I.

General Principles

A. Definition and Concept of Taxation

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

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

Taxation is a symbiotic relationship, whereby in exchange for the protection that the
citizens get from the government, taxes are paid.1

B. Nature of Taxation

1. It is an inherent attribute of sovereignty

2. It is legislative in character

C. Characteristics of Taxation

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

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

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

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

Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees,
and charges shall accrue exclusively to the local governments.4

1
Commissioner of Internal Revenue vsAllegre, Inc.,et al., L-28896, Feb. 17, 1988
2
Churchill and Tait v. Concepcion, 34 Phil 969
3
Art. VI, Sec, 28 (2); Art. X, Sec. 5].Art. VI, Sec. 28. par. 2.
4
Art. X, Sec. 5

1
 3. It is subject toConstitutional and inherent limitations; hence, it is not an absolute
power that can be exercised by the legislature anyway it pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power
2. Power of Eminent Domain

Taxation Police Power Eminent

Domain
Purpose
- levied for - exercised to - taking of
the purpose promote public property for public
of raising welfare thru use
revenue regulations
Amount of exaction
- no limit - limited to the cost - no exaction,
of regulations, compensation paid
issuance of the by the government
license or
surveillance
Benefits received
- no special - no direct benefits - direct benefit
or direct but a healthy results in the form
benefits economic standard of just
received but of society or compensation
the damnumabsqueinjuria
enjoyment of is attained
the privileges
of living in an
organized
society
Non-impairment of contracts
- the - contract may be - contracts may be
impairment impaired impaired
rule subsist
Transfer of property rights
- taxes paid - no transfer but - property is taken
become part only restraint on the by the govt upon
of public exercise of property payment of just
funds right exists compensation
Scope
- affects all - affects all persons, - affects only the
persons, property, privileges, particular property
property and and even rights comprehended
excise
Basis
- public - public necessity -public necessity,

2
 necessity and the right of the private property is
state and the public taken for public
to self-protection use
and self-preservation
Authority which exercises the power
- only by the - only by the - may be granted
government government or its to public service,
or its political political subdivisions companies, or
subdivisions public utilities

E. Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the general welfare and
protection of its citizens.

2.Non-revenue/special or regulatory

a. Promotion of General Welfare Taxation may be used as an implement of police

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

b. Regulation As in the case of taxes levied on excises and privileges like those
imposed in tobacco or alcoholic products or amusement places like night clubs, cabarets,
cockpits, etc.6

c.Reduction of Social Inequality this is made possible through the progressive

system of taxation where the objective is to prevent the under-concentration of wealth in the
hands of few individuals.

d. Encourage Economic Growth in the realm of tax exemptions and tax reliefs, for
instance, the purpose is to grant incentives or exemptions in order to encourage investments
and thereby promote the countrys economic growth.

e. Protectionism in some important sectors of the economy, as in the case of

foreign importations, taxes sometimes provide protection to local industries like protective
tariffs and customs.
F. Principles of Sound Tax System

1. Fiscal Adequacy

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

3
 The sources of tax revenue should coincide with, and approximate the needs of
government expenditure. Neither an excess nor a deficiency of revenue vis--vis the needs of
government would be in keeping with the principle.

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective administration

3. Theoretical Justice

The tax burden should be in proportion to the taxpayers ability to pay7. The 1987
Constitution requires taxation to be equitable and uniform.

G. Theory and Basis of Taxation

1. Lifeblood Theory

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

2. Necessity Theory

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

3. Benefits-Protection Theory10

The basis of taxation is the reciprocal duty of protection between the state and its
inhabitants. In return for the contributions, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his property.

4. Jurisdiction over subject and objects

Rules:

7
ability-to-pay principle
8
Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 1965
9
In a case, the Supreme Court held that:
Taxation is a power emanating from necessity. It is a necessary burden to preserve the States
sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the
citizenry and those which come with the States territory and facilities, and protection which a
government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA
775)
10
Symbiotic Relationship

4
 a) Tax laws cannot operate beyond a States territorial limits.
b) The government cannot tax a particular object of taxation which is notwithin its
territorial jurisdiction.
c) Property outside ones jurisdiction does not receive any protection of the State.
d) If a law is passed by Congress, Congress must always see to it that the object or
subject of taxation is within the territorial jurisdiction of the taxing authority.

H.Doctrines in Taxation

1. Prospectivity of tax laws

General Rule:

Taxes must only be imposed prospectively.

Exception:

The language of the statute clearly demands or express that it shall have a
retroactive effect.

2. Imprescriptibility

General Rule:

Taxes are imprescriptible.

Exception:

When provided otherwise by the tax law itself.11

3. Double taxation

a. Strict sense

Referred to as direct duplicate taxation, double taxation means:

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

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

5
 b. Broad sense

Referred to as indirect double taxation, double taxation is taxation other than direct
duplicate taxation. It extends to all cases in which there is a burden of two or more
impositions.

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does not prohibit double
taxation.

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

should, whenever possible, be avoided and prevented.

In addition, where there is direct double taxation, there may be a violation of the
constitutional precepts of equal protection and uniformity in taxation.

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

d. Modes of eliminating double taxation

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

There are two methods of relief

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

2. In the credit method, although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in the former is credited against
12
City of Baguio v. De Leon, 25 SCRA 938.

6
the tax levied in the latter. The basic difference between the two methods is that in the
exemption method, the focus is on the income or capital, whereas the credit method focuses
upon the tax.

4. Escape from taxation

a. Shifting of tax burden13

1) Ways of shifting the tax burden

a. Forward shifting

When the burden of the tax is transferred from a factor of production through the
factors of distribution until it finally settles on the ultimate purchaser or consumer.14

b. Backward shifting

When the burden of the tax is transferred from the consumer or purchaser through
the factors of distribution to the factors of production.15

c. Onward shifting

When the tax is shifted two or more times either forward or backward.16

2) Taxes that can be shifted

Only indirect taxes may be shifted;17 direct taxes18cannot be shifted.

3) Meaning of impact and incidence of taxation

Impact of taxation is the point on which a tax is originally imposed. In so far as the
law is concerned, the taxpayer is the person who must pay the tax to the government. He is

13
The transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or
imposed to someone else.
Process by which such tax burden is transferred from statutory taxpayer to another without violating the
law.
What is transferred is not the payment of the tax, but the burden of the tax
14
Example:
Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who
also shifts it to the final purchaser or consumer
15
Example:
Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is
reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer
16
Example:
Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the
wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the
retailer, we have three shifts in all.
17
e.g. VAT
18
e.g. Income tax

7
also termed as the statutory taxpayer-the one on whom the tax is formally assessed. He is the
subject of the tax.

Incidence of taxation is that point on which the tax burden finally rests or settle
down. It takes place when shifting has been effected from the statutory taxpayer to another.

b. Tax avoidance19

The exploitation of the taxpayer of legally permissible alternative tax rates or

methods of assessing taxable property or income in order to avoid or reduce tax liability.

c. Tax evasion20

The use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of tax.

5. Exemption from taxation

a. Meaning of exemption from taxation

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

corporations of a particular class from a tax which persons and corporations generally within
the same state or taxing district are obliged to pay. It is an immunity or privilege; it is
freedom from a financial charge or burden to which others are subjected.21

19
also known as tax minimization; it is not punished by law
20
also known as tax dodging; it is punishable by law
Elements of tax evasion:
1) The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or
paying no tax when it is shown that tax is due
2) An accompanying state of mind which is described as being evil, in bad faith, willful, or
deliberate and not accidental
3) A course of action (or failure of action) which is unlawful
Indicia of fraud in tax evasion:
1) Failure to declare for taxation purposes true and actual income derived from business for two (2)
consecutive years; or
2) Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive years
coupled with unintentional overstatement of deductions
Evidence to prove tax evasion:
Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the
circumstances of the case.
Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his
business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government of
its due taxes.(Republic vs. Gonzales, 13 SCRA 638)

21
Exemption is allowed only if there is a clear provision there for.
It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.

8
 b. Nature of tax exemption

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

2) It is generally revocable by the government unless the exemption is founded on a

contract which is contract which is protected from impairment.

3) It implies a waiver on the part of the government of its right to collect what
otherwise would be due to it, and so is prejudicial thereto.

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

foundation or rational basis.

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

c. Kinds of tax exemption

1) Express22

When certain persons, property or transactions are, by express provision, exempted

from all certain taxes, either entirely or in part.

2) Implied23

When a tax is levied on certain classes of persons, properties, or transactions without

mentioning the other classes.

Every tax statute makes exemptions because of omissions.

3) Contractual

Agreed to by the taxing authority in contracts lawfully entered into by them under
enabling laws.

d. Rationale/grounds for exemption

Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation
is the exemption.
22
or affirmative exemption
23
or exemption by omission
No tax exemption by implication
It must be expressed in clear and unmistakable language

9
 Rationale for granting tax exemptions:

Its avowed purpose is some public benefit or interests which the lawmaking body
considers sufficient to offset the monetary loss entailed in the grant of the exemption.

The theory behind the grant of tax exemptions is that such act will benefit the body
of the people. It is not based on the idea of lessening the burden of the individual owners of
property.

Grounds for granting tax exemptions:

1) May be based on contract. In such a case, the public, which is represented by the
government is supposed to receive a full equivalent therefor, i.e. charter of a corporation.

2) May be based on some ground of public policy, i.e., to encourage new industries
or to foster charitable institutions. Here, the government need not receive any consideration
in return for the tax exemption.

3) May be based on grounds of reciprocity or to lessen the rigors of international

double or multiple taxation.24

e. Revocation of tax exemption

It is an act of liberality which could be taken back by the government unless there
are restrictions. Since taxation is the rule and taxation therefrom is the exception, the
exemption may be withdrawn by the taxing authority.25

6. Compensation and Set-off26

General Rule:

Taxes are not subject to set-off or legal compensation. The government and the
taxpayer are not creditors and debtors or each other. Obligations in the nature of debts are
due to the government in its corporate capacity, while taxes are due to the government in its
sovereign capacity.27

Exception:

24
Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.
25
Mactan Cebu International Airport Authority vs, Marcos, 261 SCRA 667.
26
Requisites of Compensation in taxation (Domingo v. Garlitos)
1. That the tax assessed and the claim against the government be fully liquidated.
2. That the tax assessed and the claim against the government is due and demandable, and3. That the
government had already appropriated funds for the payment of the claim
27
Philex Mining Corp. vs CIR, 294 SCRA 687; Republic vsMambulao Lumber Co., 6 SCRA 622

10
 Where both the claims of the government and the taxpayer against each other have
already become due and demandable as well as fully liquated.28

7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid litigation or put an

end to one already commenced.29

8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its authority to impose

penalties on persons otherwise guilty of evasion or violation of a revenue to collect what
otherwise would be due it and, in this sense, prejudicial thereto.30

b. Distinguished from tax exemption

A tax amnesty, being a general pardon or intentional overlooking by the Statute of its
authority to impose penalties on persons otherwise guilty of evasion or violation of a
revenue or tax law, partakes of an absolute forgiveness or waiver by the Government of its
right to collect what otherwise would be due it and, in this sense, prejudicial thereto,
particularly to tax evaders who wish to relent and are willing to reform are given a chance to
do so and therefore become a part of the society with a clean slate.

Like a tax exemption, a tax amnesty is never favored nor presumed in law, and is
granted by statute. The terms of the amnesty must be strictly construed against the taxpayer
and literally in favor of the government. Unlike a tax exemption, however, a tax amnesty has
limited applicability as to cover a particular taxing period or transaction only.

28
see Domingo vsGarlitos, L-18904, June 29, 1963
29
Art. 2028, New Civil Code
Requisites:
1. Taxpayer must have a tax liability.
2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer.
3. There must be acceptance of the offer in settlement of the original claim.
When taxes may be compromised:
1.A reasonable doubt as to the validity if the claim against the taxpayer exists;
2 .The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
3 .Criminal violations, except:
a. Those already filed in court
b. Those involving fraud.
30
Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by statute must
be construed strictly against the taxpayer, who must show compliance with the law.
The government is not estopped from questioning the tax liability even if amnesty tax payments were
already received
Erroneous application and enforcement of the law by public officers do not block subsequent correct
application of the statute. The government is never estopped by mistakes or errors by its agents.

11
 Tax exemption, on the other hand, is the grant of immunity to particular persons or
corporations of a particular class from a tax of which persons and corporations generally
within the same state or taxing district are obliged to pay. Tax exemptions are not favored
and are construed strictissimijurisagainst the taxpayer.

Tax amnesty Tax exemption

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

Applies only to past tax periods, hence Prospective application

retroactive application

9. Construction and Interpretation of:

a. Tax laws

1) General Rule

Tax laws are liberally interpreted in favor of the taxpayer and strictly against the
government.

2) Exception

Liberal interpretation does not apply to tax exemptions which should be construed
instrictissimijurisagainst the taxpayer.31

b. Tax exemption and exclusion

1) General Rule

In the construction of tax statutes, exemptions are not favored and are construed
strictissimijuris against the taxpayer.32 The fundamental theory is that all taxable property
should bear its share in the cost and expense of the government.

Taxation is the rule and exemption. He who claims exemption must be able to justify
his claim or right thereto by a grant express in terms too plain to be mistaken and too

31
Reason: Lifeblood doctrine
32
Strict interpretation does not apply to the government and its agencies
Petitioner cannot invoke the rule of strictissimijuriswith respect to the interpretation of statutes granting
tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of exemptions in
favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]

12
categorical to be misinterpreted. If not expressly mentioned in the law, it must be at least
within its purview by clear legislative intent.

2) Exceptions

1. When the law itself expressly provides for a liberal construction thereof.
2. In cases of exemptions granted to religious, charitable and educational institutions
or to the government or its agencies or to public property because the general rule is that
they are exempted from tax.

c. Tax rules and regulations

1) General rule only

They shall not be given retroactive application if the revocation, modification or

reversal will be prejudicial to the taxpayers.33

d. Penal provisions of tax laws

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

The purpose of tax laws in imposing penalties for delinquencies is to compel the
timely payment of taxes or to punish evasion or neglect of duty in respect thereof.

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly declared or is clearly the

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

I.Scope and Limitation of Taxation

33
Sec. 246

13
 1. Inherent Limitations

a. Public Purpose34

The tax must be used:

1) for the support of the state or

2) for some recognized objects of governments or
3) directly to promote the welfare of the community35

b. Inherently Legislative

1) General Rule

Taxation is purely legislative, Congress cannot delegate the power to others. This
limitation arises from the doctrine of separation of powers among the three branches of
government.
2) Exceptions

a) Delegation to local governments36

The power of local government units to impose taxes and fees is always subject to
the limitations which the Congress may provide, the former having no inherent power to
tax.37

Municipal corporations are mere creations of Congress which has the power to
create and abolish municipal corporations. Congress therefore, has the power of control
over local government units. If Congress can grant to a municipal corporation the power to
tax certain matters, it can also provide for exemptions or even to take back the power.

The power to tax is primarily vested in the Congress, however, in our jurisdiction, it
may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation

34
Test in determining Public Purposes in tax:
a. Duty Test whether the thing to be threatened by the appropriation of public revenue is something
which is the duty of the State, as a government.
b. Promotion of General Welfare Test whether the law providing the tax directly promotes the
welfare of the community in equal measure.
35
taxation as an implement of police power
The term public purpose is synonymous with governmental purpose; a purpose affecting the
inhabitants of the state or taxing district as a community and not merely as individuals.
A tax levied for a private purpose constitutes a taking of property without due process of law.
The purposes to be accomplished by taxation need not be exclusively public. Although private
individuals are directly benefited, the tax would still be valid provided such benefit is only incidental.
The test is not as to who receives the money, but the character of the purpose for which it is expended;
not the immediate result of the expenditure but rather the ultimate.
In the imposition of taxes, public purpose is presumed.
36
Art. X. Sec. 5, 1987 Constitution
37
Basco v. PAGCOR

14
but pursuant to direct authority conferred by Section 5, Article X of the1987 Constitution,
subject to guidelines and limitations which Congress may provide which must be consistent
with the basic policy of local autonomy.38

b) Delegation to the President39

The power granted to Congress under this constitutional provision to authorize the
President to fix within specified limits and subject to such limitations and restrictions as it
may impose, tariff rates and other duties and imposts include tariffs rates even for revenue
purposes only. Customs duties which are assessed at the prescribed tariff rates are very much
like taxes which are frequently imposed for both revenue-raising and regulatory purposes.40

c) Delegation to administrative agencies

With respect to aspects of taxation not legislative in character.41

For the delegation to be constitutionally valid, the law must be complete in itself and
must set forth sufficient standards.

c. Territorial

1) Situs of Taxation42

a) Meaning

Literally means the place of taxation.

State where the subject to be taxed has a situs may rightfully levy and collect the tax

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

38
MCIAA v.Marcos, 261 SCRA 667
39
Art.VI, Sec. 28(2), 1987 Constitution
40
Garcia vs Executive Secretary, et. al., G.R. No. 101273, July 3, 1992
41
example: assessment and collection
Certain aspects of the taxing process that are not really legislative in nature are vested in administrative
agencies. In these cases, there really is no delegation, to wit:
a) power to value property
b) power to assess and collect taxes
c) power to perform details of computation, appraisement or adjustments.
42
It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise
within the territory of the taxing power because:
1) Tax laws do not operate beyond a countrys territorial limit.
2) Property which is wholly and exclusively within the jurisdiction of another state receives none of
the protection for which a tax is supposed to be compensation.
However, the fundamental basis of the right to tax is the capacity of the government to provide
benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing
state, where there is between him and the taxing state, a privity of relationship justifying the levy.

15
 The place that gives protection is the place that has the right to demand that it be
supported in the form of taxes so it could continually give protection.

b) Situs of Income Tax43

1)From sources within the Philippines

i. Interests derived from sources within the Philippines, and interest on bonds, notes or
other interest-bearing obligations of residents, corporate or otherwise

ii. Dividends

iii. Compensation for labor or personal services performed in the Philippines

iv. Rentals and royalties from property located inthe Philippines or from any interest in
such property, including rentals or royalties for:

(a) The use of or the right or privilege to use in the Philippines any copyright,
patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;

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

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

knowledge or
information;

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

(e) The supply of services by a nonresident person or his employee in connection

with the use of property or rights belonging to, or the installation or operation of any
brand,
machinery or other apparatus purchased from such nonresident person;

43
Sec. 42
Theories:
A) domicillary theory
- the location where the income earner resides is the situs of taxation
B) nationality theory
- the country where the income earner is a citizen is the situs of taxation
C) source rule
- the country which is the source of the income or where the activity that produced the income took place
is the situs of taxation.

16
 (f) Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and

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

(i) Motion picture films;

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

(h)Gains, profits and income from the sale of real property located in the
Philippines

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

2)From sources without the

Philippines

(1) Interests other than those derived from sources within the Philippines as provided in 1)
(i).
(2) Dividends other than those derived from sources within the Philippines as provided in 1)
(ii).

(3) Compensation for labor or personal services performed without the Philippines;

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

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

3) Income partly within and partly

without the Philippines

Allocated or apportioned to sources within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

For the purposeof computing the taxable income therefrom, where items of gross income
are separately allocated to sources within the Philippines, there shall be deducted:

(a) the expenses, losses and other deductions properly apportioned or allocated thereto, and

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

c) Situs of Property Taxes

17
 (1) Taxes on Real Property

The place where the property is located because it is that place that gives protection.
The applicable concept is lexsitusor lexreisitae.44

(2) Taxes on Personal Property

- Mobiliasequnturpersonam45

Rules:

1) Tangible personal property

- Where located, usually the owners domicile

2) Intangiblle personal property

General Rule Domicile of the owner

Exception: The situs location not domicile46

d) Situs of Excise Tax

The place where the privilege is exercised because it is that place that gives
protection.47
(1) Estate Tax

44
We can only impose property tax on the properties of a person whose residence is in the Philippines.
45
movables follow the owner
movables follow the domicile of the owner
46
Where the intangible personal property has acquired a business situs in another jurisdiction
The principle of MobiliaSequnturPersonam is only for purposes of convenience. It must yield to the
actual situs of such property.
Personal intangible properties which acquires business situs here in the Philippines
1) Franchise which is exercised within the Philippines
2) Shares, obligations, bonds issued by a domestic corporation
3) Shares, obligations, bonds issued by a foreign corporation, 85% of its business is conducted in the
Philippines
4) Shares, obligations, bonds issued by a foreign corporation which shares of stock or bonds acquire
situs here
5) Rights, interest in a partnership, business or industry established in the Philippines
These intangible properties acquire business situs here in the Philippines, you cannot apply the principle
of MobiliaSequnturPersonam because the properties have acquired situs here.
47
where the transaction performed.
The power to levy an excise upon the performance of an act or the engaging in an occupation does not
depend upon the domicile of the person subject to the exercise, nor upon the physical location of the
property or in connection with the act or occupation taxed, but depends upon the place on which the act
is performed or occupation engaged in.
Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place
where the respective transaction is perfected and consummated (Hopewell vs. Com. of Customs)

18
 Determined by the nationality and residence of the taxpayer and the place where the
property is located.

(2) Donors Tax48

e) Situs of Business Tax

(1) Sale of Real Property

The tax situs is the place or location of the real property.49

(2)Sale of Personal Property

In determining the tax situs, one should consider the place of sale.

