenue district officer
c. collection agent
d. duly authorized treasurer of city or
municipality where withholding agent
has:
1. his legal residence; or
2. principal place of business; or
3. if corporation , where
principal office is located
2.Tax deducted and withheld
►held as a special fund in trust for the
government until paid to the collecting
officers.
3.Return for final withholding tax
►filed and paid within 25 days from the
close of each calendar quarter
4.Return for Creditable withholding taxes
►filed and paid not later than last day of the
month following the close of the quarter
during which withholding was made
5. Commissioner, with approval of Sec
Finance
► require withholding agents to pay or
deposit taxes at more frequent intervals
where necessary to protect the interest of
the government
B. Statement of Income Payments Made
and Taxes Withheld
►Withholding agent shall furnish payee
a written statement showing:
1. income or other payments made by
WHA during such quarter or year and
2. amount of tax deducted and
withheld
► statement given simultaneously upon
payment at the request of the payee.
Creditable withholding taxes
1. corporate payee – not later than the
20th day following the close of the
quarter
2. individuals payee – not later than
March 1 of the following year
Final Withholding taxes
►the statement should be given to the
payee on or before January 31 of the
succeeding year.
C. Annual Information Return
►Withholding agent shall submit to the
commissioner an annual information return
containing :
1. the list of payees and income
required
2. amount of taxes withheld from each
payees
3. other pertinent information required
Final Withholding Tax: AIR
►filed on or before January 31 of the
succeeding year
Creditable withholding tax: AIR
►not later than March 1 of the year
following the year for which the annual
report is being submitted
►Commissioner may grant WHA reasonable
extension of time to furnish and submit the
return required herein.
D. Income of Recipient
1. Income upon which any creditable
tax is required to be withheld at
source shall be included in the return
of its recipient.
2. the excess of the amount of tax so
withheld over the tax due on his
return shall be refunded
3. income tax collected at source is
less than the tax due on his return –
difference shall be paid
4. all taxes withheld
1. considered trust fund
2. maintained in separate account
3. not commingled with other funds
of WHA
E. Registration with Register of Deeds
►No registration of any document
transferring real property shall be
effected by the Register of Deeds unless
the commissioner or his duly authorize
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representative has certified that the
transfer (1) has been reported and (2)
tax due has been paid
►Register of Deeds requires payment of
tax before transfer of property
Section 59 Tax on Profits Collectible
from Owner of other Persons
►Tax imposed under this title upon gains,
profits and income not falling under the
foregoing and not returned and paid by
virtue of the foregoing
shall be assessed by personal return
Intent and Purpose of this Title
1. All gains, profits and income of a
taxable class shall be charged and
assessed with the corresponding tax.
2. Said tax be paid by the owner of the
gains, profit or income or the person
having the receipt, custody, control
or disposal of the same
Determination of Ownership:
►determined as of the year for which a
return is required to be filed
CHAPTER X: ESTATES AND TRUSTS
Section 60: Imposition of Tax
1. Estate ► property of the decedent
created by an agreement, trust or
by last will and testament
2. Trust ►agreement, contract or last
will and testament
Status:
1. Estate: same status as decedent
2. Trust: same status as the grantor
Income taxpayer is the Estate:
►income of the estate pending partition
or no partition at all:
Three kinds of partition:
1. judicial
2. extra judicial partition
3. or no partition at all
During partition Estate earns income:
1. individual – income tax
2. corporation – corporate income
tax
3. estate (Taxpayer = TP)
a.Impose Income as if TP is individual
b.Impose income as if TP is
corporation
c.Impose income as if estate itself
►depends whether there is a (1) judicial
(2)extra judicial partition or (3) no partition
at all
When there is a judicial settlement which is
final and executory but no partition:
Two possibilities:
1.Creation of unregistered partnership
►Income of the Estate: corporate income
tax
2.Creation of Co-ownership
►Income of the Estate: Income tax on
individual
-co-owner liable in their individual company
Ponce Case:
H: After finality heirs did not divide the
property, the applicable income tax is
corporate income tax because they
contributed money to engage in real estate.
SECTION 61 TAXABLE INCOME
(Important)
“Taxable income of the estate or trust shall
be computed in the same manner and on
the same basis as ill the use of an
individual.”
Section 62: Applies during Pendency of
Extra Judicial Settlement
Personal Exemption (P20,000)
Individual ► it will depend whether
he/she is classified as single, head of
the family or married
Estate ►regardless
Special deductions:Income distributed to
the heirs
►if you distribute nothing you cannot
claim this special deductions
►if there is a distribution, the heir shall
be liable to pay whether individual
capacity
►if there is no distribution, heirs are not
liable to pay anything
►Special deduction not apply if individual
tax is paid by the Estate itself.
Payment: made by executor, administrator,
to creditor to preserve the estate
Sec. 61 and Sec 62
►does not apply if estate is subject to
income or corporate income tax
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►it applies if the estate pays itself ►resulted to many gimiks through tax
during the pendency of the judicial avoidance scheme, like creating a family
settlement corporation (only taxable is the
stockholders which is exempt)
Basis: Sec 60 C ►Congress enacted RA 7449 decreased
“during the period of administration or 60% to 35% and then RA 8424 – 35% to
settlement of the estate.” 20%
Q: Now is it safe to create a family
Taxpayer is a Trust: corporation?
Q; When liable to pay income tax? A: No more.
A: If the trust is revocable (if revocable, Sec
61 and 62 also apply) Q: Now: Iba na ang scheme – which is
better sale or donation?
Parties: A:
1.Grantor /creator /trustor 1.Sale of RP considered capital assets
2.fiduciary / trustee ►6% to 1.5% doc. Tax 7.5 % better
3.beneficiary / Les Qui trust 2.Sale of RP considered ordinary asset
►5% to 52% as per use may be
Q: Who is liable to pay tax: 3.Donation if given to all compulsory heir
A: If trust revocable: ► relative lower than 20% which is 15%
► obligation of the trustee ► stranger: 30% so go with 20%
►liability of trust itself and not personal
Q: Who are the taxpayers?
Liability of trustee: A: Sec 104 Estate and Donors
If trust irrevocable 1.Estate
►obligation of the grantor a. RC
►personal liability of the grantor as an b.NRC
individual c. RA
d. NRA
TWO WAYS OF REPORTING INCOME: 2. Donor’s Tax
PURSUANT TO RR2 – (1949) a. RC
1. report only once b.NRC
(building paid once) c. RA
2. after the span of 25 years d. NRA
(payment of building divided per year) e. DC
f. FC
ESTATE TAX:
1.Sec 60 ►A corporation cannot die of a natural
2.Real Estate Tax death.
3. Estate Tax Q: What is the reason for classifying the
►transfer tax impose on the Net Estate taxpayers?
for the transfer of property to the heirs A:
or beneficiary whether real, personal, 1. NRA and Estate
tangible or intangible 2. NRA and FC Donors = property
outside Phil exempt
3 KINDS OF TRANSFER TAX: 3. all, other than these 3 – taxable w in
1.Estate Tax and w/out
2. Donor’s Tax Q: Is Section 104 relevant to all taxpayers?
3. Sec 135 of LGU Transfer of Real A: No, material only to NRA and FC
Property Section 104 speaks of intangible personal
property located in the Philippines.
Q: We don’t have inheritance tax and 1.Franchise which must be exercised in
donees tax, why? the Philippines;
A: 1973 Marcos issued P.D. 69 2.S.O.B. issued by a Domestic
Explain: Sec 84, rate is max of 20% of net corporation;
before the rate is 60% plus additional 3.S.O.B. issued by foreign corporation at
amount. least 85% of the business of which is

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located in the Philippines. – do not
confuse with 42 (2nd par)
4.S.O.B. of foreign corporation which
acquired a business situs in Phil
5.S.R. in business, partnership or
industry established in the Phils
Q: NRA, German donates SOS of FG to
Filipina gf, is it subject to donor’s tax?
A: it depends (you must qualify)
1.Subject to donor’s tax if:
1.S.O.B. FG at least 85% of business
located in the Phil
2.S.O.B. FG which acquired a business
situs in Phil
2.Exempt
1.personal property outside of Phil;
2.intangible personal property net taxable
if following requisites concern:
A decedent at the time of his death or the
donor at the time of donation was a citizen
and resident.
1.of a foreign country which at the time of
his death or donation did not impose a
transfer tax of any manner, in respect of
intangible personal property of citizens of
Philippines not residing in that foreign
country; or
2. the laws of the foreign country allows
a similar exemption from transfer or
death taxes of every character or
description in respect of intangible
personal property owned by citizens of
the Philippines not residing in that
foreign country.
Q: What if citizen of one country and
resident of another country will the
exemption apply?
A: No, law requires that he must be a
citizen and resident of the foreign
country.
Campos Rueda Case:
F: NRA died – married to Moroccan man, so
she was a Moroccan resident.
Donated SS in DC – administrator claims
exemption, ground: In Morocco,
intangible personal property of Filipinos
not residing therein is exempt from
transfer tax.
BIR contends: Morocco is not a country
but a colony of Spain.
H: claim granted – even if it is not a full
pledged state, or it’s a mere colony,
what matter is that the foreign law
provides for an exception.
SECTION 84 RATES OF ESTATE TAX
Q: What is the formula for Estate tax?
A: Gross Estate (Sec 85)
- Deductions (Sec 86)
--------------
Net Estate
x Rate
-------------
Taxable net income
- Tax credit
or ---------------------
Tax due
Gross estate (define) – Sec 104
►gross estate include real and personal
property, whether tangible or intangible,
or mixed, wherever situated
NRA: Decedent / Donor – property
situated outside of Philippines not
included on the gross estate
Section 85 Gross Estate (inclusion)
A.Decedent’s interest
►includes property (1) owned at the time of
death and (2) property not owned at the
time of death
Classic example: Usufruct
Q: if terminated by the death of
usufructuary, is it subject to estate tax?
A: Not subject to estate tax
Reason: Exempt Transmission under
Sec 87 (a)
►merger of the usufruct in the owner of
the naked title
Q: is there a conflict between Sec 88 a and
Sec 87 a? How do you reconcile?
A: No conflict
1.Section 87 a contemplates a situation
where the usufruct is terminated.
2.Section 88a contemplates a usufruct
for a fixed period. Ex contract of lease
Q: How do you determine the value of
usufruct?
A: Sec. 88 a provides to determine the
value of the right of usufruct, take into
account the probable life of the
beneficiary.
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Q: Why definition of gross estate is longer
than definition of gross gift?
A: transfer occurring after death. estate
tax absolute
Transfer during the life time
►Normally Donor’s tax
However there are exceptions:
1.transfer in contemplation of death
(85B)
2.revocable transfer (85 C)
3.transfer for insufficient consideration
B. Transfer in contemplation of death
Roces case:
F: during lifetime, the following document
were instituted or executed
simultaneously
1.will and 2. donation
The heirs insisted to pay Donor’s tax,
Posados the collector tried to collect
inheritance tax.
unique thing: Donees were also the heirs
in the last will and testament
Donees wanted to pay donor’s tax
because it is always lower than the estate
tax except when the donee is a stranger
H: this is a transfer in contemplation of
death
Dizon Case:
F: Deed of Donation was executed
Dizon died several days thereafter
son claims Donor’s tax
H:Transfers in contemplation of death
Q: What are transfers deemed in
contemplation of death?
A: 1.Property was transferred during the
lifetime but the decedent:
a. retains possession or receive
income or fruits of property; or
b.retains the right to designate
persons who will possess the property
or the right to receive fruits or income
c.Revocable Transfers
1.revocable transfers are included in the
gross estate
Reason: the decedent retains
tremendous power and control over the
property
2.Irrevocable transfers are not included
in the gross estate: exempt
Reason: the decedent losses control
over the property
Notice Not Required because the person
has the control over the property
D. Property passing under general power of
appointment
► same with fidel commissary substitution
3 parties:
1.testator / decedent
2.1st heir
3.2nd heir
TAKE NOTE: To determine whether included
in Estate or not, know who has the choice to
designate the 2nd heir:
►if decedent instructs the 1st heir that he
can transfer the property to whomever he
wants included in gross estate
►1st heir choice – included in gross estate
E. Proceed of Life Insurance
1.Beneficiary is the estate
►included in gross estate whether
designation is revocable or not
2.Beneficiary is 3rd person
► revocable included
►irrevocable not included
F. Prior Interest
►important only due to the codification of
the tax code B,C,E, included whether
before or after the effectivity of the code
G. Transfer for insufficient consideration
Q: Similar provision in Sec 100 (Donor’s
tax) can you apply the two (2)
provisions simultaneously?
A: No, alternative application, one or the
other but not both.
The application will depend on the time
of transfer or motive:
1.If transferred because of impending
death
► estate tax
2.If transfer because of generosity
►Donor’s tax
Q: Parcel of land was sold for less than
adequate consideration (adequate) to
relative for P600,000 when FMV is 1
million pesos. Is this subject to transfer
tax? Is it subject to Donor’s tax?
A: No, Sec 100 provides the property should
be other than real property referred to in
Section 24 (D)
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►Not subject to Donor’s tax, the 1.ELIT (expenses, losses, indebtedness
applicable tax is 6% FIT and taxes)
a) 1.Actual Funeral Expenses; or
Q: Will your answer be the same if SOS are 2.amount equal to 5% of gross estate
sold? ►apply whichever is lower
A: No, answer not the same, SOS not Limitation:
property contemplated in Sec 24 D (1) a)amount equal to 5% of gross estate
►in this case, the amount by which the should not exceed P200,000 (basis is
FMV of prop exceeds the value of the the gross value)
consideration shall be deemed a gift and b) Judicial Expenses
included in the computation of the gross ►no limitation
gift: subject to Donor’s Tax

Q: What is the subject matter in 85 G?

A: paragraphs 85 B, 85 C, 85 D Pajonar vs Commissioner
Sale in good faith as a defense: I: Whether or not extra-judicial expenses
1.under Section 100 is not a defense may be allowed as a deduction
H: This law has been copied from U.S. In
2. under Section 85 G, it is a defense US, expenses to be claimed as a
deduction both judicial and extra judicial
H. Capital of Surviving Spouse expenses.
►correlate with Sec 86 C
►both speak of legally married individual Claims against the estate
►pertains to the separate property of ►Estate is the debtor
spouse who survived
►capital used in its generic sense Requirements:
►surviving spouse may be man or woman 1.at the time the indebtedness was
incurred the debt instrument was duly
Section 86 (c) notarized;
►to determine the limitations of 2.loan contracted within 3 days before
1. Funeral Expense death;
2. Whether written notice is required 3.the administrator or executor shall
3. to determine whether gross value submit a statement showing the
is at least P200,000 (Sec 90) disposition of the proceeds of the loan
4.to determine if gross value is at
least 42 M Claims of the deceased against insolvent
person
Q: Who are the taxpayers under 86 A? ►Estate is the creditor
A: 1.RC
2.NRC Requirement:
3.RA ►the only requirement is that the (only)
amount of loan is included in the gross
Q: Who is the taxpayer under 86 B? estate
A: NRA ►notarization and certification not
required
Q: Why do we need to know this?
A: NRA cannot avail of the following Unpaid Mortgage, taxes and losses
deductions: Q: In unpaid mortgage who is the
1.family income mortgagor?
2.standard deduction ►decedent mortgagor
3.hospitalization 1. Unpaid mortgage
4.retirement pay under RA 4917 1.value of the decedent’s interest in the
property is undiminished by such
A. Deductions Allowed to the Estate of mortgage;
a Citizen or Resident 2.included in the value of the gross
estate;
Illustration:

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1 million FMV but mortgage is only
600,000 you include 1 million
2.Estate tax
3.Losses
Requirements:
1.losses incurred during the settlement
of the estate;
2.arising from fire, storms, shipwreck or
other casualties, or from robbery, theft
or unbezzlement
3.losses not compensated by insurance
4.losses not been claimed as a
deduction for income as purpose
5. losses incurred not better than the
last day for the payment of the estate
tax
Property Previously Taxed
►Vanishing Deduction Return
Requirement:
1.person acquires the property by virtue
of donation or inheritance
Q: What if acquired through purchase?
A: Not apply, the property must be acquired
by inheritance or donation
2.Estate tax or Donor’s tax already paid
by the Estate of the Decedent (1st par)
3.Any person who died within five (5)
years prior to the death of the decedent
Q: What are the amounts?
A: Prior Decedent died within:
1.5years – 20%
2.4years – 40%
3.3 years -60%
4. 2years – 80%
5. 1 year -100%
Q: Suppose the person died within 1 year
and it was inherited by son, suppose the
son also died within 1 year or may be 2
years, should we apply the vanishing
deductions?
A: No more (last par Sec 86 A2)
Transfer for Public Use
►amount of all bequest, legacies, devises
or transfers
Recipient:government or any political
subdivision
►exclusively for public purpose
Take Note: 30% of which not used for
administrative purpose is not a
requirement
FAMILY HOME
►amount equivalent to the current FMV
of the Family Home of decedent.
Limit: FMV should not exceeds 1 million
otherwise the excess will be subject to
estate tax.
Requirements: (RR 2-2003)
1.Person is legally married
GR: if single not allowed to claim
Except: if head of the family
2.Family Home actual residence of the
decedent
3.Certification of Barangay Captain of
locality
STANDARD DEDUCTIONS
►automatic: RR 2-2003 no requirement
provided the decedent is the one in 86 (A)
(RC, NRC, RA)
MEDICAL EXPENSES
Requirements:
1.amount not exceeding P500,000
2.medical expenses incurred by the
decedent within one (1) year prior to his
death.
►must be duly substantiated with receipt
RETIREMENT PAY UNDER RA 4917
(RETIREMENT PAY WITH PRIVATE PLAN)
Requirements:
1.plan duly approved by the BIR
2.person at least 50 years old
3. 10 years in service
4. avail only once
TAKE NOTE: This is a deduction in the
nature of exemption, all other retirement
plan is excluded
B. Deductions Allowed to Non resident
Estates
1.ELIT
2.Property Previously taxed
3.Transfers for public use
C. Shares in the Conjugal Property
D. Miscellaneous Provisions
For NRA: No deduction allowed unless
include in the return the value at the time
of his death that part of his gross estate
not situated in the Philippines. For proper
deduction must include E. below
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E. Tax Credit for Estate Tax Paid to
Foreign Country
SECTION 87 EXEMPTION OF CERTAIN
ACQUISITION AND TRANSMISSIONS
1. Merger of usufruct in the owner of the
naked title;
2. transmission or delivery of the
inheritance or legacy by the fiduciary
heir or legatee to the fideicommissary;
3. transmission from the first heir, legatee
or legacy donee in favor of another
beneficiary, in accordance with the
desire of the predecessor;
4. All bequest, devises, legacies or
transfers to (1) social welfare (2)
cultural and (3) charitable institution
Requirements:
1.no part of the net income insures to the
benefit of any individual;
2.not more than 30% of donation (BDL)
shall be used by such institutions for
administration purposes.
SECTION 88 DETERMINATION OF THE
VALUE OF THE ESTATE
A.Usufruct
1.Determine value of right of usufruct:
►consider the probable life of the
beneficiary based on the latest Basic
Standard Mortality Table
B.Properties
►fair market value of the Estate at the time
of death
1.FMV determined by Commissioner
2.FMV schedule of values fixed by the
Provincial or City Assessors
SECTION 89 NOTICE OF DEATH TO BE
FILED
Q: What is the Basis?
A: the gross estate of the person
Q:When is the notice required to be filed?
A: 1.all cases of transfer subject to tax
2.although exempt, when gross values
of the estate exceeds P200,000
Q: When filed?
A: within two (2) months
1. after decedent’s death
2.same period after qualifying as executor
or administrator
►give a written notice
Q: If the Net Estate is at least P16,000 will
you in form the commissioner?
A: yes, the gross is at least 3-4 million
SECTION 90 ESTATES TAX RETURNS
Q: When required to file return?
A: 1.all cases of transfer subject to tax
2.even though exempt, gross value
of the estate exceeds P200,000
3.regardless of gross value of the
estate, when the same consists of
registered or registrable prop such as:
a.real property
b.motor vehicle
c. shares of stocks
d. other similar property where
clearance from BIR necessary for
transfer of ownership in the name of
the transferee
►return must set forth the following:
1.value of the gross estate at time of
death
2.deductions allowed
3.information necessary to establish
correct taxes
Q: What if Estate is exempt, is it required
to file a return?
A: General Rule: No
Exception:
a. gross value exceeds P200,000
b.estate contains registrable property
Q: if the estate or gross estate exceeds 2
million, what is the requirement?
A: return must be duly certified by a CPA
B. Time of Filing
►filed within 6 months from decedent’s
death
►within 30 days for filing the return
►within 30 days after promulgation of such
order
1.certified copy of the schedule of
partition and
2.order of court approving the same
C. Extension of Time
Time: 30 days
Grounds: meritorious cases
Who grants: Commissioner
D. Place of filing:
►return shall be filed with:
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1.authorized agent bank
2.revenue district officer
3. collection officer
4. duly authorized treasurer
►city or municipality in which decedent
was domiciled at the time of his death
Q: What if non resident?
A: NR with no legal residence here, with the
office of the commissioner.
Q: Let us say there are 3 compulsory heirs,
namely A, B, and C. A renounces his
inheritance coming from the parents, but A
renounces his inheritance in favor of his 2
siblings, brother and sister B and C. Is this
subject to donor’s tax?
A: NO. It is exempt.
Q: But if in the given example, A said “I am
renouncing my inheritance, but I am giving
it to my sister B”, is this subject to donor’s
tax?
A: YES. Renunciation is to the
disadvantage of the brother.
TAXATION UNDER THE LOCAL GOVERNMENT
CODE:
1. Local Tax
2. Real Property Tax
LOCAL TAXATION (§186, 187, then go to
§151, 128 down)
Q: Mayor Binay of Makati ordered the
collection of elevator tax (for elevator in the
city hall). Is the order of Mayor Binay
legally tenable?
A: NO. There should always be a tax
ordinance after conducting a public hearing.
(§186)
tax ordinance
Q: Can BIR collect the tax even in the
absence of a revenue regulation?
A: YES.
Q: Can a province, city, municipality or
barangay collect the tax if there is no tax
ordinance?
A: NO.
Q: Why is it that there should be a tax
ordinance as required by §186?
A: The rationale is not mentioned in §186,
but if you read the other provisions of the
LGC, you will come to set of conclusions of
the reason why there must be a tax
ordinance.
» In most of these provisions, it always
say: one-half if the town or municipality
shall collect a tax of not exceeding 1% of
the gross receipt.
TAKE NOTE: There is no exact amount;
hence, it is the tax ordinance which will fix
the exact amount.
public hearing
In Congress, the requirement is not
absolute (by discretion only). Under local
taxation (last phrase of §186), the
requirement is ABSOLUTE.
REYES vs. SECRETARY (320 SCRA 486)
F: In the municipality of San Juan (just
beside Mandaluyong) there was a tax
ordinance passed. Reyes, a resident,
claims that there was no public hearing
conducted, he maintains that under
§186 last phrase, there should always be
a public hearing.
H: The SC said: “yes, that requirement is
an absolute one, but since the petitioner
failed to produce evidence to support
his allegation, if there is no proof
presented other than his own
statement, we hereby rule that the
ordinance was passed in accordance to
the procedure mandated by law”. While
it is true that a public hearing is an
absolute requirement, he who alleges,
must prove the same.
Q: If you don’t agree with the validity or
the constitutionality of the tax ordinance,
what will be your remedy?
A: Within 30 days from the effectivity of
the ordinance, the taxpayer should file an
appeal with the office of the Secretary of
the DOJ (§187)
REYES vs. SECRETARY (320 SCRA 486)
F: Reyes asserted the validity and
constitutionality of the tax ordinance
only after the lapse of thirty (30) days
(perhaps his lawyer was thinking that an
ordinary statute may be contested
anytime with the RTC, CA or SC).
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H: With regard to a tax ordinance, w have a
specific rule, failure to assail the validity A. General Principles (§128-130)
with the specific period of time, is fatal
to the taxpayer. Since it was filed ► reiteration of the constitutional tax
beyond the 30day period, we do not provisions
disturb the validity of the ordinance.
► notice that the constitutional limitations
Q: Within what period should the Sec. of on taxation do not only apply to the
Justice decide? national government but also to local
A: Within 60 days from the time the appeal government units.
was filed. Failure to decide within this time,
the taxpayer has the remedy to file an B. Definitions (§132)
action with the regular courts.