(3) VAT

The tax situs is where the sale, barter, exchange or lease of goods or properties and
services in the Philippines and on importation of goods into the Philippineswas performed.

d. International Comity

The property of a foreign state or government may not be taxed by another.50

e. Exemption of Government Entities, Agencies, and

Instrumentalities

Agencies performing governmental functions

- tax exempt51

48
ibid
49
So, if the property sold is situated within the Phils., the income derived from such sale is considered as
income within.
50
The grounds for the above are:
1) sovereign equality among states
2) usage among states that when one enter into the territory of another, there is an implied
understanding that the power does not intend to degrade its dignity by placing itself under the
jurisdiction of the latter
3) foreign government may not be sued without its consent so that it is useless to assess the tax since it
cannot be collected
4) reciprocity among states
51
The exemption applies only to governmental entities through which the government immediately and
directly exercises its sovereign powers.
Tax exemption of property owned by the Republic of the Philippines refers to the property owned by
the government and its agencies which do not have separate and distinct personality (NDC vs. Cebu City)
Those created by special charter (incorporated agencies) are not covered by the exemption

19
 Agencies performing proprietary functions

- subject to tax

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation52

1) Prohibition against imprisonment for non-payment of poll

tax

No person shall be imprisoned for debt or non-payment of poll tax.53

2) Uniformity and equality of taxation

The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.54

3) Grant by Congress of authority to the President to impose

tariff rates

x xx The Congress may, by law, authorize the President to fix within specified limits,
and subject to such limitations and restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the government.55

52
under the 1987 constitution
53
Sec. 20, Art. III
The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the
rate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec.
161, LGC)
The prohibition is against imprisonment for non-payment of poll tax. Thus, a person is subject to
imprisonment for violation of the community tax law other than for non-payment of the tax and for non-
payment of other taxes as prescribed by law.
The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge,
but not to other violations like falsification of community tax certificate or non-payment of other taxes.
54
Sec. 28(1), Art. VI
Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property of
the same class shall be taxed at the same rate. A tax is uniform when the same force and effect in every
place where the subject of it is found.
Equitable means fair, just, reasonable and proportionate to ones ability to pay.
Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers
ability to pay
Inequality which results in singling out one particular class for taxation or exemption infringes no
constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27)
The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable.
55
Requisites for exemption:
1) It must be a private educational institution
2) It must be non-stock and non-profit

20
 4) Prohibition against taxation of religious, charitable entities,
and educational entities

Subject to the conditions prescribed by law, all grants, endowments, donations or

contributions used actually, directly and exclusively for educational purposes shall be exempt
from tax.56

5) Prohibition against taxation of non-stock, non-profit

institutions

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

actually, directly, and exclusively for educational purposes shall be exempt from taxes and
duties.57

3) Its assets (property) and revenues (income) must be used actually, directly and exclusively for
educational purposes
Rules:
1) If the first requisite is absent (meaning, its a government educational institution), it is nonetheless
exempt from income tax
2) If the second requirement is absent (meaning, it is stock and profit) as long as the third requirement
is present, it is nonetheless exempt from real estate tax
3) If the third requirement is absent, as long as it is non-stock and non-profit, it is nonetheless exempt
from income tax
4) If the third requirement is absent, but it is private and non-profit, it is subject to income tax, but at
the preferential rate of ten percent (10%)
Under the present tax code, for a private educational institution to be exempt from the payment of
income tax, all it has to be is non-stock and non-profit. However, a governmental educational institution is
exempt from income tax without any condition
Exemption does not extend to:
1) Income derived by these educational institutions from their property, real or personal, and
2) From activities conducted by them for profit regardless of the disposition made on such income
56
Sec. 4(4), Art. XIV.
The exemption granted to non-stock, non-profit educational institution covers income, property, and
donors taxes, and custom duties.
To be exempt from tax or duty, the revenue, assets, property or donation must be used actually,
directly and exclusively for educational purpose.
In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to
property tax.
The said constitutional provision granting tax exemption to non-stock, non-profit educational institution
is self-executing.
Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative
implementation. Their tax exemption is not self-executing.
Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed
are exempt from property tax, whether the educational institution is proprietary or non-profit
57
Sec. 4 (3), Art. XIV
Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax because
the transaction was an isolated one(Manila Polo Club vs. CTA)
Income derived from the hospital pharmacy, dormitory and canteen was exempt from income tax
because the operation of those entities was merely incidental to the primary purpose of the exempt
corporation(St. Paul Hospital of Iloilo vs. CIR)

21
 6) Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of a
majority of all the members of the Congress.58

7) Prohibition on use of tax levied for special purpose

All money collected or any tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only. If the purpose for which a special fund was
created has been fulfilled or abandoned the balance, if any, shall be transferred to the general
funds of the government.59

8) Presidents veto power on appropriation, revenue, tariff

bills

The President shall have the power to veto any particular item or items in an
Appropriation, Revenue or Tariff bill but the veto shall not affect the item or items to which
he does not object.60

9) Non-impairment of jurisdiction of the Supreme Court

The Congress shall have the power to define, prescribe, and apportion the
jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction
over cases enumerated in Sec. 5 hereof.61

The Supreme Court shall have the following powers: x xx(2) Review, revise, modify
or affirm on appeal or certiorari x xx final judgments and orders of lower courts in x xx all
cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in
relation thereto.62
10) Grant of power to the local government units to create its
own sources of revenue

Where the educational institution is private and non-profit (but a stock corporation), it is subject to
income tax but at the preferential rate of ten percent (10%)
58
Sec. 28(4), Art. VI
The provision requires the concurrence of a majority not of attendees constituting a quorum but of all
members of the Congress.
59
Sec. 29(3), Art. VI
An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of imported
crude oil. In a decide case, it was held that where under an executive order of the President, this special
fund is transferred from the general fund to a trust liability account, the constitutional mandate is not
violated. The OPSF, according to the court, remains as a special fund subject to COA audit
(OsmeavsOrbos, et al., G.R. No. 99886, Mar. 31, 1993)
60
Sec. 27(2), Art. VI
61
Sec. 5 (2), Art. VIII
62
Sec. 5 (2b), id.
Congress cannot take away from the Supreme Court the power given to it by the Constitution as the final
arbiter of tax cases.

22
 Each local government unit has the power to create its own revenue and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide.63

11) Flexible tariff clause

In the interest of national economy, general welfare and/or national security, the
President upon the recommendation of the National Economic and Development Authority
is empowered:
1) To increase, reduce or remove existing protective rates of import duty, provided that
the increase should not be higher than 100% ad valorem
2) To establish import quota or to ban imports of any commodity
3) To impose additional duty on all imports not exceeding 10% ad valorem.64

12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, building, and improvements actually, directly and
exclusively used for religious, charitable or educational purposes shall be exempt from
taxation.65
13) No appropriation or use of public money for religious
purposes

63
Sec 5, Art. X
Local government units have no power to further delegate said constitutional grant to raise revenue,
because what is delegated is not the enactment or the imposition of a tax, it is the administrative
implementation.
The power of local government units to impose taxes and fees is always subject to the limitations
which Congress may provide, the former having no inherent power to tax.
Municipal corporations are mere creatures of Congress which has the power to create and abolish
municipal corporations. Congress therefore has the power to control over local government units. If
Congress can grant to a municipal corporation the power to tax certain matters, it can also provide for
exemptions or even take back the power(Basco vs. PAGCOR)
64
Sec. 401, TCC
65
Sec. 28(3), Art. VI
Lest of the tax exemption: the use and not ownership of the property
To be tax-exempt, the property must be actually, directly and exclusively used for the purposes
mentioned.
The word exclusively means primarily.
The exemption is not limited to property actually indispensable but extends to facilities which are
incidental to and reasonably necessary for the accomplishment of said purposes.
The constitutional exemption applies only to property tax.
However, it would seem that under existing law, gifts made in favor or religious charitable and
educational organizations would nevertheless qualify for donors gift tax exemption. (Sec. 101(9)(3), NIRC)
The constitutional tax exemptions refer only to real property that are actually, directly and exclusively
used for religious, charitable or educational purposes, and that the only constitutionally recognized
exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions
which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal
Revenue v. Court of Appeals, et al., 298 SCRA 83)

23
 No public money or property shall be appropriated, applied, paid or employed,
directly or indirectly for the use, benefit, support of any sect, church, denomination,
sectarian institution, or system of religion or of any priest, preacher, minister, or other
religious teacher or dignitary as such except when such priest, preacher, minister or dignitary
is assigned to the armed forces or to any penal institution, or government orphanage or
leprosarium.66

b. Provisions Indirectly Affecting Taxation

1) Due process

No person shall be deprived of life, liberty or property without due process of law 67
x xx.

2) Equal protection

xxx Nor shall any person be denied the equal protection of the laws.68

3) Religious freedom

No law shall be made respecting an establishment of religion or prohibiting the free

exercise thereof. The free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall be forever allowed.69 x xx

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed.70

J. Stages of Taxation

1. Levy

66
Sec. 29(2), Art. VI
Public property may be leased to a religious group provided that the lease will be totally under the
same conditions as that to private persons (amount of rent).
Congress is without power to appropriate funds for a private purpose.
67
Sec. 1, Art. III
68
Ibid.
69
Sec. 5 Art. III
License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the
nature of a condition or permit of the exercise of the right.
However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally
applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentinovs
Secretary of Finance, 235 SCRA 630)
70
Sec. 10, Art. III
A law which changes the terms of the contract by making new conditions, or changing those in the
contract, or dispenses with those expressed, impairs the obligation.
The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject
to amendment, alteration or repeal by the Congress when the public interest so requires.

24
 Determination of the persons, property or excises to be taxed, the sum or sums to be
raised, the due date thereof and the time and manner of levying and collecting taxes (strictly
speaking, such refers to taxation)

2. Assessment and Collection

Consists of the manner of enforcement of the obligation on the part of those who
are taxed.71

The two processes together constitute the taxation system.

3. Payment

The act of the taxpayer in settling his obligations.

4. Refund

The actual reimbursement of tax to the taxpayer by the government.

K. Definition, Nature, and Characteristics of Taxes

Definition

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

Nature

They are not arbitrary exactions but contributions levied by authority of law, and
bysome rule of proportion which is intended to ensure uniformity of contribution and ajust
apportionment of the burdens of government.

Essential Characteristic of Taxes

1) It is levied by the law-making body of the State.72

2) It is an enforced contribution.73
3) It is generally payable in money.74

71
this includes payment by the taxpayer and is referred to as tax administration
72
The power to tax is a legislative power which under the Constitution only Congress can exercise through
the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.
73
A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent,
express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.
74
Tax is a pecuniary burden an exaction to be discharged alone in the form of money which must be in
legal tender, unless qualified by law, such as RA 304 which allows backpay certificates as payment of
taxes.

25
 4) It is proportionate in character.75
5) It is levied on persons or property.76
6) It is levied for public purpose or purposes.77
7) It is levied by the State which has jurisdiction over the persons or property.78

L. Requisites of a valid tax

1) It should be for a public purpose

2) The rule of taxation should be uniform
3) That either the person or property taxed be within the jurisdiction of the taxing
authority
4) That the assessment and collection be in consonance with the due process clause
5) The tax must not infringe on the inherent and constitutional limitations of the
power of taxation.79

M.Tax as distinguished from other forms of exactions

1. Tariff

It may be used in 3 senses:

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

several kinds of merchandise with the corresponding duties to be paid for the same.
b. As duties payable on goods imported or exported.80
c. As the system or principle of imposing duties on the importation/exportation of
goods.

2. Toll

Sum of money for the use of something, generally applied to the consideration which
is paid for the use of a road, bridge of the like, of a public nature.

Tax vs Toll
1. demand of sovereignty 1. demand of
proprietorship
2. paid for the support of 2. paid for the use of
the government anothers property

75
It is ordinarily based on the taxpayers ability to pay.
76
A tax may also be imposed on acts, transactions, rights or privileges.
77
Taxation involves, and a tax constitutes, a burden to provide income for public purposes.
78
The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.
79
Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But
their collection should not be tainted with arbitrariness
80
PD No. 230

26
 3. generally, no limit as to 3. amount depends on the
amount imposed cost of construction or
maintenance of the public
improvement used
4. imposed only by the 4. imposed by the
government government or private
individuals or entities

3. License fee

A charge imposed under the police power for the purposes of regulation.81

Tax vsLicense/Permit Fee

1. enforced contribution 1. legal compensation or
assessed by sovereign reward of an officer for
authority to defray public specific purposes
expenses
2. for revenue purposes 2. for regulation purposes
3. an exercise of the taxing 3. an exercise of the police
power power
4. generally no limit in the 4. amount is limited to the
amount of tax to be paid necessary expenses of
inspection and regulation
5. imposed also on persons 5. imposed on the right to
and property exercise privilege
6. non-payment does not 6. non-payment makes the
necessarily make the act or act or business illegal
business illegal

81
Three kinds of licenses are recognized in the law:
1. Licenses for the regulation of useful occupations.
2. Licenses for the regulation or restriction of non-useful occupations or enterprises
3. Licenses for revenue only
Importance of the distinctions between tax and license fee:
1. Some limitations apply only to one and not to the other, and that exemption from taxes may not
include exemption from license fees.
2. The power to regulate as an exercise of police power does not include the power to impose fees for
revenue purposes. (see American Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases)
3. An extraction, however, maybe considered both a tax and a license fee.
4. But a tax may have only a regulatory purpose.
5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and
regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue
is also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs Quezon
City, 172 SCRA 629)

27
 4. Special assessment

An enforced proportional contribution from owners of lands especially or peculiarly

benefited by public improvements.82

Tax vs Special Assessment

1. imposed on persons, 1. levied only on land
property and excise
2. personal liability of the 2. not a personal liability of
person assessed the person assessed, i.e. his
liability is limited only to
the land involved
3. based on necessity as 3. based wholly on benefits
well as on benefits received
4. general application (see 4. exceptional both as time
Apostolic Prefect vs Treas. and place
Of Baguio, 71 Phil 547)

5. Debt

Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delicts
between parties for their private interest or resulting from their own acts or omissions.

Tax vs Debt
1. based on law 1. based on contracts,
express or implied
2. generally, cannot be 2. assignable
assigned
3. generally payable in 3. may be paid in kind
money
4. generally not subject to 4. may be subject to set-off
set-off or compensation or compensation
5. imprisonment is a 5. no imprisonment for
sanction for non-payment non-payment of debt
of tax except poll tax
6. governed by special 6. governed by the
prescriptive periods ordinary periods of

82
Since special assessments are not taxes within the constitutional or statutory provisions on tax
exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply to
special assessments.
However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties which
are actually, directly and exclusively used for religious, charitable and educational purposes are not
exactly exempt from real property taxes but are exempt from the imposition of special assessments as
well. (see Aban)
The general rule is that an exemption from taxation does not include exemption from special
assessment.

28
 provided for in the Tax prescriptions
Code
7. does not draw interest 7. draws interest when so
except only when stipulated, or in case of
delinquent default

N. Kinds of Taxes

1. As to object

a. Personal, capitation, or poll tax

Tax of a fixed amount imposed on persons residing within a specified territory,

whether citizens or not, without regard to their property or the occupation or business in
which they may be engaged.83

b. Property tax

Tax imposed on property, real or personal, in proportion to its value or in

accordance with some other reasonable method of apportionment.
c. Privilege tax

A charge imposed upon the performance of an act, the enjoyment of privilege, or the
engaging in an occupation.

2. As to burden or incidence

a. Direct

A direct tax is demanded from the person who also shoulders the burden of the tax.
It is a tax which the taxpayer is directly or primarily liable and which he or she cannot shift
to another.

b. Indirect

An indirect tax is demanded from a person in the expectation and intention that he
or she shall indemnify himself or herself at the expense of another, falling finally upon the
ultimate purchaser or consumer. A tax which the taxpayer can shift to another.

3. As to tax rates

a. Specific

The computation of the tax or the rates of the tax is already provided for by law.

83
i.e. community tax.

29
 b. Ad valorem

Tax upon the value of the article or thing subject to taxation; the intervention of
another party is needed for the computation of the tax.

c. Mixed

Tax rates are partly progressiveand partly regressive.

4. As to purposes

a. General or fiscal

Imposed for the purpose of raising public funds for the service of the government.

b. Special, regulatory, or sumptuary

Imposed primarily for the regulation of useful or non-useful occupation or

enterprises and secondarily only for the purpose of raising public funds.

5. As to scope or authority to impose

a. National internal revenue taxes

Imposed by the National Government

b. Local real property tax, municipal tax

Imposed by the municipal corporations or local government units

6. As to graduation

a. Progressive

Rate or amount of tax increases as the amount of the income or earning to be taxed
increases.

b. Regressive

Tax rate decreases as the amount of income to be taxed increases.

b. Proportionate

Tax based on a fixed percentage of the amount of the property receipts or other
basis to be taxed.84

84
Example: real estate tax.

30
II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

1. Income Tax Systems

a. Global Tax System

One where the tax treatment views indifferently the tax base and generally treats in
common all categories of taxable income of the taxpayer

b. Schedular Tax System

One where the income tax treatment varies and is made to depend on the kind or
category of taxable income of the taxpayer.85

c. Semi-schedular or semi-global tax system86

Partly schedular, and partly global. The schedular approach is used in taxation
of individuals, while the global approach is used in the taxation of corporations.

2. Features of the Philippine Income Tax Law

a. Direct tax

One assessed upon the property, person, business income, etc. of those who pay
them.
b. Progressive

The tax rates increase as the tax base increases. In certain cases, however, final taxes
are imposed on passive income.87

c. Comprehensive

The Philippine Income tax law adopted the so-called comprehensive tax situs
Comprehensive in the sense that it practically applies all possible rules of tax situs.

85
Schedular system and Global system
1. Under the schedular treatment, there are different tax rates, while under the global treatment, there
is a single tax rate
2. Under the schedular system, there are different categories of taxable income, whileunder the global
system, there is no need for classification as all taxpayers aresubjected to a single tax rate.
3. The scheduler treatment is usually used in the income taxation of individuals whilethe global treatment
is usually applied to corporations.
86
Approach used in the Philippines
87
The individual income tax system, in the main, is progressive in nature

31
 d. Semi-schedular or semi-global tax system88

3. Criteria in Imposing Philippine Income Tax

a. Citizenship Principle

A citizen of the Philippines is subject to Philippine income tax

(a) on his worldwide income, if he resides in the Philippines, or

(b) only on his income from sources within the Philippines, if he qualifies as
nonresident citizen.

b. Residence Principle

Resident alien is liable to pay income tax on his income from sources within the
Philippines but exempt from tax on his income from sources outside the Philippines.

c. Source Principle

An alien is subject to Philippine income tax because he derives income from sources
within the Philippines. Thus, a nonresident alien is liable to pay Philippine income tax on his
income from sources within the Philippines such as dividend, interest, rent, or royalty,
despite the fact that he has not set foot in the Philippines.

4. Types of Philippine Income Tax

a) Net income tax

b) Gross income tax
c) Final income tax
d) Minimum corporate income tax of 2% of the gross income
e) Improperly Accumulated Earnings tax of 10% on improperly accumulated
earnings
f) Optional Corporate Income Tax of 15% on Gross Income.

5. Taxable Period

a. Calendar Period

This covers the period of 12 months commencing from January 1 and ending
December 31.
b. Fiscal Period

An accounting period of 12 months ending on the last day of any month other than
December.89

88
supra
89
ex. Feb 1 to Jan 31

32
 c. Short Period

A period of less than twelve (12) months.

6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens90

Those residing in the Philippinesunless he qualifies as a non-resident under Sec. 22

(E)of the NIRC.91

b) Non-resident citizens92

Those not residing in the Philippines.

A non-resident citizens means

1. One who establishes to the satisfaction of the Commissioner of Internal Revenue

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

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

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

4. A citizen who has been previously considered as non-resident citizen and who
arrives in the Phils. at any time during the taxable year to reside permanently in the
country.93

5. A citizen who shall have stayed outside the Phils. for 183 days or more by the end
of the year.94

90
taxable for income derived from all sources based on taxable (i.e., net) income
91
infra
92
taxable for income derived within the Philippines based on taxable (i.e., net) income
93
He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his
income derived from sources abroad until the date of his arrival in the Phils.
94
Sec. 22 (E)

33
 2) Aliens95

a) Resident aliens

Those residing in the Philippines though not a citizen thereof.

Those who are actually present in the Phils. and who are not mere transients or
sojourners.96

The continuity of residence abroad is not essential. If physical presence is established, such physical
presence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73,
November 26, 1973)
An overseas contract worker is taxable only on income from sources within the Philippines. (Sec.
23 (c).
A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as
member of the complement of a vessel engaged exclusively in international trade is treated as an
overseas contract worker.
Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outside
the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence
abroad, however, need not be continuous. [RR1-79]
95
What makes an alien a resident or non-resident alien is his intention with regard to the length and
nature of his stay. Thus:
a. One who comes to the Philippines for a definite purpose which in its very nature may
be promptly accomplished is not a resident citizen.
b. One who comes to the Philippines for a definite purpose which in its very nature would
require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a
resident, though it may be his intention at all times to return to his domicile abroad when the purpose
for which he came has been consummated or abandoned. (Sec. 5, RR 2)
Length of stay is indicative of intention.
An alien who shall have stayed in the Philippines for more than one year by the end of the
taxable year is a resident alien
An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred
eighty days during a calendar year shall be considered a non-resident alien in business, or in the practice
of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180 days or less
during the calendar year, he shall be deemed a non-resident alien not doing business in the Philippines,
regardless of whether he owns
1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an
inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work
in Process Inventory, Office Supplies Inventory)
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business (example: Merchandise Inventory)
3. Property used in the trade or business which is subject to the allowance for depreciation
(example: Office Equipment) actually engages in trade or business therein. (Mamalateo)
96
A mere floating intention, indefinite as to time, to return to another country is not sufficient to
constitute him a transient.
For tax purposes a resident alien is;
1) An alien who lives in the Phils. with no definite intention to stay as a resident.
2) One who comes in the Phils.for definite purposes which in its very nature would require an extended
stay and to that end, makes his home temporarily in the Phils.
3) An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils.

34
 b) Non-resident aliens97

Those not residing in the Phils. and who is not a citizen thereof.

(1) Engaged in trade or business

Taxable for income derived within the Philippines based on taxable98income.

(2) Not engaged in trade or business

Taxable for income derived within the Philippines based on gross income.

(3) Special Class of Individual Employees

a) Minimum wage earner

Refers to a worker in the private sector paid the statutory minimum wage, or to an
employee in the public sector with compensation income of not more than the statutory
minimum wage in the non-agricultural sector where he/she is assigned.99

By virtue of the passage of R.A. 9504, minimum wage earners are exempted from the
payment of the net income tax,100 thus: xxx, That minimum wage earnersshall be exempt
from the payment of income tax on their taxable income: Provided, further, that the holiday
pay, overtime pay, night shift differential pay and hazard pay received by such minimum
wage earners shall likewise be exempt from income tax.

b) Corporations101

1) Domestic corporations

Those created or organized in the Phils. or under its laws.