» If the decision was made within the 60 Local Taxing Authority (§132)
day period, and receives the decision, his  for a province, it is the provincial
remedy is to file an appeal within 30days board or the provincial council
form the receipt of the decision to court of (sangguniang panlalawigan)
competent jurisdiction → RTC.  for a city, we have the city council
(sangguniang panlusod)
» Beginning April 23, 2004, from the ruling  for the municipality, we have the
of the RTC, pursuant to RA 9282 (the law municipal council (sangguniang
uplifting the standards of the CTA), the pangbayan)
ruling of RTC on local tax cases, is  for the barangay or barrio, we have
appealable to the CTA en banc. the barangay council.

TWO APPEALS DECIDED BY THE CTA EN C. Common limitations on the taxing

BANC: power of the LGU’s (§133)
1. decisions of RTC involving local tax
cases » Under the old law this was §5 of the
2. decision of the Central Board of Local Tax Code.
Assessment Appeals.
Q: Why common?
» From CTA en banc, the appeal must be A: Because the limitations or prohibitions
file with the SC within 15days. apply to all LGUs, the provinces, cities,
municipalities and barangays.
» Go to §151:
The city could impose the tax already Two Common Crimes (under §133)
imposed by the province of by the 1. absolute prohibition
municipality. 2. relative prohibition

Q: What are the numerous taxes imposable It shall be unlawful for the LGUs to collect:
by the province which a city now allowed to I. Income Tax EXCEPT when levied on
impose? banks and other financing institutions
A: Those enumerated in §135 to §141 of (§133(A))
the LGC » the term “other financing institution
shall include money changer, lending
Reasons why a municipality wanted to be investor, pawnshop (§131(E))
converted into a city: » rate of tax: does not mention rate
1. §151 of tax, so long as it is “fair, just and
2. §233 (real estate tax) reasonable”
» In addition, the law says that the city » It cannot be “prohibited taxation,
could increase the rate of the tax by not because the element of “imposed by the
more than 50% of the maximum EXCEPT same taxing power” is not present. One
those enumerated in §139: is imposed by the national government
a) professional tax and the other is by the LGU.
b) amusement tax II. Documentary Stamp Tax (§133(B))

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» absolute prohibition
III. Estate tax, inheritance, donations inter
vivos, donations mortis causa EXCEPT in
§135 (§133(C))
» transfer tax on the transfer of realty
to be imposed by provinces and cities
(§135)
NOTE: this is not a real estate tax,
this is a local tax.
IV. Custom duties, charges or fees for the
registration of vessels or ships, wharfages
fees and wharage dues EXCEPT if the wharf
had been established, maintained and
operated by the locality (§133(D))
» wharfage due – is a custom fee
imposed on the weight of the cargoes.
» wharf – a pier
» special levy on public works (§240)
» allows provinces cities and
municipalities to impose a special real
estate tax known as “special levy or
public works”
» let us say the municipality
established a pier for a minimal value of
P10M; out of P10M, under §240, 60% of
this may be recovered; the other 40%
may be recovered by warfage due.
v. Tax, fee or charge for goods or
commodities coming out or passing through
the territorial jurisdiction even if in the
guise of a toll or a fee (§133(E))
» an absolute prohibition
» commodities marketed in a public
market, let’s say in the city of Pasig,
where the commodities came from
Laguna then to Tanay, Cainta, Taytay;
just imagine if each of the towns will
impse 1peso for every head of a chicken
or 50cents for every bundle of
vegetable.
PALMA DEV’T CORP v. MALANGAS
ZAMBOANGA DEL SUR (113 SCRA 572)
F: Municipal council passed a tax
ordinance entitled “police surveillance
fee” which provide that ALL motor
vehicle passing through a particular
street in the town proper of Malangas
which will lead to the pier or wharf will
pay a certain sum of money whether it
is camote, copra, palay,or rice. One of
the owners of the motor vehicle is Palma
Dev’t Corp. carrying copra, banana and
coconut to be loaded in a ship docked at
pier of Malangas. The lawyer of
petitioner assailed the validity of the
ordinance stating that it is a clear
violation of §133(E).
H: It is not the title of the ordinance which
is controlling but it is the essence of the
substance of the tax ordinance. The tax
ordinance clearly violated §133(E),
therefore, the SC had no option but to
declare the tax ordinance null and void
for being in violation of the law.
VI. Taxes, fees or charges on agricultural
and aquatic products when sold by
marginal farmers or fishermen (§133(F))
Q: Don Antonio Florendo, a person
coming from Pampanga who settled in
Davao City, employed thousands of
workers in the different banana
plantation. Can the LGU impose tax on
the agricultural product which is a
banana?
A: YES. The LGU can impose because
Don Antonio is not a marginal farmer. It
is only prohibited if it is sold by a
marginal farmer.
» Marginal Farmer – a farmer or a
fisherman for subsistence only, whose
immediate members are the immediate
members of the family (§131(P))
VII. Tax, fee or charge on pioneer and non-
pioneer enterprise duly registered with the
board of investments for a period of 6yrs
and 4yrs respectively (133(G))
» relative prohibition because after the
period, the LGU concerned may now
impose the tax.
VIII. Excise tax on articles and tax, fees
and charges on petroleum products
(§133(G))
» relative prohibition since under
§143(H), it says there that taxes which
are prohibited such as excise tax,
percentage tax and value added tax
nonetheless, the LGU may impose a tax
not exceeding 2% of the gross receipt
(for cities 3%).
» My former student an assistant in
the city legal attorney in a city in Metro
Manila, received a summon from the
RTC (on complaint of a supermarket in
Metro Manila) questioning the validity of
the tax ordinance under §143(H) since
the rate imposed was 3%
I said, “ineng, una file kayo ng
motion to dismiss. Nak ng puta, absent
ka na naman ata eh, you invoke §151
stating that a city can impose a tax
higher than the rate provided for by law
not more than 50% of the maximum
(50% of the maximum of 2% is 1,
therefore, 2+1 is 3%)”
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BULACAN v. CA (299 SCRA 442)
*first case decide by the SC which
interpreted both the LGC and the NIRC.
F: The then governor, Obet Panganiban
together with his provincial council
passed an ordinance imposing tax on
quarrying under the provision of §138 of
the LGC. The problem is that the
ordinance applies to ALL entities
quarrying in the province. One of the
taxpayers, Republic Cement obliged to
pay the tax, argued that under §138 of
the LGC, the tax on quarrying on which
the province may be allowed shall only
be with regard to quarrying private land,
and not only that but under §133(H),
there is a prohibition to impose excise
tax and tax on quarrying under the IRC
is an excise tax.
H: The tax on quarrying allowed to
provincial governments shall only be
with regard to lands which are public
lands, and since this is a private tax on
quarrying refers to a lot without any
distinction. Hence, if the LGC made a
qualification as to the kind of land
(where it says it should be public land),
by implication, it should refer to private
land under §151 (although the law did
not distinguish); and since it is a tax by
the national government, it should be
collected by the BIR (not the LGU), and
also the SC agreed that it is an excise
tax where LGU’s are prohibited from
collecting; thus, the SC declared the tax
ordinance null and void for being
contrary to law.
» Sir, why is it a problem when the law
is clear that under §138, it shall only
apply to public land?
Perhaps the provincial council
thought that the subject matter of the
tax ordinance may be a subject matter
provided in any book including the IRC,
or worse, that it may impose a tax on a
subject matter not mentioned in any
book.
Moral lesson: although a tax
ordinance may be passed even if the
subject matter is not provided for in any
law, it has to comply with the
limitations.
PETRON v. PENILLA (198 SCRA 86)
* The facts here arose under the old law
under §5 (now §133) of the local tax code
(PD 231)
F: Petron has a factory/plant in Penilla
where the raw materials petroleum
products are being converted into
refined petroleum products. The
municipal council of Penilla imposed a
tax by way of a tax ordinance saying
that they are invoking the old §19 (now
§143(A)) stating that municipalities are
authorized to impose tax of the
manufacture of any commodity, hence,
since it is manufacture of a petroleum
product, the LGU must e authorized.
However, Petron objected since under
§5 (now §133(H)), the prohibition
includes the prohibition to impose excise
tax and not only that, under this par.,
the tax on petroleum products is an
excise tax. Under this par., the law is
clear it does not only prohibit the
imposition of tax, fee or charge over
petroleum products.
H: The controlling provision here the old
§19 (now §143(A)) that LGUs are
authorized to impose the business tax
for the manufacturing over any kind of
commodity by and petroleum product is
“any kind of commodity”.
Q: What do you think?
A: I don’t agree with this ruling because
between §133(H) and §143(A), it is the
former which is more specific.
IX. Value added tax and percentage
(§133(I) EXCEPT §143(H)
» Relative prohibition.
X. Tax, fee or charge on common carriers
whether by land, water or air (§133(J))
FIRST HOLDING CO. v.BATANGAS CITY (300
SCRA 661)
* 2nd SC ruling discussing both the IRC and
LGC.
F: This revealed to the public the existence
of 2 very big oil pipelines coming form
Batangas City with a distance of more
than 100km, one going to Pandacan Oil
Depot and the other one is going to
Brgy. Bicutan, Taguig. The Batangas City
council deemed it necessary to impose
a tax on the gross receipt of the 1st
holding company for the operation of
the oil pipeline, but the operator argued
that the oil pipeline is not a common
carrier.
H: The SC reasoned out like in the case of
Pajunar v. Comm (328SCRA666), saying
that “we have copied the code of carrier
law form the US where the definition of
a common carrier is one habitually
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- Atty. Francis J. Sababan -
carrying not only individuals or
passengers but also goods or
commodities, and since the oil pipelines
is habitually carrying petroleum
products which is a commodity, we rule
this as a common carrier which is under
§133(J), LGU is prohibited from imposing
tax on common carriers, and not only
that but under §170 of the LGC, the law
is very explicit, that ALL LGUs are
prohibited to impose percentage tax on
common carriers”. With that, the tax
ordinance passed was declared null and
void for being contrary to law.
XI. Premiums on re-insurance (§133(K))
» absolute prohibition.
XII. Tax, fee or charge on registration of
motor vehicles and for the issuance of
license and permit for driving thereof
EXCEPT tricycles. (§133(L))
BATUAN CITY v. LTO (322 SCRA 805)
I: Which function was delegated to the
LGU? The LTO registering motor vehicles
“or” the LTFRB granting franchise and
regulation of common carriers?
H: Under §133(L), the function of the LTO is
prohibited, an therefore what may be
delegated to the LGU is the function of
LTFRB.
XIII. Tax, fee or charge on exportation of
products and is actually exported EXCEPT
under §143(C) where the LGU is authorized
to impose business tax on exportation
(§133(M))
XIV. Tax, fee or charge on cooperatives
duly registered under the cooperative cod
(RA 6938) and Business Kalakalan (RA
6810) (§133(N))
» A cooperative is exempt from local
tax, provided it is duly registered with
the cooperative code and the
cooperative development authority “or”
Business Kalakalan (not kalkalan)
XV. Tax, fee or charge over the national
government, political subdivisions and
agencies and instrumentalities of the
government (§133(O))
» Relative prohibition since it admits of
an exception under §154 of the LGC
where it says that a LGU may be
authorized to impose a fee or charge for
the operation of a public utility provided
it is owned, maintained and operated by
such LGU.
NAIA v. PARANAQUE (JULY 2006)
H: SC ruled in favor of the airport.
Paranaque being a LGU can’t impose tax
on a government instrumentality. Airport
owned by the government is not an
agency, it being an instrumentality.
Q: May the government tax itself it the
taxing power is the local government?
A: NO. The local government cannot
impose tax on the national government,
and with more reason that it cannot
impose a tax with equal LGU.
D. Taxes that can either be imposed by
Provinces or Cities
I. tax on transfer of realty (§135)
► Note that this is not a real estate tax,
this is a local tax for the simple reason that
it is not provide for under the topic of real
estate tax (§198-280)
► Law says “it should not exceed ½ of 1%
of the consideration” (NOTE: do not use
zonal value since this is used only under the
IRC, not the LGC.
Q: Since all the provinces and cities must
follow the limitation of the rate (not
exceeding ½ of 1%), is it violative of the
equal protection clause?
A: NO, because the sangguninan had to
determine the actual rate considering the
status of the province.
Q: Why is that Makati fix the rate of 75% or
3/4 of 1%?
A: Because cities are authorized to
increase the rate of 50% of the maximum,
that is 50% of ½ is 25% (50+25 is 75%).
NOTE: Do not apply transfer of realty
pursuant to RA 6657 (CARP) → this is the
Comprehensive Agrarian Reform Program →
this is exempt.
II. tax on printing an publication (§136)
► Normally, a province cannot impose this
because the tax on business can only be
imposed by a city or municipality EXCEPT
this one, on printing and publication of
magazines and periodicals.
III. franchise tax (§137)
► The old national franchise tax under the
old tax code was already abolished.
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► We still have franchise tax other than
this one, known as national franchise tax →
provided for in the republic act granting
franchise.
Two kinds of Franchise Tax:
1. local franchise tax (under LGC §137)
2. national franchise tax (provided for
in the statute or republic act
authorizing the franchise)
Q: May LGUs impose local franchise tax?
A: We have to consider here many
supreme court decisions and also §193 of
the LGC.
Under §193, it says there “unless
especially provided for in this code,
exemptions granted to natural juridical
persons are hereby withdrawn (abolished)
EXCEPT:
1. local water districts
2. cooperatives registered under the
cooperative code (RA 6938)
3. non-profit and non-stock educational
institution.
BASCO v. PAGCOR (197 SCRA 52)
F: The city council passed a tax ordinance
imposing tax on PAGCOR, an agency of
the government. PAGCOR objected
saying that the local city is prohibited
under the old local authority act to
impose tax on an agency of the
government.
H: The SC declared null and void the tax
ordinance saying Manila cannot do that.
CEBU v. MACTAN (261 SCRA 667)
F: Cebu government was trying to collect
real estate tax from the Mactan airport
(note: real property tax is a territorial
tax, meaning it should only be collected
within its territorial jurisdiction). Lawyers
of Mactan airport argued that under
§13(O), Cebu, a LGU, cannot impose tax
on an agency of the government, and
they also invoked the ruling in BASCO.
H: The lawyer of Mactan airport is devoid of
any merit at all, it is 100% erroneous
since the real estate tax is not a local
tax, hence, why invoke a SC ruling and
codal provision which can only be
applied to local tax. Therefore, Mactan
airport should pay Real Property Tax.
► Before the codification in 1991 (to take
effect January 1, 1992), local taxation was
embodied in a separate book known as
Local Tax Code (PD 231) while real property
tax was provided for in a separate book
known as Real Property Tax Code (PD 464)
LRT v. CITY OF MANILA (342 SCRA 692)
F: The Manila city government tried to
collect real property tax but the
management of the LRT said “no you
cannot do that to us since it is
exclusively for public use”.
H: NO, you are not exclusively for public
use since every time a person wants to
use the LRT he has to pay.
Q: Why not use the defense that it is
owned by the government?
A: Because in real estate tax, the defense
that it is owned by the government is not a
defense.
The LGC in §199(B) and in §217, both
provisions says that the basis for the
imposition of real estate tax is the ACTUAL
USE of anybody who is using that (maybe in
the concept of usufructuary or in the
concept of a lessee, or in the concept of an
owner); the basis is not ownership.
► in §134, the taxes here must not only be
imposed by provinces, it may also be
imposed by cities in line with §151 → those
enumerated in §135 to 141.
CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS
OCCIDENTAL (181 SCRA 38)
* This was the prevailing rule for more than
10years from 1988
H: In the franchise or the republic act,
there are only two (2) kinds of franchise,
one is a franchise which provide for a
condition that this tax (referring to the
franchise tax) shall be in lieu of all other
taxes, and the other franchise is the one
which do not provide for such provision;
the province or the city can impose local
franchise tax if the franchise belong to
the second example.
REYES v. SAN PABLO CITY (305 SCRA 353)
* Here the SC uniformly ruled
H: A provision on exemption under §193
don’t only refer to exemptions provided
for by different statutes, but it includes
those which claim exemptions by virtue
of the case of Cagayan de Oro (because
SC decisions are also laws).
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PLDT v. DAVAO (363 SCRA 750)
F: The franchise holders of Smart and
Globe are claiming exemptions from the
local franchise tax because they are
saying that they are holding a franchise
which says that it is a franchise enacted
by the house of Congress in 1995 which
carries with it an exemption form local
franchise tax.
H: By the very explicit provision of §193,
the removal of exemptions granted by
different statutes and also by SC
decisions applies only to statutes and
decided by the SC on or before Jan. 1,
1992, because §193 says “upon
effectivity of this law”. For exemptions
covered by §193 therefore, Smart and
Globe are authorized to claim
exemptions because the statue (RA
7082) was enacted on 1995.
IV. tax on sand, gravel and other quarry
resources (§138)
► We are through with that in the case of
Bulacan
V. professional tax (§139)
► this must be correlated with the tax
under §147.
► NOTE that this is an exemption to the
rule that a city may increase the rate of the
tax → under §151 of the LGC, the increase is
not allowed.
VI. amusement tax (§140)
► under the IRC, there is also amusement
tax under §125.
PBA v. QUEZON CITY (137 SCRA 358)
F: The city government enacted a tax
ordinance trying to collect amusement
tax including amusement tax on the PBA
(in Araneta, Cubao); but PBA and “no,
we are already paying amusement tax
to the national government through the
BIR because of §125 of the IRC”
H: QC government can no longer collect on
the ground that it is already being
collected by the national government
and secondly, in the enumerations of
amusement under §140, you will never
see professional basketball. Most of all,
it is the intention of the author that it is
only the national government.
*nak ng putang katangahan yan.. the local
tax code PD 231 was enacted in 1974 when
we don’t have any professional basketball..
since professional basketball was born May
1975.
* ano ba dapt tama diyan? → both the
national government and the QC
government can collect. There is no
violation of the prohibited double taxation,
because the taxing powers are different,
and not only that §140 speaks of
amusement tax on admission fee but under
§125, it is abut gross receipts.