2) Foreign corporations

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

97
A non-resident alien individual who came to the Phils.and stayed therein for an aggregate period of
more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.
98
i.e., net
99
Sec. 22 (HH), as amended by R.A. 9504
100
They are not required to file an income tax return
101
The term shall include partnership, no matter how created or organized, joint stock companies, joint
accounts, or insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to operating or consortium
agreement under a service contract with the government.(Sec. 24(b))

35
 (1) Resident

Those foreign corporation engaged in trade or business102 within the Phils.

(2)Non-resident

Those foreign corporation not engaged in trade or business within the Phils.

c. Partnerships103

Partnership is a contract whereby two or more persons bind themselves to contribute

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

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade & business.104

e. Estates and Trusts

Estate is the mass of property, rights and obligations left behind by the decedent
upon his death.105

Trust is an arrangement created by will or co-agreement under which title to property

is passed to another for conservation or investment with the income therefrom and

102
The term implies a continuity of commercial dealings and arrangements and contemplates to that
extent, the performance of acts or works or the exercise of some of the functions normally insistent to
and in the progressive prosecution of commercial gain or for the purpose and the object of the business
organization (Comm. vs. British Overseas Airways Corporation BOAC case 149 S 395)
103
An ordinary business partnership is considered as a corporation and is thus subject to tax as such.
Partners are considered stockholders and, therefore, profits distributed to them by the partnership are
considered as dividends.
What are taxable unregistered partnerships?
The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even
associations or joint accounts which have no legal personalities apart from their individual members.
Accordingly, a pool of individual real property owners dealing in real estate business was considered a
corporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1]
104
Sec. 22 (b)
e. g. Law firm
105
Estates may be classified as follows:
1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership.
- The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs shall
include in their respective returns their distributive shares of the net income of the estate.
2. Estates under judicial settlement - are subject to income tax in the same manner as individual.
- Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor,
trustee, and administrator).
- The return should be filed by executor or administrator of the trust.

36
ultimately the corpus (principal) to be distributed in accordance with the directions of the
creator as expressed in the governing instrument.106

f. Co-ownerships107

It is created whenever the ownership of an undivided thing or right belongs to

different persons.

7. Income Taxation

a. Definition

A tax on all yearly profits arising from property, professions, trades or offices.
A tax on the net income or the entire income realized in one taxable year.

b. Nature

Direct tax the tax burden is borne by the income recipient upon whom the tax is
imposed.
Progressive tax the tax base increases as the tax rate increases.
Excise tax108 a tax on the right to earn income

106
2 Kinds of Trust :
1. Irrevocable Trust - is considered as a separate taxpayer.
2. Revocable Trust - is one where at anytime the power to revest the title to any part of the corpus of
the trust is vested:
(a) in the grantor (creator of the trust) either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or
(b) in any person not having a substantial adverse interest in the disposition of such part of the corpus
or the income therefrom.
The tax shall be imposed on taxable income of the grantor.
107
General rule: Co-ownership is exempt from income tax because the activities of the co-owners are
usually limited to the preservation of the properties owned in common and the collection of the income
therefrom.
Exceptions: (When co-ownership is subject to tax).
(1) When the income of the co-ownership is invested by the co-owners in other income-producing
properties or income-producing activities, and
(2) When there is no attempt to divide inherited property for more than ten (10) years and the said
property was not under any administration proceedings nor held in trust, an unregistered partnership is
deemed to exist.
Tax liability of co-owners:
The co-owners in exempt co-ownership shall be liable for income tax only in their separate and
individual capacity.
Filing of return:
The owners shall report and include in their respective personal income tax returns their shares of the
net income of the co-ownership.
Test to determine whether co-ownership is a taxable unregistered partnership:
Find out whether the heirs have made substantial improvements on the inherited property. If so, the
implication is that they will engage in business for profit (Evangelista Doctrine). If that happens, the co-
ownership will be taxed as an unregistered partnership.

37
 c. General principles

1. A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from sources within the
Philippines.

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

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

income derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within and
without the Philippines.

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

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

8. Income

a. Definition

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

within a specified time, whether as payment for services, interests, or profits from
investments.109

Income is not merely increase in value of property; but a gain, a profit in excess of
capital as a result of exchange transactions.

b. Nature

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

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

whether as payment for services, interest or profit from investment. Unless
otherwisespecified, it means cash or its equivalent. Income can also be thought of as a flow
of the fruits of one's labor.110

108
privilege tax
109
Fisher vs. Trinidad, 43 Phil 973
110
Conwi v. Court of Tax Appeals

38
 Income includes earnings, lawfully or unlawfully acquired, without consensual
recognition, express or implied, of an obligation to repay and without restriction as their
disposition.

c. When income is taxable

1) Existence of income

There must be gain there must be a value received in the form of cash or its
equivalent as a result of rendition of service or earnings in excess of capital invested.111

2) Realization of income

a) Tests of Realization

General rule:

A mere increase in the value of property without actual realization, either through
sale or other disposition, is not taxable. The increase in value is a mere unrealized increase in
capital.

Exception:

That even without the sale or other disposition if by reason of appraisal, the cost
basis is used as the new tax base for purposes of computing the allowable depreciation
expense, the net difference between the original cost basis and new basis due to appraisal is
taxable.112

b) Actual vis--vis Constructive receipt

The gain must actuallybe or constructively realized or received.113

111
A mere expectation of profits is not an income
A transaction where- by nothing of exchangeable value comes to or is received by the taxpayer does
not give rise to or create taxable income.
Items or amounts received which do not add to the taxpayers net worth or redound to his benefits
such as amounts merely deposited or entrusted to him are not considered as gains (CIR vs. Tours
specialist, 183 SCRA 402).
Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of Ts
indebtedness, or gain from exchange of property.
112
Economic benefit principle (BIR Ruling No. 029 98, March 19, 1998)
113
Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by
him at anytime is subject to tax for the year during which so credited or set apart, although not then
actually reduced to possession. The income must be credited to the taxpayer without any substantial
limitation or restriction as to the time or manner of payment or condition upon which payment is to be
made.

39
 An income is constructively received by a person when - it is credited to the amount
of or segregated in his favor and which may be drawn by him at any time without any
limitations, e. g.:

Interest credited on savings bank deposits

Dividends applied by the corporation against the indebted- ness of stockholder
Share in the profit of a partner in General Professional Partnership.

3) Recognition of income

a. there is income, gain or profit

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

4) Methods of accounting

a) Cash method vis--vis Accrual method

Cash method - recognition of income and expense dependent on inflow or outflow

of cash (meaning, you recognize the income when you actually receive the cash payment for
the sale, and you recognize the expense when you actually pay cash for the expense)

Accrual method - method under which income, gains and profits are included in
gross income when earned whether received or not, and expenses are allowed as deductions
when incurred, although not yet paid. It is the right to receive and not the actual receipt that
determines the inclusion of the amount in gross income

b) Installment payment vis--vis Deferred

payment vis-vis Percentage completion114

1. Sales of dealers in personalproperty

Under Rules and Regulations (R&R) prescribed by the Sec. of Finance, upon
recommendation of the Commissioner: a person who regularly sells or otherwise disposes of
personal property on the installment plan may return as income therefrom in any taxable
year that proportion of the installment payments actually received in that year, which the
gross profit realized or to be realized when payment is completed, bears to the contract
price.115

114
in long term contracts
115
Example: Sale in 1997 payable in 2 equal annual installments. How to compute for income:
Contract Price/ Installments
Receivable P100,000
Cost 75,000
(GP) P 25,000
* installments payable in 2 equal annual installments
GP/Contract Price ratio = 25T/100T = 25%
Collections in 1997 = P50T
Income for 1997 = P50T x 25% = P12,500

40
 2. Sales of realty and casual sales of personalty

a) in cases of:

(i) casual sale or other casual disposition of personal property (other than
inventory on hand of the taxpayer at the close of the taxable year) for a price >
P1,000, or

(ii) sale or other disposition of real property, if in either case the initial
payments do not exceed 25% of the selling price

b) how may income be returned: same as in sales of dealer in personal property

above

3.Sales of real property considered as capital asset by individuals

a) individual who sells of disposes of real property, considered as capital asset & is
otherwise qualified to report the gain under (2) above may pay the capital gains tax in
installments under R&R to be promulgated by the Sec. of Finance, upon recommendation of
the Commissioner

b) capital asset: property held by the taxpayer (whether or not connected with his
trade or business) but does not include:

(1) stock in trade of taxpayer

(2) property which would properly be included in inventory, if on hand
(3) merchandise inventory
(4)depreciable assets used in the trade/business
(5) real property used in trade/business

d. Tests in determining whether income is earned for tax

purposes

1) Realization test

No taxable income until there is a separation from capital of something of

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

2) Claim of right doctrine or Doctrine of ownership,

command, or control

3) Economic benefit test, Doctrine of proprietary

interest

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

41
 4) Severance test

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

which is of exchangeable value116 thereby supplying the realization or transmutation which
would result in the receipt of income. Thus, income is not taxable unless separated or
severed from the capital or labor that bore it.

9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from whatever source,
whether legal or illegal, including117 the following items:

1. Gross income derived from the conduct of trade or business or the exercise of a
profession.
2. Rents
3. Interests
4. Prizes and winnings
5. Compensation for services in whatever form paid, including, but not limited to
fees, salaries, wages, commissions, and similar items
6. Annuities
7. Royalties
8. Dividends
9. Gains derived from dealings in property
10. Pensions
11. Partner's distributive share from the net income of the general professional partnership.

b. Concept of income from whatever source derived

The term derived fromwhatever source implies the inclusion of all income under
the law, irrespective of the voluntary or involuntary action of the taxpayer in producing the
gains.

It includes illegal gains arising from gambling, betting, lotteries extortion and fraud.

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

Income118

d. Classification of Income as to Source

1) Gross income and taxable income from sources

within the Philippines

116
Eisner vs. Macomer, 252 US 189
117
but not limited to
118
See definition of gross income, supra

42
 1) Interests:

a) Interests derived from sources withinthe Phils.

b) Interests on bonds, notes or other interest-bearing obligations of residents, corporate
or otherwise.119

2) Dividends:

a.) From a domestic corporation, and

b.) From a foreign corporation 50% or more of the gross income of which for the 3-
year period ending with the close of the taxable year preceding the declaration of such
dividends (or for such part of such period as the corporation within the Phils.120has been
in existence) was derived from sources. It must be only in an amount which bears the
same ratio to such dividends as the gross income of the corporation for such period
derived from sources within the Philippines bears to its gross income from all sources.

3) Compensation for labor or personal services performed in the Phils.121

4) Rentals and Royalties from property located in the Phils. or from any interest in such
property, including rentals or royalties for

a.) The use of, or the right or privilege to use inthe Phils. any copyright, patent, design
or model, plan, secret formula or process, goodwill, trademark, trade brand or other
like property or night;
b.) The use of, or the right to use in the Phils. any industrial, commercial or scientific
equipment;
c.) The supply of scientific, technical, industrial or commercial knowledge or
information;
d.) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment of, any such property or right as is
mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or
any such knowledge or information as is mentioned in paragraph (c);
e.) The supply of services by a nonresident person or his employee in connection with
the use of property or rights belonging to, or the installation or operation of any
brand, machinery or other apparatus purchased from such nonresident person;
f.) Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme; and
g.) The use of, or the right to use:

1. Motion picture films;

2. films or video tapes for use in connection with television; and
3. tapes for use in connection with radio broadcasting

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

6) Gains, profits, and income from sale of personal property, treated as derived entirely
from the country where it is sold.122

119
Sec. 42, (A)( 1)
120
Id. (A)(2)
121
Id. (A)(3)

43
 2) Gross income and taxable income from sources
without the Philippines

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

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

a. Dividends from foreign corporations in general; and

b. Dividends derived from foreign corporations, 50% or more of the gross income of
which for the 3-year period preceding the declaration of dividends (or for such part
of such period as the corporation has been in existence was derived from foreign
sources)
3) Compensation for labor or personal services performed outside the Phils.

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

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

6) Gains, profits and income from the sale of personal property located outside the Phils.,
and

7) Income derived from the purchase of personal property within and its sale outside the
Phils.123
3) Income partly within or partly without the
Philippines

1) Income from transportation such as foreign steamship companies whose vessel touch the
Phil. ports124 and other services rendered partly within and partly outside the Phils. such as foreign

122
Exception to the rule: gain from the sale of shares of stock in a domestic corporation which is treated
as derived entirely from sources within the Phils. regardless of where the shares are sold.
Passage of title test: it is the prevailing view that in ascertaining the place of sale, the determination of
where and when the title to the goods passes from the seller to the buyer is decisive.
Enumeration in Section 42 not all-inclusive.
In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149 SCRA 395], the
Supreme Court held:
xxx Section 37 (now Section 42) by its language, does not intend the enumeration to be exclusive. It
merely directs that the types of income listed therein be treated as income from sources within the Phils.
a cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and
that no other kind of income may be so considered xxx
The Supreme Court further held:
xxxThe absence of flight operations to and from the Phils. is not determination of the source of
income on the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time
pertinent to this case. The test of taxability is the source, and the source of an income is that activity xxx
which produced the income. Unquestionably the passage documentations in these cases were sold in the
Phils. and the revenue therefrom was derived from a business activity regularly pursued within the Phils.
xxx
123
Sec. 42

44
corporations carrying on the business of transmission of telegraph and cable messages between
points outside the Phils.125

2) Income from the sale of personal property produced in whole or in part by the taxpayer
within and sold outside the Phils. orproduced, in whole or in part, by the taxpayer outside and sold
within the Phils.

e. Sources of income subject to tax

1) Compensation Income126

All income payments, in money or in kind, arising from personal services under an
employer - employee relationship.

The gain derived from labor especially employment such as salaries and commission.

All remuneration for services performed by an employee for his employer, including
the cash value of all remuneration paid in any medium other than cash.127

2) Fringe Benefits128

a) Special treatment of fringe benefits

124
Sec. 163, Regulations
125
Sec. 164, id.
126
Forms of Compensation
a. money
b. in kind
Compensation paid to an employee of a corporation in its stock is to be treated as if the corporation
sold the stock for its market value and paid to the employee in cash.
Living quarters furnished to the employee in addition to cash salary. The rental value should be
reported as income.
Meals given to employee, the value thereof substitutes income.
127
Sec. 78(A)
It includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances
5. Bonuses
6. Fringe Benefits of rank and file employees
It does not include remuneration paid:
For agricultural labor paid entirely in products of the farm where the labor is performed, or
For domestic service in a private home, or
For casual labor not in the course of the employer's trade or business, or
For services by a citizen or resident of the Philippines for a foreign govt or an intl organization.
128
Sec. 33
The fringe benefit covered refers to those enjoyed by managerial and supervisory employees

45
 The special treatment of fringe benefits shall be applied to fringe benefits given or
furnished to managerial or supervising employees and not to the rank and file.129

b) Definition

Any good, service or other benefit furnished or granted in cash or in kind by an

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

c) Taxable and non-taxable fringe benefits

Taxable fringe benefits:

1) HousingPrivileges

(a) Lease of residential property for the use of the employee as his usual place of residence.
(b) Residential Property owned by employer and assigned to employee as his usual place of
residence.
(c) Residential property purchased by employer on installment basis for the use of employer
as his usual place of residence.
(d) Residential property purchased by ER and ownership is transferred to EE as his usual
place of residence.
(e) Residential property transferred to employee at less than employers acquisition cost.130

2) Household Expenses refer to expenses of the employee paid by the

employer for household personnel or other personal expenses, which shall include:

(a) salaries of household helper

(b) personal driver of the employee
(c) Payment for homeowner assoc., etc.

3) Interest on loan at less than market rate131

4) Expenses for Foreign Travel

General rule:

129
Pursuant to Revenue Regulations No. 3 98 (dated May 21, 1998) implementing section 33 of the Tax
Code.
130
Non taxable Housing Fringe Benefits
(a) Housing privilege of military officials of AFP
(b) Housing unit, which is situated inside or adjacent to the premise of a business or factory. A housing
unit is considered adjacent if it is located within the maximum 50 meters from the perimeter of the
business premises.
(c) Housing benefit granted to employees on a temporary basis not exceeding three (3) months
131
If the employer lends money to his employee:
Free of interest or at a rate lower than 12% (or prevailing market rate) the interest foregone by the
employer or the difference of the interest assumed by the employer and the 12% rate shall be treated as
taxable fringe benefit.
Applicable to installment payment or loan with interest rate lower than 12% starting January 1, 1998.

46
 Expenses for foreign travel insured by the employee and/or family members of the
employee borne by the employer shall be treated as taxable fringe benefits of the employee.

Except:

Where the expenses for foreign travel paid by the employer for the employee are for
the purpose of attending business meeting or convention. The exemption covers only the
following expenses:

a) Inland travel expenses except lodging cost in hotel averaging US$ 300 or less per day;132
and

b) Cost of economy or business class airline ticket.133

5) Membership fees, dues and other expenses borne by the employer for his
employee, in social or athletic clubs or other similar organizations.134

6) Life or Health Insurance -

General rule:

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

Except:

a) Contribution of the employer for the benefits of the employee pursuant to

existing laws.135
b) The cost of premium borne by the employer for the group insurance of his
employees.

7) Holidays and Vacation Expense

8) Motor Vehicle

a) Motor vehicle purchased by employer in name of employee.

b) cash for the purchased provided by the employer, the ownership is placed in the name of
the employee
c) Purchase on Installment basis, the ownership is placed in the name of the employee
d) Portion of purchased price shouldered by employer

132
Travel expenses should be supported by documents proving the actual occurrences of the meetings or
conventions. Likewise, documents and evidence showing the business purpose of the employees travel
must be presented otherwise, the entire cost will be considered taxable fringe benefit.
133
However, if the ticket is a first class one, 30% of the cost of the ticket shall be subject to a fringe benefit
tax.
134
These are treated as taxable Fringe Benefits of the employee in full.
135
such as RA 8287 (SSS) or RA 8291 (GSIS).

47
 e) Fleet of motor vehicle leased by the employer
f) Fleet of Motor vehicles owned and maintained by employer.136

9) Expense Account

a) Expenses incurred by the employee but paid by his employer.

b) Expenses paid by the employee but reimbursed by his employer.137

10) Educational Assistance

General Rule: The cost of the educational assistance to the employee or his
dependents which are borne by the employer shall be treated as Taxable Fringe Benefits.

Exception:

a) Education granted to employee138

b) Educational Assistance granted to the dependents of the employee in the
nature of educational assistance to the dependents of the employee through a
competitive scheme under a scholarship program of the company.
Non-taxable fringe benefits:

1) Contributions of employer for the benefits of employee to retirement, insurance, and

hospitalization benefits plans.
2) Benefits given to rank- and -file employees whether granted under CBA or not.

136
In case of letters a, b, c and d, regardless of whether the motor vehicle is used for the personal
purpose of the employee and partly for the benefit of his employer, the monetary value shall be the
entire value of the benefit.
Under letters e and f, the fleet of motor vehicles is for the use of the business and the employees. The
value of the benefit shall be the rental payments (e) or the acquisition cost (f) of all motor vehicles not
normally used for sales, freight, delivery service and non-personal use.
The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable
fringe benefit the value of the benefit shall be measured based on the depreciation of the Yacht at an
estimated useful life of 20 yrs.
The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as
business use and not subject to FBT.
137
Expense account not subject to FBT.
a) expenses duly receipted for in the name of the employer and
b) The expenditures do not partake the nature of personal expenses attributable to the employee.
Personal expenses of the employee(like groceries) paid for or reimbursed by the employer are
taxable fringe benefits, whether or not duly receipted for in the name of the EE.
Representation and Transportation Allowances (RATA) refers to fixed amounts which are regularly
received by the employees as part of their monthly compensation income. They are not treated as
Taxable Fringe Benefits but the same are treated as Taxable Compensation Income.
138
Requisites:
(1) Educational grant whereby the study is directly connected with the trade, business or profession of
the ER.
(2) And there is a written contract obligating the EE to remain under the employment for a certain
period.

48
 3) Fringe Benefits which are exempted from income tax under the tax code or other special
laws.
4) Fringe Benefits which are required by the nature of, or necessary to the trade, business or
profession of the employer.
5) Fringe Benefits granted for the convenience or advantage of the employer.
6)De minimis benefits139 as may be defined by the Secretary of Finance.

3) Professional Income

Any other income that is not derived from personal services or not related to an
employer employee relationship and is generally subject to tax on net income basis.

The value derived from an exercise of profession, business or utilization of capital

assets.140
4) Income from Business

Gains or profits derived from rendering services, selling merchandise, manufacturing

products, farming and long- term construction contracts.

5) Income from Dealings in Property

a) Types of Properties

(1) Ordinary assets

Refer to properties held by the taxpayer in the pursuit of his profession, trade or
business, they are:

i. Stock in Trade;
ii. Property of a kind which would properly be included in the inventory if on hand at
the close of the taxable year;
iii. Property held by the taxpayer primarily for sale to customers in the ordinary course
of trade or business;
iv. Property used in trade or business which in subject to the allowance for
depreciation; and
v. Real property used in trade or business.141

(2) Capital assets142

139
infra
140
e.g. income derived from sale of assets used in trade or business
141
Sec. 39, [A], NIRC
142
Specific Examples of Properties classified as capital assets
Capital assets include personal property (not used in trade or business) such as movables in ones
residence, personal vehicles, appliances and furniture for personal use, jewelries etc. as well as real

49
 Property held by the taxpayer143but does not include:

i. Stock in trade;
ii. Property of a kind which would properly be included in the inventory if on hand at
the close of the taxable year;
iii. Property held by the taxpayer primarily for sale to customers in the ordinary course
of trade or business;
iv. Property used in trade or business which in subject to the allowance for depreciation;
and
v. Real property used in trade or business.144

b) Types of Gains from dealings in property

(1) Ordinary income vis--vis Capital

gain

Includes any gain from the sale or exchange of property which is not a capital
asset.145
(2) Actual gain vis--vis Presumed
gain

(3) Long term capital gain vis--vis

Short term capital gain

(4) Net capital gain, Net capital loss

Net Capital gainis the excess of the gains from sales or exchange of capital assets
over the losses from such sales or exchanges.146

Net capital Lossis the excess of the losses from sales or exchanges of capital assets
over the gains from such sales or exchanges.147

(5) Computation of the amount of

gain or loss

property (not used in trade or business) such as residential land, idle land not used in business operations
and residential house.
143
whether or not connected with his trade or business
144
Sec. 39, [A], NIRC
This is an enumeration by exclusion, all others not enumerated are capital assets.
145
Sec. 22, [Z]
146
Sec. 39, [A, 2], id.
147
Sec. 39, [A, 3], id.