► both §139 and §147 are taxes imposed VII. delivery van (§141)
on persons exercising professional calling.
Q: What if not a delivery van, but “sako”
Section 139 Section 147 lang?
are to be imposed are to be imposed
by provinces and by municipalities
cities and cities
are applicable to are applicable to A: The applicable tax is under §143(G)
workers who must persons who are (peddler’s tax, one imposed by
pass a working but are municipalities and cities.
government not required to If may dalang sasakyan, yari siya ng
examination (e.g. take government province sa tax.
engineers, examinations
physicians, etc) NOTE: §135-141, these are taxes that can
there is a It does not be imposed by PROVINCES and CITIES.
maximum (P300) provide for any §143-150 are taxes to be imposed by
NOTE: it is not amount, the only MUNICIPALITIES, which can also be imposed
always 300, since requirement is by CITIES.
the exact amt that it must be
must be fixed by reasonable E. Taxes that can either be imposed by
the ordinance. Municipalities or Cities

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I. Business Tax (§143(A-H))
a. manufacturing, repacking,
processing, including the
manufacturer of permitted liquor and
also its dealer
b. wholesaling
c. exportation
d. retailing
e. contractor’s tax
f. tax on banking institution and
financing institution
g. peddler’s tax
h. the exemption under §133(i)
Q: If you have two branches, how many
business taxes do you have to pay?
A: You pay only one business tax (§146)
ILO-ILO BOTTLERS v. ILO-ILO CITY (164
SCRA 607)
F: Ilo-ilo Bottlers was already paying a
business tax on manufacturing under
§143(A) to the city government by virtue
of a tax ordinance. Later on, they are
obliged to pay by virtue of another tax
ordinance imposing business tax on
wholesaling. Naturally, Ilo-ilo Bottlers
argued, “how could it be, if you
manufacture, it necessary follows that
you sell the commodity so, with the
payment of the business tax on
manufacturing, it carries with it the
business of wholesaling”.
H: NO, you have to determine the
marketing system of the company. If
wholesaling is also being done in the
place of manufacture, the business tax
on wholesaling should no longer be paid
it should only be the business tax on
manufacturing. But if the marketing
system of the company provides that
wholesaling shall be done in a separate
place (maybe several kilometers away),
the manufacturer must still pay the
business tax on wholesale because now
it could be argued that they have the
separate business of wholesaling.
Q: On the business of retailing, should the
business tax of retailing be imposed by the
city or by the municipality “OR” by the
barangay in the city or the barrio in the
municipality?
A: §143(D) must be correlated with §152,
the tax to be imposed by the barangay.
It depends:
a. city
» if the gross receipt of the retailer
exceeds P50T in a minimum of
one year, it is the right and
privilege of a city to impose the
business tax on retailing.
b. barangay
» if the gross receipt of the retailer
did not exceed P50T, it is the
barangay council where the
business of retailing is located.
c. municipality
» if the gross receipt of the retailer
did not exceed P30T within a
period of one year.
d. barrio
» if the gross receipt of the retailer
did not exceed P30T within a
period of one year.
NOTE: These distinctions do not apply in
wholesaling. These are only for retailing.
► Paragraph H: for the imposition of
excise tax, percentage tax and value added
tax, the municipality may impose a tax not
exceeding 2% of the gross receipt (with
regard to a city, it may go as far as 3%)
II. Municipalities in Metro Manila who can
increase their rate (§144)
► Right now there are only two
municipalities:
1. San Juan
2. Pateros
III. Professional Tax (§147)
► we are through with that
IV. Fees for sealing and licensing of weights
and measures (§148)
V. Fishery rentals, fees and charges (§149)
F. Situs of Tax (§150)
► The tax referred to in here is the
business tax on wholesaling and retailing.
Q: RFM is manufacturing commodities, one
of them is Swift hotdogs, this is being sold
not only in Mandaluyong, Metro Manila, but
also to the inter country from Batanes to
Tawi-tawi. Where should the business tax of
wholesaling or the business tax of retailing
be paid? Should it be in the principal office
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- Atty. Francis J. Sababan -
(Mandaluyong) “or” the place where the
commodities are sold? Q: Is there a conflict with the case of Shell
A: It will be paid in the place where it had and Phil Matches?
been sold PROVIDED there is a branch office A: NONE. As a matter of fact, these two
or a sales outlet (§150(A)). decisions complement each other.

► If it so happens that the company has a G. Taxing Powers of the Barangay

factory different from the place where the (§152)
principal office is located → 30% should be
pain in the principal office and 70% in the ► Only a minimal sum (fair and
municipality or city where the branch is reasonable)
located.
Power to impose tax:
PHIL MATCHES v. CEBU (81 SCRA 99) 1. On commercial breeding of fighting
F: Phil Matches were produced in cocks, cockfights and cockpits
Nagtahan, Manila. In Cebu city, there » must be for commercial purposes
was a warehouse where the matches 2. On places of recreation which charge
were stored. Many of the customers, by administration fee
way of wholesale in the warehouse in 3. On billboards, signboards, neon signs
Cebu City, they came from different and outdoor advertisements
towns of the Visayan Region. May the » especially for the barrios and
business tax ordinance of Cebu be barangays along the highway
imposed on those transactions even if 4. For barangay clearance
the buyers did not come from the » if you want to engage in the
territorial jurisdiction of Cebu? business of retailing or wholesaling
H: Since in this case the contract booked → if barangay captain will not
and paid, meaning, it was negotiated approve that → within 7days go to
perfected and consummated in the the municipal hall or city hall for
warehouse where it was located in Cebu approval
City, the Cebu City government has the 5. For the use of barangay property
right to collect business tax. » for instance the barangay has a
plaza.
Q: What if there is an agreement that
commodities would be delivered and that H. Common Revenue Raising Powers
the buyer would be waiting in some other (§153-155)
town, is the answer still the same?
A: YES, the answer is still the same Q: Why common?
because delivery to the carrier is delivery to A: All the LGU could impose the same. But
the buyer where delivery has been termed it does not follow that all the provinces,
within the territorial jurisdiction of Cebu. cities, municipalities could impose the
same. Only the LGU which operate,
SHELL v. CEBUCOT, CAMARINES SUR (105 establish, maintain the entity
PHIL 1063) If established by the province, it should
F: The petroleum products were purchased only be the province.
at the motor vehicle traversing the
neighboring towns of Cebucot like These are:
Bason, Dimalaon, all towns in Camarines 1. service fee and charges
Norte. The contract of sale was » for services rendered
negotiated and perfected in different 2. public utility charges
municipalities where the motor vehicle » provided owned, operate and
of Shell was traveling. maintained by them
H: Although the oil depot was located in 3. toll fees and charges
Cebucot, the said municipality cannot » tax or toll for the use of a bridge or a
impose tax on that because the contract street
of sale was negotiated and perfected in
the different nearby towns of ► Padua filed a civil action in the
Camarines. MakatI RTC trying to stop the government

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- Atty. Francis J. Sababan -
form collecting a toll free in the South
Express including the North expressway
alleging that he is affected as a taxpayer
because he is from Paranaque. He argued
that if you use the property of the
government like a street or a public plaza,
you do not pay. He made the analogy, that
if you go to Luneta, you do not pay the city
government of Manila.
The Makati RTC, the CA and SC had a
uniform ruling that the operator should be
prohibited from collecting further toll fess
because if the operator had already
recovered his investment and earned an
income already, he should be stopped. As
argue by the SC, it copied the argument of
the lawyer (re: Luneta).
» NOTE: that Res Judicata do not apply
here.
When the ruling became final an
executory in 1993, the North and South
Express were totally dismantled and totally
destroyed by the DPWH to give way to the
final and executory ruling of the Court, that
It should no longer be collected.
After several months, the
government announced in the radio that
the party in the case of Padua, mutually
agreed that the collection shall be resumed
in order to have money for the maintenance
and repair of the highway.
Exceptions to §155 (collection of toll fees)
1. members of AFP
2. members of the PMP
3. post office personnel delivering mail
4. physically handicapped
5. disabled citizens 65 years and older.
I. Community Tax (§156)
► In the old days, known as “residence tax
certificate.
Q: If the Filipino is a resident of a foreign
country (NRC), is he liable to pay the
community tax certificate?
A: NO, because the basis of imposition of
this tax is whether or not you are an
inhabitant of the Philippines. Meaning you
are a resident of the Philippines.
Q: What about a foreigner residing in the
Philippines (RA)?
A: YES. You have to pay unless the
foreigner is a trans-investor for not more
than 3months.
► This is applied to both natural and
juridical persons.
Requirements:
1. for a natural person → at least 18
years of age
2. for corporations → upon registration
with the SEC
Q: What if you become 18 in the month of
January or November or December?
A: For those who celebrated their birthday
before July 1 (that is up to June 30), they
are liable to pay the tax, for this year.
For those who celebrated their birthday
on or after July 1, they are not yet liable to
pay this year, but have to wait until next
year.
Q: Is there a difference for those who
reached 18 in the months of Jan-Feb-March
and those who reached 18 in the months of
April-May-June?
A: YES. For those who celebrated birthdays
in the months of Jan-Feb-March, they have a
grace period of 20days within which to pay.
Those who celebrated their 18th birthday in
the month of April-May-June, they do not
have any grace period at all, they have to
pay the tax immediately.
Q: If you have a community tax certificate
for this year (2006), can it be used only
until December 31, 2006?
A: NO. It shall be valid up to April 15, 2007.
(§163(C))
J. Accrual of the Tax (§166)
► January 1
Q: What if the tax was only approved in the
month of May 2006, do you have to wait
until January 2007?
A: NO. You have the right to collect that in
July 1, because the law is saying that “it
should be collected in the next succeeding
quarter” (§167)
► Mayor Binay had a tax ordinance in May,
sabi ng mga bata niya: “bosing, collect na
tayo ng June”.
Binay: “hindi nga pupwede, maghintay
pa tayo ng July 1”.
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Q: What if the tax ordinance had been
existing for several years already?
A: The time of accrual will always be
January 1.
REMEDIES UNDER THE INTERNAL
REVENUE CODE
1. Remedies of the Government
2. Remedies of the Taxpayer
Remedies of the government:
1. Assessment
2. Collection
Under the NIRC, assessment and collection
have 2 kinds:
1. Normal/Ordinary assessment and
collection – Sec. 203, NIRC
2. Abnormal/Extraordinary assessment
and collection – Sec. 222, NIRC
I. Normal/Ordinary assessment and
collection
► There was a return filed and it
is not fraudulent and not false
II. Abnormal/Extraordinary assessment
and collection
► There was:
1. an omission or failure to file
the return;
2. if there was a return filed, it
was fraudulent, or;
3. the return was false
Q: Is a false and fraudulent return
presumed?
A: NO, false and fraudulent return is not
presumed. The burden of proof to prove
that the return was false and fraudulent lies
against the government through the BIR.
The mere fact that the return is
erroneous will not make the return
fraudulent, it must be proven by the BIR.
Q: Why is it important to know whether the
assessment is under normal or abnormal
condition?
A: It is important to know because the
prescriptive period between normal and
abnormal assessment differ.
Prescriptive Period for Assessment
1. Normal/Ordinary Assessment – 3 years
from the time the return has been filed
(not the payment of the tax) (Sec. 203,
NIRC)
► 3 Ways of filing the return under Sec.
203, NIRC:
1. filed before the deadline (for any tax
under NIRC)
2. filed on the date of deadline
3. filed after the deadline
► 2 Ways of counting the 3 year period of
Assessment:
1. if return is filed before or on the day
of the deadline, the prescriptive
period starts on the date of the
deadline;
2. if return is filed after the deadline,
the prescriptive period starts on the
date the return has been filed.
» For the calendar year of 2004, a return
must be filed and paid for Net Income Tax
on or before April 15, 2005. Since he was
not able to meet the deadline, the taxpayer
is now being assessed for tax due for 2004.
To minimize interest and surcharges, it has
been suggested by the BIR that the
taxpayer file a late return. Supposed he
filed his return covering 2004 on April 1,
2006. In this example, the reckoning point
is the deadline of April 15, 2005. The
starting point of the counting the 3 yr.
period is on the date the return is filed
which is April 1, 2006.
» Suppose it is not a late filing of return,
the counting of the period is on the date of
the deadline which is April 15.
2. Abnormal/Extraordinary Assessment
► the government has 2 options:
a. Assess and Collect
» the prescriptive period for
“assessment” shall be 10 years from
the discovery of none filing or false
or fraudulent return (Sec. 222, par.
o, NIRC)
» the prescriptive period for
“collection” shall be 5 years from the
date of final assessment (Sec. 222,
par c, NIRC)
b. Collect Without Assessment through
Judicial Action
» since there is “no assessment”
there is no prescriptive period for
assessment
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» prescriptive period for
“collection” shall be 10 years from
the date of discovery of none filing
of return or false or fraudulent
return.
► These options are available only if
the Assessment is under the
Abnormal/Extraordinary Conditions.
These are not available under
Normal/Ordinary Assessment
Prescriptive Period for Collection
1. Normal/Ordinary Collection – Sec. 203
did not provide for the prescriptive
period for the collection
- Intention of the author: 5 years
from the date of final assessment
Reasons: (Sababan agrees with the 5 year
prescriptive period)
Prescriptive period of collection
under 1st option on Abnormal
Assessment is 5 years from final
assessment (Sec. 222, par c, NIRC)
1. under the old code of 1939,
1977, and 1985, if the
prescriptive period for collection
under abnormal is 3 years, then
the prescriptive period for
collection under normal is also 3
years. If now a days, it is 5 years
in abnormal, the prescriptive
period for normal should also be
5 years.
2. to say that there is a prescriptive
period for collection under
Abnormal and there is none
under Normal is too abnormal. It
should be the other way around.
2. Abnormal/Extraordinary Collection
a. assess and collect – 5 years from
the final assessment
b. collect without assessment
through judicial action – 10 years
from date of discovery of none
filing, or false, or fraudulent
return.
Q: How to apply these periods?
A: Annual net income tax return filed by
individual using a calendar year. The return
should be filed on or before April 15, 2000.
It was filed on April 15, 2000.
Q Without stating the date of final
assessment, can it be collected in 2007?
A: Under normal condition, first determine
the date of final assessment. If the BIR
finally assessed the tax in November 2001,
then 2007 is way beyond the 5year period
to collect. Count the prescriptive period for
collection from the date of final assessment.
Q: (same facts) Supposed it was finally
assed on March 2003, can it be collected in
2007?
A: Yes, because it is within the prescriptive
period of 5years.
BASILAN v. COMMISSIONER (21 SCRA 17)
F: Supposed the notice of assessment was
given within the period but it was
received by the taxpayer outside the
period.
I: Whether or not the assessment is within
the period of 3 years.
H: Yes. It is within the period. If the notice
is sent through registered mail, the
running of the prescriptive period is
“stopped”. What matters is the sending
of the notice is made within the period
of prescription.
► It is the sending of the notice and not
the receipt that tolls the prescriptive period.
Q: What if the return has been amended,
how would you compute the period of
assessment?
A: NIRC is silent.
PHOENIX v. COMMISIONER (14 SCRA 52)
If the amendment of the return is
substantial as distinguished from
superficial, the counting of the prescriptive
period is also amended. The prescriptive
period shall be reckoned on the date the
substantial amendment was made. If the
amendment is superficial, the counting of
the prescriptive period is still the original
period.
Procedure for Assessment (Sec. 228,
NIRC; RR 12-99)
Steps of assessment
1. Sec. 228, NIRC (2 steps)
2. RR 12-99 (3 steps)
2 Steps under Sec. 228, NIRC
1. Pre-assessment notice
2. Final assessment notice
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3 Steps under RR 12-99
1. Notice of Informal Conference
2. Preliminary Assessment Notice
3. Formal Letter of Demand and Notice
to Pay the Tax
PROCEDURE (Sec. 228, NIRC; RR 12-99)
1. Upon receipt of the notice of
informal conference, file a reply
within 15 days from receipt of
notice;
2. Failure to file a reply, 2 things may
happen:
a. BIR will send again the Notice of
Informal Conference or
b. BIR will send a Preliminary Notice
of Assessment
3. Upon receipt of Preliminary
Assessment Notice (PAN), file a reply
within 15 days from receipt
4. Failure to file a reply will result in
either:
a. BIR will repeat PAN
b. Declare the taxpayer in default,
and send you a Final Assessment
Notice (FAN)
5. Upon receipt of FAN, taxpayer may
file a protest within 30 days.
Q: Is FAN the one appealable to the Court
of Tax Appeals (CTA)?
A: NO. This is because §228, NIRC and RR
12-99 requires the exhaustion of
administrative remedy of protest. After the
receipt of FAN or formal demand within
30days must file a protest before the office
of the commissioner of internal revenue.
FORMS OF PROTEST
1. Local Tax (Sec. 125, Local
Government Code (LGC))
2. Real Property Tax (Sec. 252, LGC)
3. Tariff and Customs Code (Sec. 2313,
RA 7651)
► In all protest under the different codes,
payment under protest is only necessary
under the “Real Estate Tax”.
RR 12-99
► If the taxpayer receives 2 final
assessments, one under the Net Income Tax
(NIT) and the other in VAT. If the taxpayer
don’t want to file protest under VAT but
want to file a protest under NIT. The
taxpayer in order to be allowed to file a
protest under the NIT must first pay the VAT
where he does not intend to file a protest.
► This is not “payment under protest”
because, payment under protest is the one
mentioned in Real Property Tax under Sec.
252, LGC.
Under NIRC, Protest is referred to as:
1. disputing of final assessment or
2. file a motion for reconsideration or
reinvestigation
Q: What should be done after filing a
protest?
A: Count 60days is the period to file the
necessary documents and receipts in
support of the protest.
Q: What is the effect of failure to file the
supporting documents?
A: Failure to file the necessary and
supporting documents within the 60day
period, to be counted on the day the protest
is filed, the final assessment shall become
final and executory.
► On the 51st day you filed the necessary
document, you have to count another
period, which is 180 days from the day you
filed the necessary documents.
Relevance of the 180 Days: 180 days is
the time given to the BIR to decide the case
Q: Supposed it did not decide the case
within 180days?
A: Do not invoke the Lascano case because
it was rejected by RA 9282
In the Lascano case, before you file an
appeal although the 180 days have lapsed,
you have to wait for the BIR to take positive
action.
The case was ruled only by the CTA,
hence it is not a law. The jurisdiction of the
CTA has been amended by RA 9282.
RA 9282 provides that in case of
inaction of the commissioner after the lapse
of 180days, remedy is to file an appeal.
RR 12-99 says that after lapse of
180days but within 30days after 180days,
that is the time to file an appeal.
Q: Supposed the BIR rule within 180?
A: Within 30days from receipt of the
decision file an appeal to the CTA sitting in
division.
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Q: Supposed the CTA decided not in your
favor?
A: File a motion for reconsideration within
15days to the same division deciding the
case.
Q: Supposed the CTA, in division decided
not in you favor?
A: File an appeal to the CTA sitting en
banc.
Q: Supposed the CTA en banc decided not
in your favor?
A: File an appeal within 15days from
receipt of decision to Supreme Court.
Q: During the pendency of the protest in
the office of the Commissioner, supposed
you receive a notice of collection, levy and/
or distraint, what is your remedy?
A:
1. YABES v. COMMISSIONER (150 SCRA
278)
2. UNION SHIPPING LINES v.
COMMISSIONER (185 SCRA 547)
YABES v. COMMISSIONER (150 SCRA 278)
F: The taxpayer receives a notice of
collection while waiting for the decision
of his protest. He then filed an “appeal”
with the CTA contending his protest has
been denied because he did not receive
a decision but receive a notice of
collection. Simultaneously, the BIR filed
before the CFI an “ordinary civil action”
for the collection of sum of money.
When the judge of the CFI, was about to
conduct the hearing of the case, the
taxpayer filed an injunction with the SC
to prohibit the judge of the CFI
contending that a single cause of action
is pending in two courts, one in the CTA
and another in CFI.
H: Injunction was granted prohibiting the
Judge of the CFI and requiring the Judge
to transfer the records to the CTA saying
that the remedy made by the taxpayer
was the correct remedy.
Q: Was the appeal made on time?
A: Yes, when the BIR filed an ordinary
action, the protest is deemed denied. Hence
an appeal is a proper remedy.
UNION SHIPPING LINES v. COMMISSIONER
F: The taxpayer was waiting for the
decision of his protest. But instead, he
received a notice of collection.
Immediately, he filed a Motion for
Reconsideration and Clarification asking
whether his protest has been denied.
The BIR did not reply or answer but
instead filed an Ordinary Civil Action
before the CFI. When the taxpayer
received summons, he did not answer
but instead filed an Appeal before the
CTA.
I: Whether or not the remedy of Appeal was
the correct remedy and Whether or not
it was filed on time.
H: Yes. The remedy of appeal is the correct
remedy and the appeal was filed on
time. The reckoning period within which
to file an appeal is the time the taxpayer
received the summons.
While an Appeal is pending before the CTA,
the CTA will determine:
1. If the decision was made within 180
days, whether the appeal was made
within 30 days from the receipt of
the said decision, or
2. if there was no decision after the
lapse of 180 days, whether the
appeal was made within 30 days
upon the expiration or the lapse of
the 180-day period.
Q: Pending appeal with the CTA, can the
BIR amend the final assessment?
A: 2 SCHOOLS OF THOUGHT:
1. GUERRERO v. COMMISSIONER
(19 SCRA 25)
2. BATANGAS v. COLLECTOR (102
PHIL 822)
GUERRERO v. COMMISSIONER (19 SCRA 25)
H: No. Because it is no longer the disputed
assessment.
BATANGAS v. COLLECTOR (102 PHIL 822)
H: Yes. In order to avoid multiplicity of
suits
► ACCORDING TO JUSTICE VITUG:
BATANGAS v. COLLECTOR (102 PHIL 822) is
the better ruling
PROTEST UNDER LOCAL TAX (Sec. 195,
LGC)
► Under NIRC, protest is filed in the Office
of the Commissioner
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► Under LGC, protest is filed with the
same City or Provincial or Municipal
Treasurer who issued the assessment
Period to file Protest
 60 days from receipt of assessment
Q: If the treasurer did not decide within a
60day period, remedy?
A: Go to the court of competent jurisdiction
(RTC)
Q: If the RTC decided not in you favor?
A: File an appeal with CTA en banc
(beginning April 23, 2004)
Q: If the CTA decided not in your favor?
A: Appeal to the SC.
NOTE:
Pursuant to RA 9282, direct appeal to CTA
en banc can be made from:
1. Decision of the RTC involving local
taxation exercising appellate
jurisdiction
2. Decision of the Central Board of
Assessment Appeal exercising
appellate jurisdiction.
PROTEST UNDER REAL PROPERTY TAX
(Secs. 226, 230, and 252)
 Remedy shall be the same
Sec. 252, LGC
 If the taxpayer receives a Notice of
Assessment from municipal, city, or
provincial treasurer, the remedy is to
file a protest but there must be first
Payment Under Protest.
- This is the only instance where
payment under protest is
necessary
Q: How is payment under protest made?
A: At the back of the receipt there will be
an annotation that there was a payment
under protest within 60days from receipt of
the notice of assessment within the same
treasurer who issued the assessment.
Q: If the treasurer rules against the
taxpayer, remedy?
A: The remedy is to file an appeal to the
Local Board of Assessment within 30days
from the receipt of the decision.
Q: From the decision of the Local Board of
Assessment?
A: Appeal should be made to the Central
Board of Assessment Appeal.
► Beginning April 23, 2004, the ruling of
the Central Board of Assessment Appeal is
no longer final. It can now be appealed to
the CTA, sitting en banc.
PROTEST UNDER THE TARIFF AND
CUSTOMS CODE (TCC) (Sec. 2313, as
amended by RA 7651)
► Formerly, the automatic appeal under
the TCC applied only to protest; but now a
days, the automatic appeal applies to both
protest and forfeiture.
For Forfeiture Under the Tariff and Customs
Code
► Refers to the Order of the Collector
confiscating the imported goods or
commodities
Doctrine of Primary Jurisdiction
If the Collector ordered the forfeiture of
the imported commodities the order of the
Collector shall be to the exclusion of all
government offices and authority.
Importer of Chemical, under the TCC,
the custom duties is only P27 but the
collector says it should be P52. The
importer will then file a protest with the
Office of the Collector.
In the old days, there is an automatic
appeal from the decision of the collector
under protest. But under RA 7651, the
remedy of automatic appeal is applicable to
both protest and forfeiture.
I. In both cases of protest and forfeiture, if
the importer lose the case and the
government wins, the remedy is to file an
appeal within 15 days before the Office of
the Commissioner.
 From the ruling of the Commissioner,
the importer should file an appeal
within 30 days before the CTA,
sitting in division.
 From the ruling of the CTA in
division, the importer should file an
MR within 15 days before the same
division hearing the case.
 From the ruling of the CTA in
division, deciding on the MR, the
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importer should file an appeal within
15 days before the CTA sitting en 3 Questions asked in 2004 BAR:
banc. 1. May the Government compromise
 From the CTA en banc, appeal to SC criminal cases and civil cases?
within 15 days. 2. Supposed the corporation is already
dissolved, can the stockholder be
II. If the importer-taxpayer wins the case, obliged to pay?
the government lose the case, Sec. 2313 of 3. Suppose the civil case filed by the
TCC as amended by RA 7651, there shall be BIR is final and executor, can it be
an automatic review within 15 days. subject to compromise?