50
 The gain from the sale or other disposition of property shall be the excess of the
amount realized therefrom over the basis or adjusted basis for determining gain, and the loss
shall be the excess of the basis or adjusted basis for determining loss over the amount
realized. The amount realized from the sale or other disposition of property shall be the sum
of money received plus the fair market value of the property148received.149

(a) Cost or basis of the

property sold

The basis of property shall be -

(1)If such was acquired by purchase, it isthe cost of the property.

(2) If the property sold was acquired by inheritance; the fair market price or value
as of the date of acquisition.

(3) If the property sold was acquired by gift, the basis shall be the same as if it
would be in the hands of the donor or the last preceding owner by whom it was not
acquired by gift.

(4) If the property was acquired for less than an adequate consideration in money
or money's worth, the basis of such property is the amount paid by the transferee for the
property.150

(b) Cost or basis of the

property exchanged in
corporate readjustment

[1] Merger
[2] Consolidation

A merger or consolidation has income tax consequences to the corporation which is

aparty tothe merger or consolidation, to its stockholders, and to its security holders. To the
corporation, or to its stockholders, or to its security holders, loss is not recognized from the
merger or consolidation.151

Gain will be recognized only if, on the exchange under the merger or consolidation,
the taxpayer received cash or property. The gain to be recognized should not exceed the sum
of money and the fair market value of the property received.
[3] Transfer to a
controlled
corporation152

148
other than money
149
Sec. 40 (A)
150
Id., (B)
151
Id., (C)
152
tax-free exchanges

51
 When a taxpayer transfers property to a corporation, in consideration of stock
received for the transfer, as a result of which transfer, the taxpayer153 gains control of the
corporation, no loss is recognized on the transfer of property.154

(c) Recognition of gain or loss

in exchange of property

[1] General rule

Upon the sale or exchange or property, the entire amount of the gain or loss, as the
case may be, shall be recognized.155
[a] Where no
gain or loss
shall be
recognized

a) Exchange solely in kind156in legitimate mergers or consolidations.

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

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

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

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

3) A shareholder exchanges stock in a corporation which is a party to the

merger or consolidation solely for the stock of another corporation, also a party to
the merger or consolidation.
4) A security holder of a corporation which is a party to the merger or
consolidation exchanges his securities in such corporation solely for stockor
securities in another corporation, a party to the merger or consolidation.

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

control.157

153
alone or together with others not exceeding four [or a total of five]
154
Id., (C)(2)(c), last par.
Suppose the transfer resulted in a gain to the transferor, will the gain be recognized? Gain will be
recognized only if on the transfer, the taxpayer received cash or property in addition to the shares
received. The gain to be recognized shall not exceed the sum of money and fair market value of the
property received.
If before the transfer to the corporation, the transferor already had control over the corporation, the
gain or loss on the transfer will be recognized
155
Id., (C) (1)
156
exchange of property solely for stocks

52
 [2] Exceptions

[a] Meaning of
merger,
consolidation,
control
securities

"Merger" or "consolidation shall be understood to mean:

(i) the ordinary merger or consolidation, or

(ii) the acquisition by one corporation of all or substantially all the properties of
another corporation solely for stock: Provided, That for a transaction to be regarded as a
merger or consolidation within the purview of this Section, it must be undertaken for a bona
fide business purpose and not solely for the purpose of escaping the burden of taxation:
Provided, further, That in determining whether a bona fide business purpose exists, each and
every step of the transaction shall be considered and the whole transaction or series of
transaction shall be treated as a single unit: Provided, finally, That in determining whether
the property transferred constitutes a substantial portion of the property of the transferor,
the term 'property' shall be taken to include the cash assets of the transferor.

The term "control shall mean ownership of stocks in a corporation possessing at

least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to
vote.158

[b] Transfer of
a controlled
corporation159

(6) Income tax treatment of capital

loss
(a) Capital loss limitation
rule160

Provides thatcapital lossesare deductible only to the extent of capital gains.

(b) Net loss carry-over rule161

157
A person exchanges his property for stock or unit of participation in a corporation of which as a result
of such exchange said person, alone or together with others, not exceeding four persons, gains control of
said corporation
Control means ownership of stocks in a corporation possessing at least 51% of the total voting power
of all classes of stock entitled to vote.
The items enumerated above are also called tax-exempt exchanges.
158
Id., (C)(6)
159
See (5)(b)(3), supra
160
applicable to both corporations and individuals
161
applicable only to individuals

53
 Net Capital Loss Carry Over (NCLCO)means that:

i. If any taxpayer, other than a corporation, sustains in any taxable year a net
capital loss;
ii. Such net capital loss cannot be deducted from ordinary income due to the
loss limitation rule;
iii. Such loss could be carried over to the next taxable year162as a deduction
against net capital gain in an amount not in excess of the taxable income163in
the year the loss was sustained; and
iv. Such loss shall be treated as a loss from the sale or exchange of capital assets
held for not more than twelve (12) months.164

(7) Dealings in real property situated

in the Philippines165

On sale, exchange, or other disposition of real property in the Philippines, held as a

capital asset - on the gross selling price, or the current fair market value at the time of the
sale, whichever is higher, a final tax of 6%.166

(8) Dealings in shares of stock of

Philippine corporations

(a) Shares listed and traded in

the stock exchange

This is not subject to income tax but subject to percentage tax of of 1% of the
gross selling price.

(b) Shares not listed and

traded in the stock exchange

162
not thereafter
163
i.e. net income before exemptions
164
Sec. 39 [D]
165
The real property involved must be considered capital asset.A capital asset is property held by the
taxpayer whether or not connected in his trade or business except:
1. Stock in trade or other property of any kind which would be included in the inventory of the taxpayer if
on hand at the end of the taxable year.
2. Property primarily held for sale to customers in the ordinary course of trade or business.
3. Property used in trade or business subject to depreciation.
4. Real property used in trade or business.
166
Sec. 24 (D)

54
 The provisions of Section 39(B)167 notwithstanding, a final tax at the rates prescribed
below is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation,
except shares sold, or disposed of through the stock exchange.

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

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

(9) Sale of principal residence168

Not liable for capital gains tax when:

a. There is a sale or disposition of their principal residence by natural persons.

b. The proceeds of the sale are fully utilized in acquiring or constructing a new
principal residence within 18 calendar months from the date of sale or disposition.

c. The Commissioner shall have been duly notified by the taxpayer within 30 days
from the date of sale or disposition through a prescribed return of his intention to avail of
the tax exemption.

d. A deposit is made of the 6% capital gain tax otherwise due, in cash or managers
check, in an interest-bearing account with an Authorized Agent Bank (AAB), under an
Escrow Agreement between the taxpayer and the Bureau of Internal Revenue that the same
shall be released to the taxpayer when the proceeds of the sale shall have been utilized as
intended.

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

If there is no full utilization of the proceeds of sale or disposition, the portion of the
gain presumed to have been realized from the sale or disposition shall be subject to capital
gains tax (CGT). The GSP or FMV at the time of sale, whichever is higher, shall be

167
In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset shall be taken into account in computing net
capital gain, net capital loss, and net income:
(1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12)
months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months
168
Conditions for tax exemption of gain from the sale or exchange of principal residence:
1. Proceeds are fully utilized in acquiring or constructing a new principal residence within18 months from
the date of sale or disposition;
2. Historical cost or adjusted basis or the real property sold or disposed shall be carried over to the new
principal residence built or acquired;
3. Notice to the Commissioner of Internal Revenue shall be given within thirty (30) days from the date of
sale or disposition; and
4. If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have been
realized from the sale or disposition shall be subject to capital gains tax

55
multiplied by a fraction which the unutilized amount bears to the gross selling price in order
to determine the taxable portion..169

6) Passive Investment Income

a) Interest Income

An earning derived from depositing or lending of money, goods or credits.170

b) Dividend Income171

(1) Cash dividend

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

(2) Stock dividend

Involves the transfer of a portion of retained earnings to capital stock by action of

stockholders. it simply means the capitalization of retained earnings.172

(3) Property dividend

A dividend paid in property of a corporation such as stock investment, bands or

securities held by the corporation and to the extent of the FMV of the property received at
the time of the distribution.
(4) Liquidating dividend

A dividend distributed to the shareholders upon dissolution of the corporation.

169
Sec. 24 (D)(2)
170
General rule: Interest received by a taxpayer, whether usurious or not, is subject to income tax.
Except: When interest income is exempted by law from income tax.
171
Dividends means any distributions made by a stock corporation to its stockholders (SHs)) out of its
earnings or profits and payable to its SHs in money or other property.
172
General rule: A mere issuance of stock dividends is not subject to income tax, because it merely
represents capital and it does not constitute income to its recipient. Before disposition thereof, stock
dividends are nothing but a representation of interest in the corporate entity.
Exceptions: When stock dividends are subject to tax;
a) These shares are later redeemed for a consideration by the corporation or otherwise conveyed by
the stockholder to the extent of such contribution. Under the NIRC, if a corporation, after the distribution
of a non-taxable stock dividend, proceeds to cancel or redeem its stock at such time and in such manner
as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a
tax of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated
as a taxable dividend to the extent that it represents a distribution of earnings or profits. (Sec.73 (B),
NIRC). Depending on the circumstances, corporate earnings may be distributed under the guise of initial
capitalization by declaring the stock dividends previously issued and later redeem or cancel said dividends
by paying cash to the stockholder. This process amounts to distribution of taxable dividends which is just
delayed so as to escape the tax. (CIR vs. CA, 301 SCRA 152)
b) The recipient is other than the stockholder. (Bachrach vs. Seifert, 57 PHIL 483)
c) A change in the stockholders equity results by virtue of the stock dividend issuance.

56
 c) Royalty Income

These are the compensations or payments for the use of property and are paid to the
owner of a right.

d) Rental Income173

Refers to earning derived from leasing real estate as well as personal property. It
includes all other obligations assumed to be paid by the lessee to the third party in behalf of
the lessor.

(1) Lease of personal property

(2) Lease of real property

(3) Tax treatment of

(a) Leasehold improvements

by lessee

The lease can be drawn up to grant a credit to the renter toward any amounts he
might spend in leasehold improvements. This would benefit the landlord in that the taxable
income for rent will be reduced. The amounts spent for these improvements can be
deducted from any capital gains on the future sale of the leased building.174

(b) VAT added to rental/paid

by the lessee

If VAT registered, the lessee is able to treat the full amount of the VAT charged on
the rentals as input tax and to claim a credit in the normal way. However, non-registered
lessees (including most small enterprises), and those classified as exempt cannot claim a
VAT refund and hence have to bear the cost.175
(c) Advance rental/long term
lease

(a) If the advanced rental is a SecurityDeposit which restricts the lessor as to its use -
such amount shall be excludedin the determination of rental income.

(b) If the advance rental is prepaid rental received without restriction as to its use
the entire amount is taxable in the year it is received.
7) Annuities, Proceeds from life insurance or other
types of insurance

173
Taxes paid by the tenant (lessee) to or for a lessor for a business property are additional rent and
constitute income taxable to the lessor.
174
e.How.com
175
practicalaction.org

57
 Annuities - amounts payable yearly or at other regular intervals for a certain or
uncertain period.They also represent as installment payments for life insurance sold by
insurance companies.176

Proceeds of life insurance paid by reason of the death of the insured to his estate or
to any beneficiary,177 directly or in trust.

Return of insurance premium178

8) Prizes and awards

Contest prizes and awards received are generally taxable. Such payment
constitutes gain derived from labor.

The exceptions are as follows:

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

educational, artistic, literary or civic achievements are exclusions from gross income if:

a. The recipient was selected without any action on his part to enter a contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition
to receiving the prize or award.

Prizes and awards granted to athletes in local and intl sports competitions and
tournaments held in the Philippinesand abroad and sanctioned by their national associations
shall be exempt from income tax.

9) Pensions, retirement benefit, or separation pay

Pensionrefers to allowance paid regularly to a person on his retirement or to his

dependents on his death, in consideration of past services, meritorious work, age, loss or
injury.

Retirement benefits received under RA 7641 and those received by officials and
employees of private firms in accordance with a reasonable private benefit plan maintained
by the employer.179
176
If the part of annuity payments represent interest = taxable income.
If the annuity is a mere return of premium = not taxable.
177
individual, partnership, or corporation, but not a transferee for a valuable consideration.
If the proceeds are retained by the insurer, the interest thereon is taxable;
178
If such amounts (when added to amounts already received before the taxable year under such
contracts) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable
year), then the excess shall be included in the gross income. However, in the case of a transfer for a
valuable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract,
or any interest therein, only the actual value of such consideration and the amount of the premiums and
other sums subsequently paid by the transferee are exempt from taxation. No loss is realized on
surrender of a life insurance policy for its surrender value.

58
 Any amount received by an employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer
because of death, sickness, other physical disability or for any cause beyond the control of
the employee.180

The social security benefits, retirement gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the Philippines or aliens who come to reside
permanently in the Philippines from foreign government agencies and other institutions.

Payments of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veterans
Administration

Benefits received from or enjoyed under the Social Security System.

Benefits received from theGSIS, including retirement gratuity received by

government officials and employees.

10) Income from any source whatever

All income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the taxpayer in producing the
income.181
a) Forgiveness of indebtedness

The cancellation and forgiveness of indebtedness may, dependent upon the

circumstances, amount to:

1. a payment of income;
2. a gift; or
3. a capital transaction.

If, for example, an individual performs services for a creditor who, inconsideration
thereof cancels the debt, income to that amount is realized by the debtor as compensation
for his service.

If, however, a creditor merely desires to benefit a debtor and without any
consideration thereof cancels the debt, the amount of the debt is a gift from the creditor to
the debtor and need not be included in the latters gross income.

179
Requisites:
i. The retiring employee has been in the service of the same employer for at least 10 years.
ii. The retiring employee is not less than 50 years of age at the time of his retirement
iii. The benefits shall be availed of by an employee only once.
iv. That there be a reasonable private benefit plan as defined below.
180
i.e., the separation of the employee must be involuntary and not initiated by him
181
Gutierrez vs. Collector of Internal Revenue, CTA case no. 65, August 31, 1965.

59
 If a corporation to which a stockholder is indebted forgives the debt, the transaction
has the effect of payment of dividends.182

b) Recovery of accounts previously written

off

Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered
shall be included as part of the taxpayers gross income in the year of such recovery to the
extent of the income tax benefit of said deduction.183There is an income tax benefit when the
deduction of the bad debt in the prior year resulted in lesser income and hence tax savings
for the company.184

c) Receipt of tax refunds or credit

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

profession, is taxable income185in the year of receipt to the extent of the income tax benefit
of said deduction.186
Tax credit takes place upon the issuance of a tax certificate or tax credit memo,
which can be applied against any sum that may be due and collected from the taxpayer.

d) Income from any source whatever187

f. Source rules in determining income from within and

without188

182
Sec. 50, Rev. Reg. 2
183
Tax Benefit Rule
184
Sec. 4, RR 5-99
185
e.g., refund of fringe benefit tax
186
i.e., the tax benefit rule applies
However, the following tax refunds are not to be included in the computation of gross income:
1. Philippine income tax, except the fringe benefit tax
2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit for such tax
in the year it was paid or incurred.
3.Estate and donors taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed
(Special assessments)
5.ValueAddedTax
6. Fines and penalties due to late payment of tax
7.Final taxes
8. Capital Gains Tax
187
supra
188
Sec. 42

60
 The following items of gross income shall be treated as gross income from sources
within the Philippines:

1) Interests

Interests derived from sources within the Philippines, and interests on bonds, notes
or other interest-bearing obligation of residents, corporate or otherwise.

2) Dividends

The amount received as dividends:

(a) from a domestic corporation; and

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

3) Services

Compensation for labor or personal services performed in the Philippines.

4) Rentals

Rentals and royalties from property located in the Philippines or from any interest in
such property, including rentals or royalties for -

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design
or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or
right;

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

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

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

(e) The supply of services by a nonresident person or his employee in connection with the
use of property or rights belonging to, or the installation or operation of any brand, machinery or
other apparatus purchased from such nonresident person;

61
 (f) Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
project or scheme; and

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

(i) Motion picture films;

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

5) Royalties189

6) Sale of real property

Gains, profits and income from the sale of real property located in the Philippines.

7) Sale of personal property

Gains, profits and income from the sale of personal property

The following items of gross income shall be treated as income from sources without
the Philippines:

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

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

(3) Compensation for labor or personal services performed without the Philippines;

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

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

8) Shares of stock of domestic corporation

Gain from the sale of shares of stock in a domestic corporation shall be treated as
derived entirely form sources within the Philippines regardless of where the said shares are
sold.

g. Situs of Income Taxation190

h. Exclusions from Gross Income191

189
See 4) Rentals, supra
190
See Inherent Limitations, Territorial, supra
191
See Sec. 32 (B)

62
 Refers to income received or earned but is not taxable as income because it is
exempted by law or by treaty. Receipts which are not in fact income are also excluded from
Gross Income.192
1) Rationale for the exclusions

a) Life Insurance proceeds

represents indemnity not income

b) Amount Received by Insured as Return of Premium

the amount returned are not income but return of capital. They
represent earnings which were previously taxed.

c) Gifts, Bequests, and Devises

- the property is subject to donors or estate taxes as the case may be.
Further, there is no income.

d) Compensation for Injuries or Sickness

- they are mere compensation for injuries or sickness suffered and
not income.

e) Income Exempt under Treaty

- the principle of reciprocity and comity among nations.

2) Taxpayers who may avail of the exclusions

a) Individuals b) Corporations; and c) Estates and trusts

3) Exclusions distinguished from deductions and tax

credit

Exclusions refer to income received or earned but is not taxable because by law or
treaty. Such tax free income is not to be included in the income tax return unless
information regarding it is specifically called for.193

Deductions refer to the items or amounts authorized by law to be subtracted from

the pertinent items of gross income to arrive at taxable income.194

Tax credit an amount subtracted from an individuals or entitys taxliability to

arrive at the total tax liability.195
4) Under the Constitution

192
Exclusions are in the nature of tax exemptions, thus, the claimant must establish them convincingly.
193
Sec. 61, Rev. Regs. No. 2
194
Secs. 34 and 35, NIRC
195
M.E. Holding Corp. vs. Commissioner of Internal Revenue, CTA Case No. 5314, prom.August 17, 1998
citing Blacks Law Dictionary, 6th Ed.

63
 a) Income derived by the government or its
political subdivisions from the exercise of any
essential governmental function

Refers only to income derived by the Government or any of its political subdivisions
from:

1) any public utility; and

(2) the exercise of any essential governmental function.196

5) Under the Tax Code

a) Proceeds of life insurance policies

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise.197

b) Return of premium paid

The amount received by the insured as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term or at the maturity of the
term of the contract of upon surrender.198
c) Amounts received under life insurance,
endowment or annuity contracts199

d) Value of property acquired by gift, bequest,

devise or descent

The value the property acquired by gift, devise, or descent shall be excluded.
However, the income from such property, as well as gift, bequest, devise, or descent of
income from property, in cases of transfers of divided interest, shall be included in gross
income.

e) Amount received through accident or

health insurance

196
Thus, income from sources other than those mentioned is subject to income tax.
197
Reason for exclusion: The contract of insurance is a contract of indemnity, hence, the proceeds thereof
are considered indemnity rather than a gain or profits.
Instances when proceeds from insurance are taxable:
a) Where proceeds are held by the insurer under an agreement to pay interest. The interest is included
in determination of gross income.
b) Where the transfer is for valuable consideration.
198
Reason for the exclusion: The return of premium is a mere return of capital. However, where the
included in the gross amount received exceed the aggregate premiums paid, the excess shall be income
199
See b.

64
 Amounts received, through Accident or Health Insurance or under Workmens
Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of
any damages received, whether by suit or agreement, on the account of such injuries or
sickness.200

f) Income exempt under tax treaty

Income of any kind, to the extent required by any treaty obligation binding upon the
Government of the Philippines.

g) Retirement benefits, pensions, gratuities,

etc.

a) Retirements benefits received under RA 7641 and those received by officials and
employees of private firms in accordance with reasonable private benefit plan.201
b) Any amount received by an official or employees or by his heirs from the
employer as a consequence of separation from service due to death, sickness or other physical
disability beyond the control of the said official or employer.
c) Terminal leave and other social security benefits.202
d) Benefits received under the US veterans Administration.
e) Benefits received from SSS
f) Benefits received from GSIS

h) Winnings, prizes, and awards, including

those in sports competition

200
Example of damages recovered from personal injuries: Moral damages for personal injuries.
If the award of damages is to compensate loss of property or an award of damages to compensate loss
of income / profits, such is subject to tax.
201
Requisites:
1) The retiring official or employees has been in service of the same employer for at least ten years.
2) Is not less than 50 yrs. of age at the time of his retirement and
3) Available to official or employee only once.
A reasonable private benefit plan means a pension; gratuity, stock bonus or profit sharing plan
maintained by an employer for the benefit of some or all of his employees
a) wherein contributions are made by such employer or employees, or both, for the purpose of
distributing to such employer the earnings and principal of the fund thus accumulated; and
b) wherein said plan provides that at no time shall any part of the principal or income of the fund be
used for, or be diverted to, any purpose other than for the exclusive benefit of said employee
202
The terminal leave pay of government employees whose employment is co-terminous is exempt since it
falls within the meaning of the phrase for any cause beyond the control of the said official or employees
(BIR Ruling 143-98)

65
 1) Prizes and Award - to be excluded, the following conditions must concur:

(1) Prizes and award made primarily in recognition of religious, charitable,

scientific, educational, artistic, literary, or civic achievement.
(2) The recipient was selected without any action on his part to enter the
contest or proceeding.
(3) The recipient is not required to render substantial future services as a
condition in receiving the award.

2) Prizes and Award in Sports Competition - All prizes and award granted to athletes
in local and international sports competitions and tournaments whether held in the Phils. or
abroad and sanctioned by sports associations.

6) Under a Tax Treaty

To the extent required by any treaty obligation binding upon the Philippine
government.

7) Under Special Laws

1. Prizes received by winners in charity horse race sweepstakes from PCSO.

2. Back pay benefits
3. Income of cooperative marketing association
4. Salaries and stipends in dollars received by non Filipino citizens on the
technical staff of IRRI (International Rice Research Institutes).
5. Supplemental allowances per diem, benefits received by officer or employees of
the Foreign Service.
6. Income from bonds and securities for sale in the international market.

i. Deductions from Gross Income203

203
These are items or amounts authorized by the law to be subtracted from the pertinent items of the
gross income to arrive at the taxable income.The term taxable income means the pertinent items of
gross income specified in the National Internal Revenue Code [Sec. 32], less the deductions [Sec. 34]
and/or personal and additional exemptions [Sec. 35], if appropriate, authorized for such types of income
by the Code or other special laws. [Sec. 31].
Who can avail of deductions?
General rule: All taxpayers
Exception: Those earning compensation income arising from personal services
rendered under an employer-employee
relationship
Basic Principles Governing Tax Deductions:
He who claims it must point to the specific provision of the statute authorizing it, and he must be able
to prove that he is entitled to it.
If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of
the exemption by clear legislative intent. However, if there is an express mention in the law or if the
taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict
construction against the taxpayer-claimant will not apply.

66
 1) General rules

a) Deductions must be paid or incurred in

connection with the taxpayers trade, business
or profession

It must be directly connected with trade or business or profession of the taxpayer.

b) Deductions must be supported by adequate

receipts or invoices204

The claimed deduction must be evidenced by official receipts or other adequate

records.205

2) Return of capital (cost of sales or services)

a) Sale of inventory of goods by

manufacturers and dealers of properties
b) Sale of stock in trade by a real estate dealer
and dealer in securities
c) Sale of services

3) Itemized deductions206

a) Expenses207

(1) Requisites for deductibility

Unlike gross income, there is no catch-all provision for deductions. Deductions must comply with the
substantiation requirement.
204
except standard deduction
205
The evidence must establish the following;
a) the amount of expenses being deducted
b) the direct relation of such to the development, management, operation, and/or conduct of the
trade, business or profession of the taxpayer.
206
The following can claim itemized deductions:
a. Corporations, whether domestic or (resident) foreign
b. General Professional Partnerships
c. Individuals engaged in trade, profession or business (citizen, resident alien, non-resident alien
doing business in the Philippines)
d. Estates and trusts engaged in trade or business
e. Proprietary educational institutions and hospitals (non-profit)
f. Government-owned or controlled corporations
Only individuals, except non-resident aliens, can elect between itemized deductions and optional
standard deduction.
207
Sec. 34(A)
Only deductions allowable are ordinary and necessary trade, business or professional expenses

67
 1. It must be ordinary and necessary.
2. It must be paid or incurred during the taxable year.
3. It must be paid or incurred in carrying on or which are directly attributable to the
development, management, operation and/or conduct of the trade, business or exercise of
a profession.
4. The amount must be reasonable.
5. It must be substantiated with sufficient evidence, such as official receipts or other
adequate records, showing:

i. the amount of the expense being deducted, and

ii. the direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade, business or
profession of the taxpayer.

6. It is not contrary to law, public policy or morals.

7. The tax required to be withheld on the amount paid or payable must have been
paid to the BIR by the taxpayer, who is constituted as a withholding agent of the
government.208

(a) Nature: Ordinary and

necessary209

Ordinary expenses which are commonly incurred in the trade or business of the
taxpayers as distinguished from capital expenditures. An expense is ordinary if it is normal
or usual to the line of business.

Necessary expenses which are appropriate and helpful to the taxpayers business or
if it is intended to realized profit or to minimize a loss.

(b) Paid and incurred during

taxable year

Paid the payment is on cash receipt basis, expenses are deductible in the year they
are incurred.

Incurred the payment thereof is on accrual basis, expenses are deductible in the
year they are incurred, whether paid or not.

(2) Salaries, wages and other forms of

compensation for personal services

208
For instance, withholding tax on compensation income paid to employees, fringe benefit tax on
fringe benefits given to managerial and supervisory employees, etc. ( Sec. 2.58.5, RR 2-98 as amended by
Sec. 6, RR 14-2002)
209
The two conditions must concur. A court may decide on when an expense is, or is not, ordinary, but
as much as possible, it will refuse to substitute its judgment for that of the taxpayer on the necessity of an
expense.

68
 actually rendered, including the
grossed-up monetary value of the
fringe benefit subjected to fringe
benefit tax which tax should have
been paid210

(3) Travel/Transportation expenses211

(4) Cost of materials

(5) Rentals and/or other payments for

use or possession of property212

(6) Repairs and maintenance213

(7)Expenses under lease agreements214

(8) Expenses for professionals

(9) Entertainment expenses

(10) Political campaign expenses

(11) Training expenses

b) Interest215

210
Sec. 34 (A)(1)(a)(i)
211
For travel expenses, here and abroad,while away from home, in the pursuit of trade, business or
profession.
Include meals and lodging, here and/or abroad.
While away from home means away from principal place of business
If the trip is undertaken for purposes other than business or exercise of profession, the transportation
expenses are personal expenses and the meals and lodging are living expenses and are not deductible.
Transportation expenses of an employee from his residence to his office and back are not deductible.
They are personal expenses. However, transportation expenses from his office to his customers place of
business and back are deductible. They are business expenses.
212
Required as a condition for the continued use or possession, for purposes of the trade, business or
profession, of property to which the taxpayer has not taken or is not taking title or in which he has no
equity other than that of a lessee, user or possessor.
213
Extraordinary repairs - those in the nature of replacements, alteration, and expansion to the extent
that they arrest deterioration and prolong the life of the property.
Ordinary repairs - those made to keep the property ordinarily efficient working condition and do not
materially add to the value of the property
214
See 5) Rentals, etc., supra

69
 (1) Requisites for deductibility

a) there must be indebtedness.

b) the indebtedness must be that of the taxpayer
c) the indebtedness must be connected with the trade, business or profession of the taxpayer
d) the interest must have been paid or incurred during the taxable year
e) the interest must have been stipulated in writing
f) the deduction for interest expense shall be reduced by an amount equal to 38% of the
interest income subject to final tax.216
g) The interest payment arrangement must not be between related taxpayers as
mandated in Sec. 34(B)(2)(b), in relation to Sec. 36(B),217 both of the Tax Code of 1997.
h) The interest must not be incurred to finance petroleum operations.
i) In case of interest incurred to acquire property used in trade, business or exercise of
profession, the same was not treated as a capital expenditure.

(2) Non-deductible interest expense

1) Interest paid in advance by a taxpayer reporting income on cash basis provided:

a) Such interest may be allowed as deduction in the year the indebtedness is paid:
and

(b) If the indebtedness is payable in periodic amortization -- the interest

corresponding to the amortized principal may be deducted during the taxable year.

(2) If the indebtedness is incurred to finance petroleum exploration.

(3) Interest on loans between related taxpayer:

(a) between members of a family

- Brothers and sisters218

- Spouse
- Ancestors
- Lineal descendants

(b) between an individual and a corporation --- where more than 50 % in the value of
outstanding capital stock is owned by such individual except in the case of distribution
in liquidation.

(c) between two corporations where more than 50% of the OCS of which is owned
directly or indirectly by or for the same individual except distribution in liquidation.

215
The amount of interest paid or incurred within a taxable year on indebtedness in connection with the
taxpayer's profession, trade or business shall be allowed as deduction from gross income. (Sec. 34,
B (1))
216
beginning Jan. 1, 2000
217
infra
218
whether full or half-blood

70
 (d) between the Grantor and the fiduciary in Trust

(e) between the fiduciary of a trust and a fiduciary of another trust if the same person is
a grantor with respect to each trust.

(4) In the case of banks and loan or trust companies, interest paid within the year on
deposits or on savings received for investment and secured by interest-bearing certificates of
indebtedness issued by such bank or company.

(3) Interest subject to special rules

(a) Interest paid in advance

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 through discount or
otherwise: Provided, That such interest shall be allowed as a deduction in the year the
indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic
amortizations, the amount of interest which corresponds to the amount of the principal
amortized or paid during the year shall be allowed as deduction in such taxable year.

(b) Interest periodically

amortized219

(c) Interest expense incurred

to acquire property for use in
trade/business/profession

At the option of the taxpayer, interest incurred to acquire property used in trade
business or exercise of a profession may be allowed as a deduction or treated as a capital
expenditure.220

c) Taxes221

(1) Requisites for deductibility

1. It must be paid or incurred within the taxable year.

2. It must be paid or incurred in connection with the taxpayerstrade, profession or
business.222

219
See a), above
220
Sec. 34 (B)(3)
221
The word taxes means taxes proper and no deduction should be allowed for amounts
representing interest, surcharge, or penalties incident to delinquency. (Sec. 80, RR-2)
222
Examples:
1) Import duties
2) Business taxes
3) Occupation taxes
4) Privilege and license taxes
5) Excise taxes

71
 3. It must be imposed directly on the taxpayer.
4. It must not be specifically excluded by law from being deducted from the taxpayers
gross income.

(2) Non-deductible taxes

1. Foreign income tax, if not claimed as tax credit223

2. Final Taxes
3. Estate and donors taxes
4. Stock transaction tax on the sale, barter or exchange of s/s listed and traded through the
local stock exchange.
5. Taxes assessed against local benefits tending to increase the value of the property224
6. Taxes which are not in connection with the trade, business or profession of taxpayer.
7. Income tax imposed by the Philippine govt.
8. Value added Tax (VAT)225
9. Energy Taxes

(3)Treatment/of
surcharges/interests/fines/for
delinquency226

6) Documentary stamp taxes

7) Automobile registration fees
8) Real property taxes
Limitation: In the case of a nonresident alien individual engaged in trade or business (NRAETB) and
a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to the extent
that they are connected with income from sources within the Philippines.
223
Income tax imposed by a foreign country are deductible only if:
a) the taxpayer is qualified to avail of tax credit;
b) He does not signify in its return his desire to avail of the same.
The right to deduct income taxes paid to a foreign government is given only as an alternative or
substitute to his right to claim a tax credit for such foreign income taxes.
Limitation on deduction
a) non resident alien engaged in trade or business in the Phils.
b) resident foreign corporation --- the deductions for taxes shall be allowed only if and to the extent
that they are connected with income from sources within the Phils.
224
special assessment or levies
225
To be deductible, the taxes must be imposed by law and payable by the taxpayer. Thus, a value- added
tax is not deductible by the customer upon whom the burden of the tax is shifted by the seller. However,
the customer may consider the tax burden as part of his cost as an ordinary or capital expenditure if
incurred in business or trade.

72
 (4) Treatment of special assessment

A special assessment227 is levied on land.

A special assessment is not a personal liability of the person assessed; it is limitedto
the land.
A special assessment is based wholly on benefits, not necessity.
A special assessment is exceptional both as to time and place.

(5) Tax credit228 vis--vis deduction

Tax Credit Tax deduction

-- deducted from Phil -- deducted from the
income tax gross income
-- all taxes are allowed -- only foreign
to be deducted with the income taxes may be
exception of the taxes claimed as credits
expressly excluded

d) Losses

226
See (F)(3)(a)(2), under Tax Remedies under the NIRC, infra
227
an enforced proportional contribution from owners of lands, especially or peculiarly benefited by public
improvements.
228
refers to the taxpayers right to deduct from the income tax due, the amount of tax he has paid to
foreign country.
Persons entitled to tax credit
1 .Resident Citizen of the Philippines
2. Domestic Corp. except General Professional Partnership
3. Members of the GPP
4. Beneficiaries of Estates and Trusts.
Persons not entitled to Tax credit
1. Non Resident Citizen
2. Aliens, whether residents or non residents
3. Foreign Corporation, whether residents or non - residents

73
 Losses actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity shall be allowed as deductions:

1) If incurred in trade, profession or business;

2) Of property connected with the trade, business or profession, if the loss arises
from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.

(1) Requisites for deductibility229

a) The loss must be that of the taxpayer.230

b) There must be an actual loss suffered in a closed and completed transaction.231
c) The loss must be connected with the taxpayers trade, business or profession.
d) The loss must not be compensated for by insurance or otherwise.
e) The loss must be actually sustained and charge off during the taxable year.232
f) In the case of casualty loss, declaration of loss233must be filed within 45 days
from the occurrence of the casualty loss.234
g) The loss must not be claimed as deduction for estate tax purposes in the estate tax return.

(2) Other types of losses

(a) Capital losses

(a) Losses from sale or exchange of capital assets.

b) Losses resulting from securities becoming worthless and which are capital assets235
(c) Losses from short sales of property.
(d) Losses due to failure to exercise privilege or options to buy or sell.

(b) Securities becoming

worthless

229
Despite concurrence of requisites, when is loss nonetheless NOT deductible?
In computing net income, no deductions shall in any case be allowed in respect of losses from
sales or exchanges of property directly or indirectly [between related taxpayers (Sec. 36 (B) ]
230
The loss is personal to the taxpayer and is not transferable or usable by another. The loss of a
predecessor partnership is not deductible by a successor corporation. The loss of the parent company
may not be deducted by its subsidiary.
231
closed transaction means that taxable year when the amount of loss was finally ascertained.
232
The deduction shall be in full or not at all.
However, if the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent
year in which it appears that no compensation at all can be had, or there is a remaining net loss (or
there is no full compensation). Deduction will be denied if there is a measurable right to compensation for
the loss, with ultimate collection reasonably clear. So where there is reasonable ground for
reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he
establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies
to recover or reduce his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187)
233
Sworn Declaration of Loss
234
RR 12-77
235
A mere loss on account of the shrinkage in value of securities or shares of stock is not deductible. The
loss to be deducted must be actually suffered when the stock is disposed.

74
 If any securities which are capital assets, are ascertained to be worthless and charged-
off within the taxable year, the loss resulting therefrom to the taxpayer236is not considered as
a bad debt but as a capital loss.

(c) Losses on wash sales of

stocks or securities

Loss on wash sales not deductible when:

1) A taxpayer who is not a dealer of stocks in trade has disposed shares and
2) Within the period of 60(sixty) days beginning 30 days before the date of such sale
and ending 30 days after such date.
3) The taxpayer has acquired substantially identical stocks or securities.237

(d) Wagering losses

Wagering losses are deductible only to the extent of the gains from such wagering
transaction. If there is no gain from the wagering transaction, the loss therefrom cannot be
deducted from gross income.238

(e) NOLCO

Net Operating Loss denotes the excess of allowable deductions over gross income.

Net Operating loss Carry over it means that the net operating loss for the taxable
year immediately preceding the current taxable year shall be carried over as a deduction from
gross income for the next three (3) consecutive taxable yrs. immediately following the year of
such loss.239
e) Bad debts

236
other than a bank or trust company incorporated under the laws of the Phil.
237However, if losses from wash sales are claimed by a dealer in securities in the ordinary course of
business, such losses are deductible.
238
Wagering transactions - are those in which the outcome is uncertain or those that involve games of
chance.
239
Limitations of availability of NOLCO
a) There must be no substantial change in ownership of the business or enterprise in that:
1. Not less than 75% in nominal value of the outstanding issued shares, if the business is on the name
of the corporation, is held by or on behalf of the same persons; or
2. Not less than 75% of the paid up capital of the corporation, if the business is in the name of the
corporation, is held by or on behalf of the same persons.
b) Where one business operation is income tax exempt and the other is not, the losses in the latter
operations are not deductible from the profits in the taxable operation.
c) Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall
not be allowed to be carried over to the next three years.
NOLCO For mines other than oil and gas wells - the net operating loss of mines incurred in the first 10
yrs. of operation shall be carried over to the next five (5) yrs following the loss.

75
 Debts due to the taxpayer when actually ascertained to be worthless240 and charged-
off within the taxable year.241

They refer to those debts resulting from the worthlessness or uncollectibility, in

whole or in part, of amounts due to the taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or services rendered.242

(1) Requisites for deductibility

1) There must be a valid and subsisting debt.243

2) The same must be connected with the taxpayers trade, business or practice of profession.
3) The same must notbe sustained in a transaction entered into between related parties
enumerated under Sec. 36 (B)244 of the NIRC.
4) The same must be actually charged-off the books of accounts of the taxpayer as of the
end of the taxable year.245

240
In general, a debt is not worthless simply because it is of doubtful value or difficult to collect.
Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of
sound business judgment. The determination of worthlessness in a given case must depend upon the
particular facts and the circumstances of the case. A taxpayer may not postpone a bad debt deduction on
the basis of a mere hope of ultimate collection or because of a continuance of attempts to collect notes
which have long become overdue, and where there is no showing that the surrounding circumstances
differ from those relating to other notes which were charged off in a prior year. While a mere hope
probably will not justify postponement of the deduction, a reasonable possibility of recovery will permit
the account to be carried along notwithstanding that the probabilities are that the debt may not be
collected at all.
241
Sec.34 [E1]
242
Sec.2 [a], Rev. Regs. No.5-99
243
A valid and subsisting debt is one the collection of which may be enforced in a court of law. A debt
which had prescribed is no longer valid and subsisting.
244
The said section provides:
In computing net income, no deduction shall in any case be allowed in respect of losses from sales or
exchange of property directly or indirectly.
i. Between members of a family. For the purpose of this paragraph, the family of an individual shall
include only his brothers and sisters (whether by the whole half-blood), spouse, ancestors, and lineal
descendants; or
ii. Except in the case of distributions in liquidation, between an individual and a corporation more than
fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for
such individual; or
iii. Except in the case of distributions in liquidation, between two corporations more than fifty percent
(50%) in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same
individual, if either one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
iv. Between the grantor and a fiduciary of any trust; or
v. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor
with respect to each trust; or
vi. Between a fiduciary of a trust and a beneficiary of such trust.
245
A partial writing-off of a bad debt is not allowed; it must be charged-off in full or not at all (Fernandez
Hermanos, Inc. vs. Commissioner, 29 SCRA 552; Philippine Refining Co. vs. Court of Appeals, 70 SCAD 544,
256 SCRA 667).

76
 5) The same must be actually ascertained to be worthless and uncollectible as of the end of
the taxable year.246

f) Depreciation

The gradual diminution in the useful value of tangibleproperty used in trade or

business resulting from exhaustion, wear and tear, and normal obsolescence.

The term is also applied to amortization of value of intangible assets the use of
which in trade or business is definitely limited in duration.247

(1) Requisites for deductibility

a) The allowance for depreciation must be reasonable248

b) It must be for property arising out of its use or employment in the business or trade, or
out of its not being used temporarily during the year249
c) It must be charged-off during the taxable year;250
d) A statement on the allowance must be attached to the return.
e) The property must have a limited useful life.

(2) Methods of computing

depreciation allowance

(a) Straight-line method251

This method spreads the total depreciation over the useful life of the asset and
generally results in an equal depreciation per unit of time regardless of the use to which the
properties are put.
(b) Declining-balance method

This method uses a rate252 to the declining book value of the asset. Depreciation is
largest in amount the first year and declines in the years thereafter.

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

246
In general, a debt is not worthless simply because it is of doubtful value or difficult to collect.
Worthlessness is determined upon the exercise of a sound business judgment. The determination of
worthlessness in a given case must depend upon the particular facts and circumstances of the case.
247
Basilan Estates, Inc. vs. Comm., 21 SCRA 17
248
Bacolod-Murcia Milling Co. Inc. vs. Comm., CTA Case No. 1402, Oct. 31, 1969
249
Connel Bros. Co. vs. Collector, CTA Cases No. 411 & 610, April 30, 1966).
250
The deduction must be made in the year in which the wear & tear occurs. Depreciation may not be
accumulated.
251
Fixed Percentage Method
252
usually 1.5 or 2 times the straight-line rate

77
 This method requires the application of a changing fraction to the cost basis of the
property, reduced by the estimated residual salvage value.

g) Charitable and other contributions253

(1) Requisites for deductibility

1) The contribution must actually be paid or made to the Phil. Government or any of its
agencies or political subdivision or to any domestic corporations or associations
specified by the Tax Code or other entities as allowed by the Tax Code and existing
special laws.
2) It must be made within the taxable year;
3) It must not exceed 10% of the individuals taxable income and 5% of the corporations
taxable income before deducting the contribution (applicable only to contributions with
limit); and
4) It must be evidenced by adequate records or receipts.254

(2) Amount that may be deducted

The following are subject to limit:255

1.) Donations to the Philippine government or any of its agencies or any political
subdivision thereof exclusively for public purposes;

2.) Donations to accredited domestic corporations or associations organized and

operated exclusively for:

a.) Religions;
b.) Charitable;
c.) Scientific;
d.) Youth and sports development;
e.) Cultural; or
f.) Educational purposes; or for the
g.) Rehabilitations of veterans; and

3.) Donations to social welfare institutions or to non-government organizations in

accordance with rules and regulations promulgated by the Secretary of
Finance,provided no part of the net income of which inures to the benefit of any
private stockholders or individual.256

Contributions deductible in full under the Tax Code:

253
Kinds of contributions allowed as deduction:
1) Ordinary or contributions with limit or subject to limitation
2) Special or contributions deductible in full
254
Sec. 34 (H)
255
5%/10%
256
Sec. 34 (H)(1)

78
 1.) Donations to the government of the Philippines or to any of its agencies or political
subdivisions including fully-owned government corporations exclusively to finance, to
provide for, or to be used in undertaking priority activities in:

a.) Education;
b.) Health;
c.) Youth and sports development;
d.) Human settlements;
e.) Science and culture; and
f.) Economic development

According to the national priority plan determined by NEDA provided, that donations
not in accordance with the said annual priority plan shall be with limit;

2.) Donations to foreign institutions or international organizations in pursuance or

compliance with agreements, treaties, or commitments entered into by the government
of the and the foreign laws or international organizations or in pursuance of special laws,
and

3.) Donations to certain accredited non-government organization.257

h) Contributions to pension trusts

(1) Requisites for deductibility258

1) The employer must have established a pension or retirement plan to provide for the
payment of reasonable pensions to its employees;
2) The pension plan is reasonable and actuarially sound.259
3) It must be funded by the employer; i.e., the employer contributes cash to the plan;
4) The amount contributed must no longer be subject to its control or disposition; and
5) The payment has not therefore been allowed as a deduction.