Q: Where should the automatic review be CAN THERE BE COMPROMISE IN:

made? 1. CIVIL CASES?
A: It depends. Publish the value of the - YES, IN ANY STAGE OF THE
commodity. PROCEEDING
1. IF P5 MILLION OR MORE – - EXCEPT WHEN THE CIVIL CASE IS
AUTOMATIC REVIEW SHALL BE ALREADY FINAL AND EXECUTORY
BEFORE THE SECRETARY OF THE BECAUSE IT WILL BE VIOLATIVE
DEPT. OF FINANCE. OF THE SEPARATION OF POWERS
2. IF LESS THAN P5 MILLION – 2. CRIMINAL CASES?
AUTOMATIC REVIEW SHALL BE - YES, EXCEPT:
BEFORE THE OFFICE OF THE a. IF ALREADY FILED IN COURT
COMMISSIONER (RTC) OR;
b. IF IT INVOLVES FRAUD
Q: Suppose the commissioner decide or did 3. IF THE CORPORATION IS ALREADY
not decide within 30days, what happens? DISSOLVED, CAN THE STOCKHOLDER BE
A: If the commissioner reverses the ruling HELD LIABLE TO PAY TAX?
of the collector, the ruling is final and - GENERAL RULE: NO
executory. - EXCEPT:
If the commissioner affirms or did not a. IF IT IS PROVEN THAT THE
decide within 30days, there shall be an ASSETS OF THE COPORATION
automatic appeal before the sec. of finance. IS TAKEN BY ONE
STOCKHOLDER OR;
Q: Between the two which will be appealed b. IF THE STOCKHOLDER DID
to the CTA? NOT PAY HIS UNPAID
A: The decision of the secretary which SUBSCRIPTION
passes through the office of the
commissioner (RA 9282)
But not all the decision of the secretary Minimum Amount to be Compromised (Sec.
which passes the office of the commissioner 204)
affirms or did not decide within 30days and 1. If the ground is financial incapacity
appealed before the secretary of finance of the taxpayer, the minimum shall
will appeal to the CTA be allowed. not be less than 10% of the original
assessment.
There are 3 instances when the Secretary of 2. If based on other grounds, the
Finance renders a decision appealable to minimum amount shall not be lower
the CTA: than 40% of the original assessment.
1. decision of the Secretary by virtue of
automatic review passing through Q: Can it be lower than that prescribed by
the Commissioner law?
2. cases of anti-dumping duty, where A: As a rule, no. EXCEPT, if allowed by the
the anti-dumping duty was ordered evaluation board consisting of the:
by the Secretary a) commissioner; and
3. decision of the Secretary of Finance b) deputy commissioner.
on countervening duty.
Instances when the Final Assessment
COMPROMISE (Sec. 204, NIRC) becomes final and executor:

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1. If the taxpayer did not file the ► The owner shall be requested to sign the
protest on time receipt.
2. Failure to submit the supporting
documents within the 60-day period Q: What if the owner refuses to sign the
3. After the lapse of the 180-day receipt?
period, you did not file an appeal A: Sec. 206: The distraining officer shall
within the 30-day period to the CTA require 2 individuals within the
4. An appeal was filed but made neighborhood with the warning that they
beyond the reglementary period to should not allow the taxpayer to dispose,
appeal transfer, or sell the property subject of
distraint.
METHODS OF COLLECTION (SEC. 205)
1. Judicial Action Grounds for Constructive Distraint (Sec.
a. Civil 206):
b. Criminal 1. The taxpayer intends to leave the
2. Administrative Action Philippines
a. Distraint 2. The taxpayer leaves the Philippines
b. Levy 3. The taxpayer ceases or retires from
c. Tax lien business
4. The taxpayer obstructs the collection
Q: Why is it important to know whether the of the tax.
final assessment is under normal or
abnormal conditions? ► THESE GROUNDS ALSO ANSWER THE
A: It is important because of the QUESTION: WHAT ARE THE TAXABLE
requirement under §222. If the final PERIOD LESSER THAN 12 MONTHS?
assessment becomes final and executory,
the government (BIR) can exercise the
remedies under §205 in any order or 2. Distraint of Intangible Property
simultaneously (§207). But it is not always
the case, because the right of the Limited to 3 Intangible Properties:
government to collect is limited in case of 1. Shares of stocks
abnormal assessment/collection under 2. Bank accounts
§222. Under the second option, the right of 3. Credits and debits
the government is limited to judicial action
either civil or criminal. Administrative Share of stocks
remedies such as distraint, levy, or tax lien ► Warrant of distraint furnished to the
is not available under such condition. taxpayer or the officer of the
corporation with the warning that the
Q: In distraint, levy or tax lien, is the 10 property is subject of distraint and it
year period of collection applicable? should not dispose of it.
A: No, only the 5year period should apply.
Bank Accounts
Distraint ► Warrant of distraint furnished to the
taxpayer or the officer of the bank with
Kinds: the warning that the taxpayer should
1. Constructive (Sec. 206) not be allowed to withdraw.
2. Distraint of Intangible (Sec. 208)
3. Actual (Sec. 207, par. a, and Sec. Debits and Credits
209) ► Warrant of distraint furnished to the
debtor and creditor
1. Constructive Distraint

► The distraining officer shall make a list 3. Actual Distraint

of the personal property of the property to
be distraint in the presence of the owner of ► Personal property shall be physically
the property or the person in possession of taken by the distraining officer.
the property.