4) Optional standard deduction

a) Individuals, except non-resident aliens

The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%)
of gross sales or gross receipts during the taxable year. The cost of sales in case of
individual seller of goods, or the cost of services in the case of individual seller of services,
is not allowed to be deducted for purposes of determining the basis of the OSD inasmuch as
the law260 is specific as to the basis thereof which states that for individuals, the basis of the
40% OSD shall be the gross sales or gross receipts and not gross income261
b) Corporations, except non-resident foreign
corporations

257
see Sec. 34(H)( 2)
258
under Sec. 34 [J]
259
Sec. 118,Regs.
260
R.A. 9504, Minimum Wage Earner Law
261
Rev. Reg. No. 16-2008

79
 The OSD shall be in an amount not exceeding forty percent (40%) of their gross
income.

5) Personal and additional exemption262

a) Basic personal exemptions

Fifty thousand pesos (P50,000) for each individual taxpayer.263

b) Additional exemptions for taxpayer with

dependents

Twenty-five thousand pesos (P25,000) for each dependent264 not exceeding four
265
(4).

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

1. If taxpayer marries during taxable year, taxpayer may claim the corresponding
BPE266in full for such year267

2. If taxpayer should have additional dependent(s) during taxable year, taxpayer may
claim corresponding AE268in full for such year.

3. If taxpayer dies during taxable year, his estate may still claim BPE and AE for
himself and his dependent(s) as if he died at the close of such year.

4. If during the taxable year

262
R. A. 9504
263
Sec. 4, id.
In the case of married individual where only one of the spouses is deriving gross income, only such spouse
shall be allowed the personal exemption.
264
means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the
taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully
employed or if such dependent, regardless of age, is incapable of self-support because of mental or
physical defect.
265
In the case of legally separated spouses, additional exemptions may be claimed only by the spouse
who has custody of the child or children:
Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed
the maximum additional exemptions herein allowed. (ibid)
266
Basic personal exemption
267
i.e., no need to pro- rate the exemption
268
additional exemption(s)

80
 a. spouse dies, or
b. any of the dependents dies or marries, turns 21 years old or becomes
gainfully employed, taxpayer may still claim same exemptions as if the spouse or any
of the dependents died, or married, turned 21 years old or became gainfully
employed at the close of such year.269

6) Items not deductible

a) General rules

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

b) Personal, living or family expenses

These are not deductible from compensation and business/professional income.270

c) Amount paid for new buildings or for

permanent improvements (capital
expenditures)

Does not apply to intangible drilling and development cost incurred in petroleum
operations which are deductible under Sec.34 (G)(1)271of the NIRC (Depletion).

d) Amount expended in restoring property272

They are capital expenditures or those expenditures that result in obtaining benefits
of a permanent nature such as lands, buildings and machineries

e) Premiums paid on life insurance policy

covering life or any other officer or employee
financially interested

A person is said to be financially interestedin the taxpayers business, if he is a

stockholders thereof or he is to receive as his compensation a share of the property of the
business.

f) Interest expense, bad debts, and losses from

sales of property between related parties

Interest Expense

269
Sec. 35 (C)
270
under Sec. 24 (A)
271
See Reference
272
major repairs

81
 In general, the amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession, trade or business.273
Bad Debts

In general, debts due to the taxpayer actually ascertained to be worthless and charged
off within the taxable year except those not connected with profession, trade or business and
those sustained in a transaction entered into between parties mentioned under Section 36 (B)
of this Code: Provided, That recovery of bad debts previously allowed as deduction in the
preceding years shall be included as part of the gross income in the year of recovery to the
extent of the income tax benefit of said deduction.274

Losses from sales of property between related parties:

(1) Between members of a family;275 or

(2) Except in the case of distributions in liquidation, between an individual and corporation
more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more than
fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or
for the same individual if either one of such corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was under the law applicable to such taxable
year, a personal holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if
the same person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.276

g) Losses from sales or exchange or property

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

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises
from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.277

h) Non-deductible interest

273
Sec. 34 (B)
274
Id., (E)
275
The family of an individual shall include only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants;
276
Sec. 36 (B)
277
Sec. 34 (D)(1)

82
 (a) interest paid in advance through discount or otherwise278allowed as deduction in
the year the debt is paidif indebtedness is payable in periodic amortizations, interest is
deducted in proportion of the amt. of the principal paid.

(b) payments made:

1. between members of a family279

2. between an individual & a corp. more than 50% in value of outstanding stock is
owned by such individual (except in case of distributions in liquidation)
3. between 2 corps. more than 50% in value of outstanding stock owned by same
individual, if either one is a personal holding co. or a foreign holding co. during the taxable
yr. preceding the date of sale/exchange
4. between grantor & fiduciary of any trust
5. between Fiduciary of a trust & the fiduciary of another if same person is a grantor
to each trust
6. between Fiduciary & a beneficiary of a trust
7. indebtedness is incurred by a service contractor to finance petroleum corp.
8. interest on preferred stock which in reality is dividend
9. interest on unpaid salaries and bonuses
10. interest calculated for cost keeping on account of capital or surplus invested in
business which does not represent charges arising under interest-bearing obligation
11. interest paid when there is no stipulation for the payment thereof

i) Non deductible taxes

a) Philippine income tax280

b) incometax imposed by authority of any foreign country (except when the taxpayer
signifies his desire to avail of the tax credit for taxes of foreign countries)
c) estate & donors taxes
d) taxes assessed against local benefits of a kind tending to increase the value of the
property assessed
e) final taxes, being in the nature of income tax
f) special assessments

j) Non-deductible losses

1. Losses from Illegal Transactions

2.Losses from sales or exchanges of property between related taxpayers281 but the
gains are taxable

k) Losses from wash sales of stock or

securities

278
in case of cash basis taxpayer
279
supra
280
but FBT can be deducted from gross income (RR 8-98)
281
As provided under Sec. 36

83
 Notdeductible unless claim is made by a dealer in stock/securities & made in
ordinary course of business.

j.Exempt Corporations

1. General Professional Partnerships282

Any other partnership is liable for corporate income tax.

2. Joint Venture under a service contract with the government

A merger of two (2) or more corporations for the purpose of engaging in construction
projects or energy operations pursuant to a consortium agreement or a service contract with the
government. The corporations comprising the joint venture or consortium must be engaged in the
same line of business.

It is only the joint venture or consortium itself which is exempt from corporate income tax,
not the income of each corporation from the joint venture consortium. Thus, each corporation
comprising of the joint venture or consortium is liable for corporate income tax.283

3. Government-owned or controlled corporations:

i. Government Service Insurance System (GSIS),

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

Other exempt corporations:

The following organizations shall not be taxed in respect to income received by them as
such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without profit;

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

282
Two (2) requisites to be exempt from corporate income tax:
1. It is formed by persons for the sole purpose of exercising their common profession; and
2. No part of the income of which is derived from engaging in any trade or business.
283
Batangas Land Transportation Co. vs. Collector, 102 Phil. 822

84
 (D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Non-stock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its
net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any
specific person;

(F) Business league chamber of commerce, or board of trade, not organized for profit and
no part of the net income of which inures to the benefit of any private stock-holder, or individual;

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

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

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local character,
the income of which consists solely of assessments, dues, and fees collected from members for the
sole purpose of meeting its expenses; and

(K) Farmers, fruit growers, or like association organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to them the proceeds of sales,
less the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.284

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

Aliens
a. General rule: Resident citizens Taxable on income from
all sources within and without the Philippines

The tax base is net income.

b. Taxation on Compensation Income

1) Inclusions

a) Monetary compensation

(1) Regular salary/wage

284
Sec. 30

85
 Compensation income derived from an employer-employee relationship in
consideration of services rendered,except in the case of a minimum wage earner.285

(2) Separation pay/retirement benefit

not otherwise exempt

Separation pay received by an employee who voluntarily resigns is subject to income

tax. Retirements benefits may be subject to tax if it does not comply with the provision of
Sec. 32 (B)(6)(a).286
(3) Bonuses, 13th month pay, and
other benefits not exempt

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

(4) Directors fees287

b) Non-monetary compensation

(1) Fringe benefit not subject tax288

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

(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;

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

(4) De minimis benefits.289

(5) If the grant of fringe benefits to the employee is required by the nature of, or
necessary to the trade, business, or profession of the employer.

(6) If the grant of the fringe benefits is for the convenience of the employer.290

2) Exclusions

285
infra
286
See Reference
287
See (1) Regular salary/wage, supra
288
Sec. 33, consolidated with Sec. 2.33 (C), RR 03-98
289
infra
290
Convenience of the employer rule

86
 a) Fringe benefit subject to tax

Any good, service or other benefit furnished or granted in cash or in kind by an employer to
an individual employee291 such as, but not limited to, the following:

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

b) De minimis benefits

Limited to facilities or privileges furnished or offered by an employer to his

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

(a) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not
more than P1,500; and

(b) Uniform and clothing allowance not exceeding P4,000 per annum.292

c) 13th month pay and other benefits and

payments specifically excluded from taxable
compensation income

Gross benefits received by officials and employees of public and private entities:
Provided, the total exclusion shall not exceed Thirty thousand pesos (P30,000) which shall
cover:

(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 6686;

(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;

(iii) Benefits received by officials and employees not covered by Presidential decree No. 851,
as amended by Memorandum Order No. 28, dated August 13, 1986; and

291
except rank and file employees
292
RR 5-2008

87
 (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at the end of the taxable year.293

3) Deductions

a) Personal exemptions and additional

exemptions

A basic personal exemption amounting to Fifty thousand pesos (P50,000) for each
individual taxpayer.294

An additional exemption of Twenty-five thousand pesos (25,000) for each dependent

not exceeding four (4).295

b) Health and hospitalization insurance

The amount of premiums not to exceed Two thousand four hundred pesos (P2,400)
per family or Two hundred pesos (P200) a month paid during the taxable year for health
and/or hospitalization insurance taken by the taxpayer for himself, including his family:
Provided, said family has a gross income of not more than Two hundred fifty thousand
pesos (P250,000) for the taxable year, and in the case of married taxpayers, only the spouse
claiming the additional exemption for dependents shall be entitled to this deduction.296

c) Taxation of compensation income of a

minimum wage earner

293
Sec. 32 (e)
294
Sec. 35(A),as amended by R.A. 9504
In the case of married individual where only one of the spouses is deriving gross income, only such spouse
shall be allowed the personal exemption
295
Sec. 35 (B), id.
The additional exemption for dependents shall be claimed by only one of the spouses in the case of
married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who
has custody of the child or children:
Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed
the maximum additional exemptions herein allowed
296
Sec. 34 (M)

88
 (1) Definition of Statutory Minimum
Wage

The rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by
the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE)297

(2) Definition of Minimum Wage

Earner298

(3) Income also subject to tax

exemption: holiday pay, overtime pay,
night shift differential, and hazard
pay299

c. Taxation of Business Income/Income from Practice of

Profession

Optional Standard Deduction (OSD) orItemized deductions

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

individuals300who are not purely compensation income earners. This is in lieu of the itemized
deductions.

Premium payments on health and/or hospital insurance.301

Personal and additional exemptions.

d. Taxation of Passive Income

1) Passive income subject to final tax

a) Interest income

Interest income derived by a resident individual302from a depositary bank under the

expanded foreign service deposit system 7.5%.

Interest income from long term deposit or investment evidenced by certificates

prescribed by BSP:

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

297
Sec. 22, as amended by R.A. 9504
298
See II. (A) (6), Kinds of Taxpayers, supra
299
ibid
300
except nonresident aliens
301
if requisites are complied with
302
non-resident citizen not included

89
 b) If investment is pre-terminated, interest income on such investment shall be subject to the
following rates:
20% - If pre-terminated in less than 3 years
12% - If pre-terminated after 3 years to less than 4 years
5%- If pre-terminated after 4 years to less than 5 years

b) Royalties

Royalties, except on books, as well as other literary works and musical compositions 20%

Royalties on books literary works and musical compositions 10%

c) Dividends from domestic corporation

Cash and or property dividend actually or constructively received from adomestic

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

d) Prizes and other winnings

Prizes over P10,000 20%

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

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

2) Passive income not subject to final tax

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

common or individual trust funds, deposit substitutes, investment management accounts and
other investments evidenced by certificates in such form prescribed by the
BangkoSentralngPilipinas (BSP) shall be exempt from final tax.303

e. Taxation of capital gains

1) Income from sale of shares of stock of a Philippine

corporation

303
See Sec. 24 (B)(1)

90
 a) Shares traded and listed in the stock
exchange

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

Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the
Local Stock Exchange. - There shall be levied, assessed and collected on every sale, barter,
exchange, or other disposition of shares of stock listed and traded through the local stock
exchange other than the sale by a dealer in securities, a tax at the rate of one-half of one
percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock
sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or
transferor.304

b) Shares not listed and traded in the stock

exchange

A final tax at the rates prescribed below shall be imposed on net capital gains realized
during the taxable year from the sale, exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed of through the stock exchange:

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

Amount in excess of P100,000.. 10%305

2) Income from the sale of real property situated in

the Philippines

A final tax of six percent (6%) based on the gross selling price or current fair market
value, whichever is higher, upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified as capital
assets, including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts xxx.306

3) Income from the sale, exchange, or other

disposition of other capital assets

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

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

a. General rules

304
Sec. 127 (A)
305
Sec. 27 (D)(2)
306
Sec. 24 (D)

91
 A nonresident alien individual engaged in trade or business in the Philippines shall be
subject to an income tax in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within the Philippines.A nonresident
alien individual who shall come to the Philippines and stay therein for an aggregate period of
more than one hundred eighty (180) days during any calendar year shall be deemed a
'nonresident alien doing business in the Philippines.307

b. Cash and/or property dividends

10% final tax, by January 1, 2000, on the following:

a) Cash and or property dividend actually or constructively received from a domestic

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

b) Share of an individual in the distributive net income after tax of a partnership except a
general professional partnership of which he is a partner

c) Share of an individual in the net income after tax of an association, joint account, or a
joint venture or consortium taxable as a corporation of which he is a member or a co-venture.308

c. Capital gains

Capital gains realized from sale, barter or exchange of shares of stock in domestic
corporations not traded through the local stock exchange, and real properties shall be subject
to the tax prescribed under Subsections (C) and (D) of Section 24.309

[12. Exclude Non-resident Aliens Not Engaged in Trade or Business]

13. Individual Taxpayers Exempt from Income Tax

a. Senior citizens

Senior Citizen is:

1. any resident citizen of the Philippines

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

3. has an income of not more than sixty thousand pesos (P60,000.00) per annum
subject to the review of the NationalEconomic Development Authority(NEDA) every three
(3) years.

b. Exemptions granted under international agreements

307
Sec. 25 (A)(1)
308
Id., (A)(2)
309
Id., (A)(3)

92
 NRAETB310 may deduct personal exemption311but only to the extent allowed by his
country to Filipinos not residing therein, and shall not exceed the aforementioned amounts.
NRANETB cannot claim any personal or additional exemption.

14. Taxation of Domestic Corporations

a. Tax payable

1) Regular tax

An income tax of thirty-five percent (35%)312 is hereby imposed upon the taxable
income derived during each taxable year from all sources within and without the Philippines
by every corporation,313 and taxable as a corporation, organized in, or existing under the laws
of the Philippines.314

2) Minimum corporate income tax (MCIT)

a) Imposition of MCIT315

A tax rate of 2% is imposed on the gross income of domestic corporations and

resident foreign corporations.

b) Carry forward of excess minimum tax

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

c) Relief from the MCIT under certain

conditions

310
Non-resident alien engaged in trade or business
311
but not additional exemption
312
lowered to 30% beginning January 1, 2009 (R.A. 9337)
313
The term "corporation" shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not
include general professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract with the
Government. (Sec. 22(B))
314
Sec. 27 (A)
315
a. It is imposed beginning the fourth (4th) taxable year immediately following the taxable yr. in which
such corporation starts its business operation.
b. It is imposable only if such corporation has zero or negative taxable income or whenever the amount of
MCIT is greater than the Normal Corporate Income Tax (NCIT) due from such corporation.

93
 The Sec. of Finance, upon recommendation of the Commissioner may suspend the
imposition of MCIT, upon showing that the corporation suffers losses due to any of the
following causes:

a. Prolonged labor dispute316

b. Legitimate business reverses317
c. Force majeure318
d) Corporations exempt from the MCIT

The following corporations are not subject to MCIT:

(1.) Proprietary Educational Institution

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

e) Applicability of the MCIT where a

corporation is governed both under the
regular tax system and a special income tax
system

Only one may be imposed. A minimum corporate income tax of 2% of the gross
income xxx is imposed xxx on a corporation319 xxx when the minimum income tax is greater
than the (net income tax)320

b. Allowable deductions

1) Itemized deductions

Business321expenses which are ordinary and necessary in the conduct of business.322

2) Optional standard deduction323

May be taken by an individual, in lieu of itemized deductions.324

316
e.g. strikes for more than 6 months
317
e.g. strikes for more than 6 months)
318
e.g. war
319
domestic and resident foreign
320
Secs. 27 (E) and 28 (A)(2)
321
or professional
322
or in the exercise of profession
323
See also (9)(h)(4)(b), supra
324
Section 34(L)
Requisites:
a. Available only to citizens and resident aliens

94
 c. Taxation of Passive Income

1) Passive income subject to tax

a) Interest from deposits and yield or any

other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements and royalties

A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however,
That interest income derived by a domestic corporation from a depository bank under the
expanded foreign currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7 1/2%) of such interest income.325

b) Capital gains from the sale of shares of

stock not traded in the stock exchange

On sale, barter, exchange or other disposition of shares of stock of a

domestic corporation not listed and traded through a local stock exchange, held as a
capital asset:

On the net capital gain:

Not over P100,000

Final Tax of 5%

On any amount in excess of P100,000

plus 10% Final tax on the excess

c) Income derived under the expanded

foreign currency deposit system

Income derived by a depository bank under the expanded foreign currency deposit system
from foreign currency transactions with local commercial banks, including branches of foreign banks
that may be authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign
currency depository system units and other depository banks under the expanded foreign currency
deposit system, including interest income from foreign currency loans granted by such depository
banks under said expanded foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income.

b. The standard deduction is optional; i.e., unless the taxpayer signifies in his return his intention to
elect this deduction, he is considered as having availed of the itemized deductions.
c. Such election, when made by the qualified taxpayer, is irrevocable for the year in which made;
however, he can change to itemized deductions in succeeding years.
325
Sec. 27 (D)(1)

95
 Any income of nonresidents, whether individuals or corporations, from transactions with
depository banks under the expanded system shall be exempt from income tax.326

d) Intercorporate dividends

Dividends received by a domestic corporation from another domestic corporation

shall not be subject to tax.

e) Capital gains realized from the sale,

exchange, or disposition of lands and/or
buildings

On the sale, exchange or disposition of lands and/or buildings which are not actually
used in the business of a corporation and are treated as capital assets.

On the gross selling price, or the current fair market value at the time of the sale,
whichever is higher, a final tax of6%.327

2) Passive income not subject to tax328

d. Taxation of Capital Gains

1) Income from sale of shares of stock329

2) Income from the sale of real property situated in

the Philippines330

3) Income from the sale, exchange, or other

disposition of other capital assets331

e. Tax on proprietary educational institutions and hospitals

Proprietary educational institutions and hospitals which are nonprofit shall pay a tax
of ten percent (10%) on their taxable income except those covered by Subsection (D)
hereof: Provided, that if the gross income from unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be
imposed on the entire taxable income..332

326
Id., (D)(3)
327
Tax treatment is the same as that of individuals
328
supra
329
See 10 (e), Taxation of Capital Gains, supra
330
ibid
331
See (A)(10)(e)(3), under Taxation of Capital Gains, supra
332
Sec. 27 (B)
A "Proprietary educational institution" is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of Education, Culture and

96
 f. Tax on government-owned or controlled corporations,
agencies or instrumentalities

The provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government, except
the Government Service Insurance System (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office
(PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay
such rate of tax upon their taxable income as are imposed upon corporations or associations
engaged in s similar business, industry, or activity.333

15. Taxation of Resident Foreign Corporations334

a. General rule

Resident foreign corporationsare subject to any or some of the following:

1. Capital Gain Tax

2. Final Tax on Passive Income
3. Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross Income
Tax (GIT)
4. Branch Profit Remittance Tax

b. With respect to their income from sources within the

Philippines

Normal corporate income tax rate at 35%335 of net taxable income from sources
within the Philippines.

c. Minimum corporate income tax

At 2% of MCIT Gross Income from sources within the Philippines. The MCIT is
imposed on RFCs under the same conditions as domestic corporations.336

d. Tax on certain income

Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.
The term 'unrelated trade, business or other activity' means any trade, business or other activity, the
conduct of which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. (ibid)
333
Id., (C)
334
Income subject to Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross Income Tax
(GIT)under the subheading of domestic corporations is equally applicable to resident foreign corporations,
both as to concepts and computations, except that RFCs are taxed only on income from sources within
the Philippines.
335
Lowered to 30% beginning January 1, 2009
336
Sec. 28(A)(2)

97
 (1) Interest from deposits and yield or any other
monetary benefit from deposit substitutes, trust funds
and similar arrangements and royalties

Interest from any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, the interest income derived by a resident
foreign corporation from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half percent (7
1/2%) of such interest income.337

(2)Income derived under the expanded foreign

currency deposit system

Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with local commercial banks including branches
of foreign banks that may be authorized by the BangkoSentralngPilipinas(BSP) to transact
business with foreign currency deposit system units, including interest income from foreign
currency loans granted by such depository banks under said expanded foreign currency
deposit system to residents, shall be subject to a final income tax at the rate of ten percent
(10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions

with depository banks under the expanded system shall be exempt from income tax.338

(3) Capital gain from sale of shares of stock not

traded in the stock exchange

A final tax at the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition of shares
of stock in a domestic corporation, except shares sold, or disposed of through the stock
exchange:

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

On any amount in excess of P100,00010%

(4) Intercorporate dividends339

337
Sec. 28 (A)(7)(a)
338
Id., (A)(7)(c)
339
supra

98
 16. Taxation of Non-resident Foreign Corporations

a. General rule

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

1. Capital Gains Tax

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

b. Tax on certain income

(1) Interest on foreign loans

A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the
amount of interest on foreign loans contracted on or after August 1, 1986.340

(2) Intercorporate dividends

15%, as long as the country in which the nonresident foreign corporation is

domiciled allows a tax credit for taxes deemed paid in the Philippines equivalent to 20%.