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► Within 10 days from the receipt of
the warrant, a report of the distraint
shall be submitted to the BIR (Sec. 207,
par a last par.)
► The property subject of distraint
shall be sold at a public auction EXCEPT
bank accounts and debits and credits.
» Notice of sale shall be by posting
in 2 conspicuous place, stating the
date and the place of the sale (No
publication requirement)
► Sec. 211: after the sale and within 2
days, a report shall be made to the BIR
Q: If the property sold is a personal
property, is there a right of redemption?
A: NO. The rule is absolute.
Q: If the property is a personal property, is
there a right of preemption?
A: SEC. 210: Before the scheduled sale,
the taxpayer is allowed to recover the
property by paying all the property by
paying all the proper charges as well as the
interest, cost and penalties.
During the Scheduled Auction Sale, 2
Things may happen:
1. There is bidder and the bid is
enough
2. There is no bidder or there is a
bidder but the bid is not enough
Q: What is the relevance of knowing the
difference?
A: 1. If there is a bidder and the bid is
enough
» In case of insufficiency, there shall
be further distraint to cover the liability.
(§217)
» In case of excess, the excess shall be
returned to the taxpayer.
2. If there is no bidder or the bid is not
enough.
» It will be purchase by the
government and the later sold in a
public auction again (§212)
» In case of insufficiency, no further
distraint, §217 applies only if there was
a bidder.
» In case of excess, the excess shall
not be returned to the taxpayer but shall
be remitted to the national treasury.
Levy
► Other than the delinquent taxpayer,
warrant of levy is served to the register
of deeds having jurisdiction over the
real property (Sec. 213)
► Within 10 days from the receipt of
the warrant, a report of the levy shall be
submitted to the BIR (Sec. 207 (b) last
par)
Notice of Sale in Public Auction:
1. Posting in 2 conspicuous places
2. Publication in newspaper of general
circulation once a week for 3
consecutive weeks.
Q: Is there a right of pre emption?
A: Yes, §213.
Q: Is there a right of redemption?
A: Yes.
2 Things may happen in a Public Auction:
1. There is a bidder and the bid is
enough
2. There is no bidder or the bid is not
enough
Q: What if there is no bidder or the bid is
not enough?
A: Forfeiture shall be made (§215)
3 Definitions of Forfeiture under the Internal
Revenue Code
1. Violation of Excise Tax Law (Sec.
224)
2. If there is no bidder or the bid is not
enough (Sec. 215)
3. The order of the Collector to
confiscate imported commodities
(Sec. 2313, TCC)
Relevance of the Choice of Words:
► Under sec. 212, the law says
“purchase”
► Under sec. 215, the law says
“forfeiture”
» under 215: the real property
shall be automatically registered in
the name of the Government
(forfeiture)
» under 212: the real property is
not automatically registered in the
name of the Government (purchase)
Q: If sold at a private sale, what is the
requirement?
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A: There must be an approval of the
Secretary of Finance (§216)
Q: After sale, if there was deficiency?
A: There shall be no further levy, because
§215 says that it shall be to the total
satisfaction of the taxpayer.
Q: After sale, if there was an excess?
A: It shall not be returned to the taxpayer
but shall be remitted to the national
treasury.
Sec. 217: this is only true if there was no
bidder or the bid was not enough because
of the provisions of the Secs. 212, 215, and
216
Sec. 218: no court shall issue an
injunction to restrain the collection of tax
under this code
Determine what kind of injunction is
referred to here:
1. Prohibitory – referred in Sec. 218
because it restrains the collection of
tax.
2. Mandatory
Q: Is the provision limited to “tax under
this code”?
A: Limited to internal revenue taxes.
EXCEPT: CTA (Regular Court) → RA 1125 and
9282: CTA is authorized to issue injunction
to restrain the collection of taxes or fees
collected under other code.
Q: Is the rule of distraint or levy the same
under local taxation?
A: Yes, local tax.
» §175 for DISTRAINT
» §176 for LEVY
Q: How about real property tax?
A: No, distraint is not authorized (§256,
LGC), because the remedy is only Judicial
Action and Levy.
Tax Lien
► Non payment of tax, the government
has the right to claim a lien over the
property of the taxpayer
1. NIRC – Sec. 219, NIRC
2. Local Tax – Sec. 173, NIRC
3. Real Property Tax – Sec. 257,
NIRC
Q: Supposed a parcel of land is about to be
levied by the government, but the same is
being foreclosed by the mortgagee, which
of the 2 obligee, the government or the
mortgagee shall be preferred?
A: §219, last portion: The government is
the preferred one if the lien is annotated
and recorded in the registry of deed. In the
absence of annotation in the registry of
deeds, the mortgagee is preferred.
Q: Do we have the same rule under Local
Tax and Real Property Tax?
A: NO. Both §173 and §257, the
government is always the preferred one.
The lien can only be removed by payment
of tax, interest and penalty.
Sec. 220: approving of filing an ordinary
civil action for violation of the internal
revenue code
► The approval must be made by the
Commissioner of Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574)
F: An ordinary civil action for violation of
the tax code was filed in the city of San
Fernando. But the filing was only
approved by the Revenue Regional
Director of Central Luzon. The plaintiff
opposed the filing in the court on the
ground that it should be approved by
the Commissioner and the Revenue RD.
H: Sec. 220 should be read with Sec. 7 of
the NIRC
» General Rule: powers and
functions of the Commissioner may
be delegated but not to a position
lower than a Division Chief
» Under Sec. 7, there are powers
which can not be delegated
a) Power to recommend to the
Secretary of Finance to issue
rules and regulation
b) Power to decide a case of fist
impression
c) Power to enter into a
compromise agreement
d) Power to assign BIR officer in
the place of production
subject to income tax
» Since the case does not fall
under the prohibited delegation, the
filing of the case is legal and
tenable.
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 Taxation law review notes
- Atty. Francis J. Sababan -
► Decision of the Commissioner of Internal
Revenue (CIR) is appealable to CTA.
Q: When is a decision of the cir appealable
to the Secretary of Finance?
A: §4, on matters of interpretation of tax
laws.
SEC. 223: SUSPENSION OF THE
RUNNING OF PRESCRIPTIVE PERIOD
Q: A Filipino taxpayer went to Canada, after
15years he went back, he is being assessed
by the BIR under normal assessment. Has
the right of the government to asses the tax
already prescribed?
A: NO. When he went to Canada, the
running of the prescribed period is
suspended.
Q: What if the change of address is within
the Philippines, say only from manila to
Pasay City, is the running of the prescriptive
period suspended?
A: In order that the running of the
prescriptive period will not be suspended,
especially if the change is district office,
§223 provides that the taxpayer must send
a written notice of change of address to the
BIR.
In the absence of the written notice, the
period will be suspended.
Q: Change of address is from Philippines to
abroad?
A: The period will be suspended.
Other Grounds for Suspension:
1. During collection if there is no
property found, the period is
suspended
2. If the BIR is prohibited from making
assessment such when the subject
property is under litigation
3. In distraint of levy, the BIR officer
can’t locate the property
CLAIM FOR REFUND (SEC 229)
Written claim for refund:
1. Sec. 229, NIRC
2. Sec. 112, VAT
3. Sec. 136, Local Tax
4. Sec. 253, Real Property Tax
5. None except sec. 1603, Tariff and
Custom
Written claim for refund under the
input tax (Sec. 112)
► Period is also 2 years from the close of
the taxable quarter when the transaction
was made
Q: Can we apply §229 to VAT?
A: Yes, because there is no conflict. §112 is
refund under input tax system.
§229 is refund for:
1. errors in payment or;
2. collected without authority; or
3. assessment without authority.
► The period to claim refund is 2years.
Doctrine of Equitable Recoupment
► If a taxpayer is entitled to a written
claim for refund but the prescriptive period
to claim has lapsed, the taxpayer is allowed
to credit his written claim for refund which
he failed to recover to his existing tax
liability.
Computed from;
a. Individual – counted on the day the
tax has been paid
1. paying by way of withholding tax
system, the reckoning point is
the end of the taxable year.
2. paying by way of installment,
reckoning point is the date the
last installment is paid.
3. if sold to public auction through
distraint or levy, the date the
proceeds is applied to the
satisfaction of the tax liability.
b. Corporation
1. Existing
- 1992, *** v. Commissioner (205
SCRA 184)
- 1995, Commissioner v. Philam
life (244 SCRA 446)
- 1998, Commissioner v. CTA (301
SCRA 435)
2. Non-existing
- 2001, BPI v. Commissioner (363
SCRA 840)
1. Existing – the counting of the
prescriptive period is 2 years on the
day the annual adjusted return is
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 Taxation law review notes
- Atty. Francis J. Sababan -
filed, because it is at that day that In case of compromise, there must be
the tax liability is known. consent.
2. Non-existing – the counting of the
prescriptive period should also be
reckoned on the day the annual
return is filed. But the corporation is
no longer required to wait till the
taxable period is over to file the
return. Upon receipt of a notice from
the SEC to dissolve the corporation,
within 30 days thereafter, a return
should be filed.

Q: Suppose there is a supervening event,

and the taxpayer was not able to file a
written claim of refund within the period?
A: Regardless of supervening event, a
written claim for refund must be filed within
2years.

Q: Suppose the 2 year period is about to

expire and there is no decision yet as to
your refund?
A: Remedy is to file an appeal before the
CTA (deemed a denial)

Q: Suppose the BIR decided within 2 years

against the refund?
A: Appeal within 30days from the decision,
provided it is still within the 2 year period.

Q: Suppose there is only 21days remaining

after receiving the decision, when to file an
appeal?
A: Within 21days before the end of the 2
year period.

► A written claim for refund should be filed

within 2 years

► Sec 204 (c) last phrase: in case of over

payment a written claim is not necessary
because a return constitutes a written claim
for refund.

Q: May the commissioner of internal

revenue open the bank account of a
taxpayer?
A: General Rule: NO. EXCEPT:
1. To determine the gross value of the
estate; and
2. To enter into a compromise
agreement. (under §204(A))

► The written claim for refund to

determine the gross value of the estate
because the taxpayer is already dead

92