20% represents the difference between the regular income tax of 35% on
corporations and the 15% tax on dividends

If the country within which the NRFC is domiciled does not allowa tax credit, a final
withholding tax at the rate of 35% is imposed on the dividends received from a domestic
corporation.341

(3) Capital gains from sale of shares of stock not

traded in the stock exchange342

17.Improperly Accumulated Earnings of Corporations

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

18. Exemption from tax on corporations

340
Sec. 28 (B)(5)(2)
341
Sec. 28 (B)(5)(b)
In other words, the dividends are subject to the third kind of tax: Final Tax on [Other] Gross Income from
sources within the Philippines.
342
See 10 (e)(1)(b), under Taxation of capital gains

99
 A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without profit;

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

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

(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its
net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any
specific person;

(F) Business league chamber of commerce, or board of trade, not organized for profit and
no part of the net income of which inures to the benefit of any private stock-holder, or individual;

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

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local character,
the income of which consists solely of assessments, dues, and fees collected from members for the
sole purpose of meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for
the purpose of marketing the products of its members and turning back to them the proceeds of
sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.343

19. Taxation of Partnerships344

343
Sec. 30
344
partnerships wherein all or part of their income is derived from the conduct of trade or business

100
 Rules:

1. The partnership is subject to the same rules on corporations (capital gains tax, final tax on
passive income, normal tax, minimum corporate income tax [MCIT] and gross income tax [GIT]),
but is not subject to the improperly accumulated earnings tax [IAET]. The partnership must file
quarterly and year-end income tax returns.

2. The taxable income of the partnership, less the normal corporate income taxthereon, is
the distributable net income of the partnership.

3. The share of a partner in the partnerships distributable net income of a year shall be
deemed to have beenactually or constructively received by the partners in the same taxable year and
shall be taxed to them in their individual capacity, whether actually distributed or not.345Such share
will be subjected to a final tax of 10% to be withheld by the partnership.346

20. Taxation of General Professional Partnerships347

Rules:

1. A GPP as such shall not be subject to the income tax.

2. The partners shall only be liable for income tax only in their separate andindividual
capacities.

3. For purposes of computing the distributive share of the partners, the net income of
the GPP shall be computed in the same manner as a corporation.

4. Each partner shall report as gross income his distributive share, actually
orconstructively received, in the net income of the partnership.

6. The share of a partner shall be subject to a creditable withholding income tax of 15%.348

21. Taxation on Estates and Trusts

a) Application

345
Sec. 73(D)
346
Sec. 24(B)(2)
347
GPP is not a taxable entity The partnership is a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate mechanism distribution of such income to the individual
partners. (Tan v. Commissioner [Oct. 3, 1994]) But, the partnership itself is required to file income tax
returns for the purpose of furnishing information as to the share in the gains or profits which each partner
shall include in his individual return. (RR 2- 1998)
The share of an individual partner in the net profit of a general professional partnership is deemed to
have been actually or constructively received by the partner in the same taxable year in which such
partnership net income was earned, and shall be taxed to them in their individual capacities, whether
actually distributed or not, at the graduated income tax ranging from 5% to 32%. Thus, the principle
of constructive receipt of income or profit is being applied to undistributed profits of GPPs. The payment
[to the partners] of such tax-paid profits in another year should no longer be liable to income tax.
(Mamalateo)
348
RR 2- 1998

101
 The tax imposed upon individuals shall apply to the income of estates or of any kind
ofproperty held in trust, including:

1. Income accumulated in trust for the benefit of unborn or unascertained

person or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;

2. Income which is to be distributed currently by the fiduciary to the beneficiaries,

and income collected by a
guardian of an infant which is to be held or distributed as the court may direct;

3. Income received by estates of deceased persons during the period of

administration or settlement of the estate; and
4. Income which, in the discretion of thefiduciary, may be either distributed to the
beneficiaries or accumulated.

b) Exception

The tax shall not apply to employee's trust which forms part of a pension,
stock bonus or profit-sharing plan ofan employer for the benefit of some or all of his
employees:

i. if contributions are made to the trust by such employer, or employees, or both

for the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with such plan, and

ii. if under the trust instrument it is impossible, at any time prior to the satisfaction
of all liabilities withrespect to employees under the trust, for any part of the corpus or
income to be349used for, or diverted to, purposes other than for the exclusive benefit of his
employees.350

c) Determination of tax

1) Consolidation of income of two or more trusts

Where, in the case of two or more trusts, the creator of the trust in each instance is
the same person, and the beneficiary in each instance is the same, the taxable income of
all the trusts shall be consolidated and the tax computed on such consolidated income, and
such proportion of said tax shall be assessed and collected from each trustee which the
taxable income of the trust administered by him bears to the consolidated income of the
several trusts.

349
within the taxable year or thereafter
350
Any amount actually distributed to any employee or distributee shall be taxable to him in the year in
which so distributed to the extent that it exceeds the amount contributed by such employee or
distributee.

102
 2) Taxable income351

General rule:

Any amount actually distributed to any employee or distributee shall be taxable to

him in the year in which so distributed to the extent that it exceeds the amount contributed
by such employee or distributee.

3) Revocable trusts

Where at any time the power to revest in the grantor title to any part of the corpus
of the trust is vested:

i. in the grantor either alone or inconjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the income
therefrom, or

ii. in any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom,the income of such part of the trust shall be
included in computing the taxable income of the grantor.352

4) Income for benefit of grantor

Where any part of the income of a trust

351
The taxable income of the estate or trust shall be computed in the same manner and on the same basis
as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust
the amount of the income of the estate or trust for the taxable year which is to be distributed currently
by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant
which is to be held or distributed as the court may direct, BUT the amount so allowed as a deduction
shall be included in computing the taxable income of the beneficiaries, whether distributed to them or
not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under
Subsection (B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the period of administration
or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be
either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction the
amount of the income of the estate or trust for its taxable year, which is properly paid or credited during
such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A)
and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the
return of said trust shall not be included in computing the income of the beneficiaries. (Sec. 61)
352
Exception

103
 i. is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor, or
ii. may, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income, be distributed to
the grantor, or
iii. is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income may be applied to
the payment of premiums upon policies of insurance on the life of
the grantor, such part of the income of the trust shall be included in computing the taxable
income of the grantor.353

5) Meaning of "in the discretion of the grantor"

'In the discretion of the grantor' means in the discretion of the grantor, either alone
or in conjunction with any person not having a substantial adverse interest in the disposition
of the part of the income in question.

22. Withholding tax

a. Concept

This practice which is also known as taxation at source refers to the requirement
that taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor-
corporations and/or persons from payments made to payees-corporations and/or persons
for the former to pay the same directly to the BIR.

b. Kinds

1) Withholding of final tax of certain incomes

Subject to rules and regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(1), 27(D)(2), 27(D)(3),
27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified
items of income shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 58 of this Code.354

2) Withholding of creditable tax at source

353
ibid
354
Sec. 57 (A); see Reference

104
 The Secretary of Finance may, upon the recommendation of the Commissioner,
require the withholding of a tax on the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but not more than thirty- two percent (32%)
thereof, which shall be credited against the income tax liability of the taxpayer for the taxable
year.355

c. Withholding on wages

1) Requirement for withholding

Every employer making payment of wages shall deduct and withhold upon
such wages a tax determined in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner:
No withholding of a tax shall be required where the total compensation income of an
individual does not exceed the statutory minimum wage, or five thousand
pesos (P5,000.00) per month, whichever is higher.356

2) Tax paid by recipient

If the employer fails to deduct and withhold the tax as required, and thereafter the
tax against which such tax may be credited is paid, the tax so required to be deducted and
withheld shall not be collected from the employer; but in no case relieve the employer from
liability for any penalty or addition to the tax otherwise applicable in respect of such failure
to deduct and withhold.357

3) Refunds or credits

(1) Employer. - When there has been an overpayment of tax, refund or credit shall
be made to the employer only to the extent that the amount of such overpayment was not
deducted and withheld hereunder by the employer.

(2) Employees. - The amount deducted and withheld during any calendar year
shall be allowed as a credit to the recipient of such income against the tax imposed under
Section 24(A).358Refunds and credits in cases of excessive withholding shall be granted under
rules and regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.

Any excess of the taxes withheld over the tax due from the taxpayer shall be returned
or credited within three (3) months from the fifteenth (15th) day of April. Refunds or credits
made after such time shall earn interest at the rate of six percent (6%) per annum, starting
after the lapse of the three-month period to the date the refund of credit is made.

355
Id., (B)
356
Sec. 79 (A)
357
Id. (B)
358
See Reference

105
 Refunds shall be made upon warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of counter- signature by the Chairman,
Commission on Audit or the latter's duly authorized representative as an exception to the
requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive
Order No. 292, otherwise known as the Administrative Code of 1987.359

4) Year-end adjustment

On or before the end of the calendar year but prior to the payment of the
compensation for the last payroll period, the employer shall determine the tax due from each
employee on taxable compensation income for the entire taxable year in accordance with
Section 24(A).360 The difference between the tax due from the employee for the entire year
and the sum of taxes withheld from January to November shall either be withheld from his
salary in December of the current calendar year or refunded to the employee not later
than January 25 of the succeeding year.361

5) Liability for tax

The employer shall be liable for the withholding and remittance of the correct
amount of tax required to be deducted and withheld. If the employer fails to withhold and
remit the correct amount of tax as required to be withheld, such tax shall be collected from
the employer together with the penalties or additions to the tax otherwise applicable in
respect to such failure to withhold and remit.

Where an employee fails or refuses to file the withholding exemption certificate or

willfully supplies false or inaccurate information thereunder, the tax otherwise required to be
withheld by the employer shall be collected from him including penalties or additions to the
tax from the due date of remittance until the date of payment. On the other hand, excess
taxes withheld made by the employer due to:

(1) failure or refusal to file the withholding exemption certificate; or

(2) false and inaccurate information shall not be refunded to the employee but
shall be forfeited in favor of the Government.362

d. Withholding of VAT

359
Id. (C)
360
supra
361
Id. (H)
362
Sec. 80

106
 (a) The government or any of its political subdivisions, instrumentalities or agencies,
including government-owned or controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods and/or services taxed at twelve percent
(12%0 VAT pursuant to Secs. 106 and 108363 of the Tax Code, deduct and withhold a final
VAT due at the rate of five percent (5%) of the gross payment thereof.

The five percent (5%) final VAT withholding rate shall represent the net VAT
payable of the seller. The remaining seven percent (7%) effectively accounts for the standard
input VAT for sales of goods or services to government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, in lieu of the actual input VAT directly
attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale
to government exceedsseven percent (7%) of gross payments, the excess may form part of
the sellers expense or cost. On the other hand, if actual input VAT is less than seven
percent (7%) of gross payment, the difference must be closed to expense or account.

(b) The government or any of its political subdivisions, instrumentalities or agencies,

including government-owned or controlled corporations(GOCCs), as well as private
corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall
withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following
payments:

(1) Lease or use of properties or property rights owned by non-residents; and

(2) Other services rendered in the Philippines by non-residents.364

e. Filing of return and payment of taxes withheld

1) Return and payment in case of government

employees

If the employer is the Government of the Philippines or any political subdivision,

agency or instrumentality thereof, the return of the amount deducted and withheld upon any
wage shall be made by the officer or employee having control of the payment of such wage,
or by any officer or employee duly designated for the purpose.365

2) Statements and returns

(A) Requirements. - Every employer required to deduct and withhold a tax shall furnish to
each such employee in respect of his employment during the calendar year, on or before January
thirty-first (31st) of the succeeding year, or if his employment is terminated before the close of such
calendar year, on the same day of which the last payment of wages is made, a written statement
confirming the wages paid by the employer to such employee during the calendar year, and the
amount of tax deducted and withheld under this Chapter in respect of such wages. The statement
required to be furnished by this Section in respect of any wage shall contain such other information,
and shall be furnished at such other time and in such form as the Secretary of Finance, upon the
recommendation of the Commissioner, may, by rules and regulation, prescribe.

363
supra
364
RR 16-2005, as amended by RR 4-2007
365
Sec. 82

107
 (B) Annual Information Returns. - Every employer required to deduct and withhold the
taxes in respect of the wages of his employees shall, on or before January thirty-first (31st) of the
succeeding year, submit to the Commissioner an annual information return containing a list of
employees, the total amount of compensation income of each employee, the total amount of taxes
withheld therefrom during the year, accompanied by copies of the statement referred to in the
preceding paragraph, and such other information as may be deemed necessary. This return, if made
and filed in accordance with rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance with the requirements of
Section 68 of this Title in respect of such wages.

(C) Extension of time. - The Commissioner, under such rules and regulations as may be
promulgated by the Secretary of Finance, may grant to any employer a reasonable extension of time
to furnish and submit the statements and returns required under this Section.366

f. Final withholding tax at source

Subject to rules and regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3),
27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282of this Code on specified
items of income shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 58 of this Code.367

g. Creditable withholding tax

1) Expanded withholding tax

The Secretary of Finance may, upon the recommendation of the Commissioner,

require the withholding of a tax on the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the taxpayer for the taxable
year.368

2) Withholding tax on compensation369

366
Sec. 83
367
Sec. 57 (A), supra
368
Id. (B)
369
Elements of Withholding on Compensation:
1. There must be an employer-employee relationship

108
 Every employer must withhold from compensation paid, an amount computed in
accordance with the regulations.

Exception:

Where such compensation income of an individual:

1. Does not exceed the statutory minimum wages; or

2. Five thousand pesos (P5,000) monthly (P60,000 a year)-whichever is higher

h. Fringe benefit tax

A final tax of thirty-two percent (32%) is imposed on the grossed-up monetary value
of fringe benefit furnished or granted to the employee370 by the employer, whether an
individual or a corporation, unless the fringe benefit is required by the nature of, or
necessary to the trade, business or profession of the employer, or when the fringe benefit is
for the convenience or advantage of the employer.371

B. Estate Tax

1. Basic principles

The estate tax accrues as of the death of the decedent and the accrual of the tax is
distinct from the obligation to pay the same. Upon the death of the decedent, succession
takes place and the right of the State to tax the privilege to transmit the estate vests instantly
upon death.372
Not a direct tax on the property transmitted or transferred although its amount is
based thereon.

2. Definition

A graduated tax imposed on the privilege of the decedent to transmit property at

death and is based on the entire net estate, regardless of the number heirs and relations to
the decedent.

3. Nature

2. There must be payment of compensation or wages

for services rendered
3. There must be a payroll period
370
except rank and file employees
371
Sec. 33 (A)
372
Sec. 3, RR 2-2003

109
 It is not a direct tax on property nor is it a capitation tax, that is, the tax is laid
neither on the property, nor on the transferee or transferor, but on the right of the decedent
to transmit his estate.

It is not a property tax but an excise tax.

4. Purpose or object

a) Benefit-Received Theory

For the performance of services rendered by the government in the distribution of

the estate of the decedent and other benefits that accrue to the estate and the heirs, the state
collects the tax.

b) Redistribution of Wealth Theory

Is a contributing factor to the inequalities in wealth and income. The imposition of

death tax reduces the property received by the successor bringing about a more equitable
distribution of wealth in society.

c) Ability-to pay- theory

The receipt of inheritance places assets in the hands of the heirs and beneficiaries
thereby creating an ability to pay the tax and thus to contribute to governmental income; and

d) Privilege theory or State Partnership theory

Inheritance is not a right but a privilege granted by the state and large estates have
been acquired only with the protection of the state. The State, as a passive and silent
partner in the accumulation of property has the right to collect the share which is properly
due to it

5. Time and transfer of properties

At the time of death. The tax should not be construed as a direct tax on the property
of the decedent although the tax is based thereon.

6. Classification of decedent

a) resident decedent
b) non resident alien decedent

7. Gross estate vis--vis Net estate

110
 The total value of all property, whether real or personal, tangible or intangible
belonging to the decedent at the time of his death, situated within or outside the Philippines,
where such decedent was a resident or citizen of the Philippines.

In the case of a nonresident alien decedent, it shall include only property situated in
the Philippines.

8. Determination of gross estate and net estate

Formula:

Gross Estate373
Less: Allowable deductions
Estate after allowable deductions

Less: net share of surviving spouse on conjugal or community property374

Family home allowance375

= Net estate of decedent

Less: P200, 000.00 exemptions

= Taxable net estate X Tax Rate in section 84.

= Amount of estate tax due

9. Composition of gross estate

Gross Estate. - the value of the gross estate of the decedent shall be determined by
including the value at the time of his death of all property, real or personal, tangible or
intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who
at the time of his death was not a citizen of the Philippines, only that part of the entire gross
estate which is situated in the Philippines shall be included in his taxable estate.

(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of
his/death;

(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the
decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to
take effect in possession or enjoyment at or after death, or of which he has at any time made a
transfer, by trust or otherwise, under which he has retained for his life or for any period which does
not in fact end before his death

373
when the gross estate exceeds P2,000,000.00, the estate tax return shall be accompanied by a
statement, which is certified by an independent public accountant stating:
1. The itemized assets of the decedent with its corresponding gross value at the time of his death or in
the case of a non-resident, not citizen of the Philippines that part of his gross estate situated in the
Philippines.
2. The itemized deductions from the gross estate.
3. The amount of tax due, whether paid or still due and outstanding.
374
if applicable
375
ibid

111
 (1) the possession or enjoyment of, or the right to the income from the property, or

(2) the right, either alone or in conjunction with any person, to designate the person
who shall possess or enjoy the property or the income therefrom; except in case of a
bonafide sale for an adequate and full consideration in money or money's worth.

(C) Revocable Transfer. -

(1) To the extent of any interest therein, of which the decedent has at any time made
a transfer376 by trust or otherwise, where the enjoyment thereof was subject at the date of his
death to any change through the exercise of a power377 by the decedent alone or by the
decedent in conjunction with any other person (without regard to when or from what source
the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such
power is relinquished in contemplation of the decedent's death.

(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be
considered to exist on the date of the decedent's death even though the exercise of the
power is subject to a precedent giving of notice or even though the alteration, amendment or
revocation takes effect only on the expiration of a stated period after the exercise of the
power, whether or not on or before the date of the decedent's death notice has been given
or the power has been exercised. In such cases, proper adjustment shall be made
representing the interests which would have been excluded from the power if the decedent
had lived, and for such purpose if the notice has not been given or the power has not been
exercised on or before the date of his death, such notice shall be considered to have been
given, or the power exercised, on the date of his death.

(D) Property Passing Under General Power of Appointment. - To the extent of any property
passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed
executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his
death, or (3) by deed under which he has retained for his life or any period not ascertainable without
reference to his death or for any period which does not in fact end before his death (a) the
possession or enjoyment of, or the right to the income from, the property, or (b) the right, either
alone or in conjunction with any person, to designate the persons who shall possess or enjoy the
property or the income therefrom; except in case of a bona fide sale for an adequate and full
consideration in money or money's worth.

(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the
deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon
his own life, irrespective of whether or not the insured retained the power of revocation, or to the
extent of the amount receivable by any beneficiary designated in the policy of insurance, except when
it is expressly stipulated that the designation of the beneficiary is irrevocable.

(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C)
and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and
relinquishment of powers, as severally enumerated and described therein, whether made, created,
arising, existing, exercised or relinquished before or after the effectivity of this Code.

376
except in case of a bona fide sale for an adequate and full consideration in money or money's worth
377
in whatever capacity exercisable

112
 (G)Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests,
rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made,
created, exercised or relinquished for a consideration in money or money's worth, but is not a bona
fide sale for an adequate and full consideration in money or money's worth, there shall be included in
the gross estate only the excess of the fair market value, at the time of death, of the property
otherwise to be included on account of such transaction, over the value of the consideration received
therefor by the decedent.

(H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall
not, for the purpose of this Chapter, be deemed a part of his or her gross estate.378

10.Items to be included in gross estate

In case of resident citizens, nonresident citizens and resident aliens:

1. Real Property within and without the Philippines;

2. Tangible personal property within and without the Philippines; and
3. Intangible personal property within and without the Philippines.

In cases of nonresident aliens:

1. Real property within the Philippines;

2. Tangible personal property within the Philippines and;
3. Intangible personal property within the Philippines, unless there is reciprocity in which case,
it is not taxable.

11.Deductions from estate

The following are the expenses, losses, indebtedness and taxes that may be allowed
as deductions from the gross estate:

A) If decedent is a resident decedent:

Ordinary deductions:

1) Funeral Expenses379

378
Sec. 85
379
The amount deductible is equal to 5% of the gross estate or the amount of the actual funeral expenses
whichever is lower, but in no case to exceed P200, 000.
Actual funeral expenses are those which were actually incurred in connection with the interment or
burial of the deceased and paid for from the estate of said deceased.
Funeral expenses include:
a) Costs of coffin, tombstone, mausoleum, and burial lot;
b) Funeral parlor fees;
c) Mourning clothing of the surviving spouse and the unmarried minor children;
d) Costs of obituary notices; and
e) Expenses during the wake
The following cannot be deducted under funeral expenses:
a) Cash advances of the surviving spouse and the heirs;
b) Expenses paid by the relatives and friends; and

113
 2) Medical expenses380
3) Judicial expenses of the testamentary or intestate proceedings.381
4) Claims against the decedents estate382
5) Claims against insolvent persons383
6) Unpaid mortgages indebtedness384
7) Casualty Losses385
8) Unpaid Taxes386

c) Expenses after the burial.

380
Provided, that the following requisites are met:
a. Must be incurred by the decedent within one (1) year prior to his death
b. Must be duly substantiated by receipts; and
c. Must not exceed P500, 000.00.
381
Include administration expenses to those actually incurred in the administration of the estate
Examples:
a) fees of the executor or administrator;
b) attorneys fees;
c) accountants fees;
d) court fees;
e) salaries of employees; and
All other expense related to the administration of the estate.
Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of the
heirs, legatees, or devisees are not allowed as deductions.
382
Debts or obligations of the decedent that is enforceable against the estate provided that the following
requisites are met:
a) They were contracted in good faith and for an adequate and full consideration in money or moneys
worth.
b) They must be existing against the estate.
c) They must be legally enforceable obligations of the decedent and ought to be enforced by the
claimants.
d) They must be reasonably certain in amount; and;
e) At the time the indebtedness was incurred, the debt instrument was duly notarized and if the loan
was contracted within three (3) years before the death of the decedent, the administrator or executor
shall submit a statement showing the disposition of the proceeds of the loan.
383
Requisites for deductibility:
a) The amount of said claims has been initially included as part of the gross estate; and
b) The incapacity of the debtors to pay their obligations is proven and not merely alleged.
384
Requisites for deductibility:
a) The fair market value of the property mortgaged without deducting the mortgage indebtedness has
been initially included as part of his gross estate; and
b) The mortgage indebtedness was contracted in good faith and for an adequate and full consideration
in money or moneys worth.
385
They include all losses incurred during the settlement of the estate arising from fires, storms,
shipwreck or other casualties or from robbery, theft or embezzlement.
Provided, that the following requisites are met:
a) Losses not compensated by an insurance or otherwise;
b) Losses not have been claimed as a deduction for income tax purposes; and
c) Losses incurred not later than the last day for payment of the estate tax (6 months from death).
386
Unpaid income tax on income due or received before death of the decedent, and real property taxes,
which have accrued prior to the death of the decedent (real property taxes accrued at the beginning of
the year but may be paid before or at the end of each quarter) are deductible.

114
 9) Vanishing deduction387
10) Transfer for public use388
11) Family home389
12) Standard deduction equivalent to P1, 000,000.00390
13) Amounts received by heirs under RA NO.4917 from the decedents employer as a
consequence of the death of the decedent employee provided that such amount is included
in the gross estate of the decedent.
14) Net share of the surviving spouse in the conjugal / community property.
15) Tax credit for estate tax paid to a foreign country.

B) If decedent is a non resident alien.

Income taxes upon income received after the death of the decedent, or property taxes not accrued
before his death, or any estate tax cannot be deducted because they are chargeable to the income of the
estate.
387
property previously taxed
Is an amount allowed to reduce the taxable estate of a decedent where the property:
a. received by him from prior decedent by gift, bequest, devise or inheritance, or
b. transferred to him by gift, has been the object of previous transfer deduction.
It is so-called a vanishing deduction because the rate of deduction gradually diminishes and entirely
vanishes depending upon the time interval between the two (2) successive transfers.
Two (2) factors necessary in vanishing deduction, these are;
a. There are two (2) deceased persons and the first is the donor; and
b. The second decedent dies within five (5) years after the death of the prior decedent or in the case of
gifts the decedent donee dies within the same period after the date of the gift.
Rationale:
The deduction operates to ease the harshness of successive taxation of the same property within a
relatively short period of time.
388
Requisites:
a. The disposition must be testamentary in character.
b. To take effect after death.
c. In favor of the government of the Philippines, or any political subdivision thereof.
d. Exclusively for public purpose.
389
Refers to the dwelling house, including the land on which it is situated, where the husband and wife, or
an unmarried person who is the head of the family and members of their immediate family resides as
certified by the Barangay Captain of the locality.
For the purpose of availing of a family home deduction to the extent provided by law, a person may
constitute only one family home.
The amount deductible is equivalent to the current fair market value of the decedents family home if
said current fair market value exceeds P1, 000,000.00., the excess shall be subject to estate tax.
Requisites to be deductible:
a. The family home must be the actual residential home of the decedent and his family at the time of
his death as certified by the barangay Captain of the locality where the family is situated.
b. The total value of the family home must be included in the gross estate of the decedent.
c. The allowable deduction must be in an amount equivalent to the current fair market value of the family
home as declared or included in the gross estate not exceeding P1, 000,000.00.
390
does not include the P 200,000.00 exemption

115
 The deductions allowed to citizens or residents of the Philippines are also extended
to a non-resident alien decedent with respect to his estates situated in the Philippines at the
time of his death.

In case of deductions for expenses, losses, indebtedness and taxes, the amount of the
allowable deduction is limited only to the proportion of such deductions with the value of
such part of his gross estate which at the time of his death, is situated in the Philippines,
bears to the value of his entire gross estate wherever situated.391

12.Exclusions from estate

The following properties are excluded from gross estate:392

1) Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the
insured.
2) Proceeds of a group insurance policy taken out by a company for its employees.
3) Proceeds of insurance policies issued by the GSIS to government officials and employees.
4) Benefits accruing under the Social Security Act.
5) Proceeds of life insurance payable to the heirs of deceased members of the military
personnel of the United States Army or Philippine Army under laws administered by the
United State veterans Administration.
6) Accident insurance proceeds.393
7) Separate property of the surviving spouse.

13.Tax credit for estate taxes paid in a foreign country

The estate tax imposed by the tax code shall be credited with the amount of any
estate tax paid to a foreign country.

14.Exemption of certain acquisitions and transmissions

a. The first P200, 000.00 value of the estate.394

b. The merger of the usufruct in the owner of the naked title.
c. The transmission from the first heir, legatee, or donee in favor of another beneficiary in
accordance with the desire of the predecessor.
d. All bequest, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inured to the benefit of any individual and provided
that not more than 30% of the said bequest, etc. shall be used by such institution for administration
purposes.

391
Sec. 86 (B)
392
In the determination of the gross estate, the nature of the property, whether common property of the
spouses, separate or exclusive property either of the deceased or of the surviving spouse, becomes of
vital importance. What regime of property relations shall govern the spouses?
Under the Civil Code, the husband and wife who got married before August 3, 1988 are governed by
the Conjugal Partnership of Gains, while those who got married on or after August 3, 1988 are governed
by the Absolute Community of Property, unless a different regime was agreed upon in the marriage
settlement.
393
Items 1 6 are proceeds of insurance not includible in the gross estate of the decedent
394
Sec. 84

116
 e. Intangible personal property of non-resident aliens under the principle of reciprocity.
f. Retirement benefits of employees of private firms from private pension plans approved by
the BIR.
g. Amount received for war damages.
h. Grants and donations to the Intramuros administration.

15.Filing of notice of death

Where the gross value of the estate exceeds twenty thousand pesos (P 20,000.00)
although exempt, the executor, administrator, or any of the legal heirs shall give, within two
(2) months after the decedents death or within like period after the executor or
administrator qualifies as such, a written notice thereof, to the Commissioner of Internal
Revenue.395

16.Estate tax return

An estate tax return, under oath, is required by law to be filed by the executor,
administrator, or any of the legal heirs;

a) Where the gross value of the estate exceeds p200, 000.00 though exempt from the estate
tax; or
b) Regardless of the gross value of the estate, where the said estate consists of registered or
registrable real property, such as real property, motor vehicle, shares of stock or other
similar property for which a clearance from the Bureau of Internal Revenue is required
as a condition precedent for the tr5ansfer of ownership thereof in the name of the
transferee.

C. Donors Tax

1. Basic principles

It is levied, assessed, collected and paid upon the transfer of any person, resident or
non-resident, of the property by gift inter vivos. It applies whether the transfer is in trust or
otherwise, whether the gift is direct or indirect, and whether the property is real or personal,
tangible or intangible.396

A gift is merely subjected to donors tax.

2. Definition

A tax on the privilege of transmitting ones property or property rights to another or

others without adequate and full valuable consideration.

3. Nature

395
Sec. 89
396
Sec. 98

117
 Gift or donation an act of liberality whereby a person disposes gratuitously of a
thing or right in favor of another who accepts it.397

4. Purpose or object

Donors tax shall be imposed whether the transfer is in trust or otherwise, whether
the gift is direct or indirect and whether the property is real or personal, tangible or
intangible.

5. Requisites of valid donation

1. The donor must have capacity

2. There must be an intent to donate
3. There must be delivery, either actual or constructive
4. The donee must accept the donation

6. Transfers which may be constituted as donation

a. Sale/exchange/transfer of property for insufficient

consideration398

If bona fide sale no value shall be included in the gross estate.

If not a bona fide sale - the excess of the fairmarket value at the time of death over
the value of the consideration received by the decedent shall form part of his gross estate.

If inter vivos transfer is proven fictitious - total value of the property at the time of
death included in the gross estate.399

b. Condonation/remission of debt

If a creditor wishes merely to benefit the debtor, and without any consideration
therefore, cancels the debt, the amount of the debt is a gift to the debtor and need not be
included in the latters report of income.

7. Transfer for less than adequate and full consideration

Where property, other than real property referred to in Section 24(D),400 is

transferred for less than an adequate and full consideration in money or money's worth, then
the amount by which the fair market value of the property exceeded the value of the

397
Art. 725, CC
398
Transfers that are not bona fide sales of property for an adequate and full consideration in money or
moneys worth
399
Sec. 85 (G)
400
real property located in the Philippines, classified as capital assets

118
consideration shall, for the purpose of the tax imposed, be deemed a gift, and shall be
included in computing the amount of gifts made during the calendar year.401

8. Classification of donor

1. Citizens or Residents of the Philippines all properties located not only within
the Philippines but also in foreign countries

2. Nonresident Alien all real and tangible properties within the Philippines, and
intangible personal property, unless there is reciprocity,402 in which case it is not taxable

9. Determination of gross gift

10.Composition of gross gift

Include real and personal property, whether tangible or intangible, or mixed,

wherever situated: Provided, however, That where the decedent or donor was a nonresident
alien at the time of his death or donation, as the case may be, his real and personal property
so transferred but which are situated outside the Philippines shall not be included as part of
his "gross estate" or "gross gift".

11.Valuation of gifts made in property

If the gift is made in property, the fair market value thereof at the time of the gift
shall be considered the amount of the gift. In case of real property, the provisions of Section
88(B) shall apply to the valuation thereof.403

12.Tax credit for donors taxes paid in a foreign country

In General.- The tax imposed by this Title upon a donor who was a citizen or a
resident at the time of donation shall be credited with the amount of any donor's tax of any
character and description imposed by the authority of a foreign country.

Limitations on Credit.- The amount of the credit taken under this Section shall be
subject to each of the following limitations:

401
Sec. 100
402
There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time
of his death:
a) did not impose a transfer tax of any character, in respect of intangible personal property of citizens
of the Philippines not residing in that foreign country; or
b) allowed a similar exemption from transfer tax in respect of intangible personal property owned by
citizens of the Philippines not residing in that country (Sec. 104)
In sum, both states must exempt nonresidents (citizens of the other state) from transfer taxes in respect
of intangible personal property.
For the reciprocity rule to apply, there must be total reciprocity.
403
Sec. 102.

119
 (a) The amount of the credit in respect to the tax paid to any country shall not exceed the
same proportion of the tax against which such credit is taken, which the net gifts situated within such
country taxable under this Title bears to his entire net gifts; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against
which such credit is taken, which the donor's net gifts situated outside the Philippines taxable under
this title bears to his entire net gifts.404

13. Exemptions of gifts from donors tax

The following gifts or donations shall be exempt from the tax:

(A) In the Case of Gifts Made by a Resident. -

(1) Dowries or gifts made on account of marriage and before its celebration or within one
year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the
extent of the first Ten thousand pesos (P10,000):

(2) Gifts made to or for the use of the National Government or any entity created by any of
its agencies which is not conducted for profit, or to any political subdivision of the said Government;
and
(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment organization, trust or philanthropic organization
or research institution or organization: Provided, however, That not more than thirty percent (30%) of
said gifts shall be used by such donee for administration purposes. For the purpose of the exemption,
a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment
organization, trust or philanthropic organization and/or research institution or organization' is a
school, college or university and/or charitable corporation, accredited nongovernment organization,
trust or philanthropic organization and/or research institution or organization, incorporated as a
non-stock entity, paying no dividends, governed by trustees who receive no compensation, and
devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of
philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of
Incorporation.

(B) In the Case of Gifts Made by a Nonresident Not a Citizen of the Philippines. -

(1) Gifts made to or for the use of the National Government or any entity created by any of
its agencies which is not conducted for profit, or to any political subdivision of the said Government.

(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or philanthropic organization or research institution or
organization: Provided, however,That not more than thirty percent (30%) of said gifts shall be used by
such donee for administration purposes.405

14. Person liable

There shall be levied, assessed, collected and paid upon the transfer by any person,
resident or nonresident, of the property by gift, a tax, computed as provided in Section 99.

404
Sec. 101 (C)
405
Sec. 101

120
 The tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or intangible.406

15. Tax basis

(A) In General. - The tax for each calendar year shall be computed on the basis of the total
net gifts made during the calendar year in accordance with the following schedule:

If the net gift is:

OVER BUT NOT OVER THE TAX PLUS OF THE EXCESS

SHALL BE OVER

P 100,000 Exempt
P 100,000 200,000 0 2% P100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000

(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is stranger, the
tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a
"stranger", is a person who is not a:

(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal
descendant; or
(2) Relative by consanguinity in the collateral line within the fourth degree of
relationship.

(C) Any contribution in cash or in kind to any candidate, political party or coalition of
parties for campaign purposes shall be governed by the Election Code, as amended.

406
Sec. 98

121
 D. Value-Added Tax (VAT)

1. Concept

VAT is a percentage tax imposed at every stage of the distribution process on the
sale, barter, or exchange, or lease of goods or properties, and on the performance of service
in the course of trade or business, or on the importation of goods, whether for business
or non-business purposes.

It is a business tax levied on certain transactions involving a wide range of

goods, properties, and services, such tax being payable by the seller, lessor, or transferor. The
tax is so- called because it is imposed on the value not previously subjected to VAT.407

It is also an excise tax, or a tax on the privilege of engaging in the business of selling
goods or services, or in the importation of goods.

The taxpayer408determines his tax liability by computing the tax on the gross selling
price or gross receipt409and subtracting or crediting the earlier VAT on the purchase or
importation of goods or on the sale of service (input tax) against the tax due on his own sale.

2. Characteristics

It is an indirect tax, the amount of which may be shifted to or passed on the buyer,
transferee, or lessee of the goods, properties or services.410

This rule shall likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of RA No. 9337.411

It is equitable: The law is equipped with a threshold margin (P1.5M). Also, basic
marine and agricultural products in their original state are still not subject to tax.
Congress also provided for mitigating measures to cushion the impact of the imposition of
the tax on those previously exempt. Excise taxes on petroleum products and natural gas
were reduced. Percentage tax on domestic carriers was removed. Power producers are
now exempt from paying franchise tax.

VAT, by its very nature, is regressive. But the Constitution does not really
prohibit the imposition of indirect taxes412. What it simply provides is that Congress shall
evolve a progressive system of taxation. In Tolentino v. Sec. of Finance, the Court said
that direct taxes are to be preferred, and as much as possible, indirect taxes should be
minimized but not avoided entirely because it is difficult, if not impossible, to avoid them.

407
De Leon, The National Internal Revenue Code Annotated, 2000 edition
408
seller
409
output tax
410
Sec. 105
411
RR 16-200523
412
which is essentially regressive

122
 The Constitution mandate to evolve a progressive system of taxation simply
means that direct taxes are to be preferred as much as possible, and indirect taxes should be
minimized. Resort to indirect taxes should be minimized but not avoided entirely. Also, the
regressive effects are corrected by the zero rating of certain transactions and through the
exemptions. The transactions which are subject to VAT are those which involve goods and
services which are used or availed of mainly by higher income groups.413

3. Impact of tax414

The seller415who shifts the burden to

4. Incidence of tax416

the customer who finally bears the incidence of the tax.

5. Tax credit method

This method relies on invoices, an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.417

If at the end of a taxable period, the output taxes charged by a seller are equal to the
input taxes passed on by the suppliers, no payment is required. It is when the output taxes
exceed the input taxes that the excess has to be paid. If however, the input taxes exceed the
output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should
the input taxes result from zero-rated or effectively zero-rated transactions or from
acquisition of capital goods, any excess over the output taxes shall instead be refunded to the
taxpayer or credited against other internal revenue taxes.418

6. Destination principle

VAT is imposed in the country in which the products or services are actually
consumed or used. Exportsexempt, imports taxable.419

413
real properties held primarily for sale to customers, right or privilege to use patent, copyright...
414
The point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the
person who must pay the tax to the government. He is also termed as the statutory taxpayer-the one on
whom the tax is formally assessed. He is the subject of the tax
415
manufacturer
416
That point on which the tax burden finally rests or
settle down. It takes place when shifting has been effected from the statutory
taxpayer to another
417
Commissioner of Internal Revenue v. Seagate Technology Philippines, G. R. No. 153866, February 11,
2005 citing various cases and authorities; AbakadaGuro Party List (etc.) v. Ermita, etc., et al., G. R. No.
168056, September 1, 2005 and companion cases)
418
Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11,
2005 citing various cases and authorities
419
Situs: country of Consumption.

123
 7. Persons liable420

A. Any person who, in the course of trade or business421

(1) sells, barters, exchanges goods or properties,

(2) leases goods or properties,
(3) renders services; and
(4) any person who imports goods.422

8. VAT on sale of goods or properties

a. Requisites of taxability of sale of goods or properties:

1) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the

previous year exceeds 2 4/5%; or
2) National government deficit as a percentage of GP of the previous year exceeds 1
%.423

9. Zero-rated sales of goods or properties, and effectively zero-rated

sales of goods or properties

1. Export Sales as provided in Section 106(A)(2)(a)424

2. Foreign Currency Denominated Sale as provided in Section 106 (A)(2)(b)425
3. Sale to persons or entities which is VAT exempt under special laws or international
agreements to which the Philippines is a signatory as provided in Section 106 (A)(2)(c)
4. Transactions subject to zero-rated (0%) as provided in Section 108(B)426

10.Transactions deemed sale427

a. Transfer, use or consumption not in the course of business

of goods/properties originally intended for sale or use in the course
of business.

e.g. when a VAT-registered person withdraws goods from his business for his
personal use.428

420
Sec. 105
421
The phrase in the course of trade or business means the regular conduct or pursuit of a commercial
or an economic activity, including transactions incidental thereto, by any person regardless of whether or
not the person engaged therein is a non-stock, nonprofit organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or their guests), or government entity (Sec.
105)
422
The importer, whether an individual or corporation and whether or not made in the course of his
trade or business, shall be liable to pay VAT. (RR 16-2005)
423
Sec. 106 (i)(ii)
424
See Reference
425
Ibid.
426
Ibid.
427
Sec. 106 (B)
428
RR 16-2005

124
 b. Distribution or transfer to shareholders, investors or
creditors

Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered persons;

or(b)Creditors in payment of debt.429

c. Consignment of goods if actual sale not made within 60

days from date of consignment

Consigned goods returned by theconsignee within the 60-day period are not deemed
430
sold.

d. Retirement from or cessation of business with respect to

inventories on hand

Retirement from or cessation of business, with respect to inventories of taxable

goods existing as of such retirement or cessation431as of the date of such retirement or
cessation, whether or not the business is continued by the new owner or successor.
Examples are change of ownership of the business432and dissolution of a partnership and
creation of a new partnership which takes over the business.433

11.Change or cessation of status as VAT-registered person

VAT shall apply to goods disposed of or existing as of a certain date if under the
circumstances to be prescribed in rules and regulations to be promulgated by the Secretary
of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-
registered person changes or is terminated. xxx

429
Property dividends which constitute stocks in trade or properties primarily held for sale or lease
declared out of retained earnings on or after Jan. 1, 1996 and distributed by the company to its
shareholders shall be subject to VAT based on the zonal value or FMV at
the time of the distribution, whichever is applicable. ( RR 16-2005)
430
RR 16-2005
431
with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials
432
e.g. when a sole proprietorship incorporates, or the proprietor sells his entire business
433
RR 16-2005

125
 a. Subject to VAT

Subject to output tax - applicable to goods/properties originally intended for sale

or use in business and capital goods which are existing as of the occurrence of the following:

1) Change of business activity from VAT taxable

status to VAT-exempt status

2) Approval of request for cancellation of a

registration due to reversion to exempt status

3) Approval of request for cancellation of registration

due to desire to revert to exempt status after lapse
of 3 consecutive years434

b. Not subject to VAT

1) Change of control of a corporation

Change of control of a corporation by the acquisition of the controlling interest of

such corporation by another stockholder or group of stockholders.

2) Change in the trade or corporate name

Change in the trade or corporate name of the business

3) Merger or consolidation of corporations

The unused input tax of the dissolved corporation, as of the date of merger or
consolidation, shall be absorbed the surviving or new corp.

12.VAT on importation of goods

On every importation of goods.435

a. Transfer of goods by tax exempt persons

If importer is tax-exempt, the subsequent purchasers, transferees or recipients of

such imported goods shall be considered as importers who shall be liable for the tax on
importation.

The tax due on such importation shall constitute a lien on the goods superior to all
charges or liens on the goods, irrespective of the possessor thereof.436

434
from the time of registration by a person who voluntarily registered despite being exempt under Sec.
109 (2)
435
whether or not goods are for use in business
436
Sec. 107 (B)

126
 13.VAT on sale of service and use or lease of properties

a. Requisites for taxability

The President, upon the recommendation of the Sec. of Finance, shall, effective
January 1, 2006, raise the rate of value- added tax to 12%, after any of the following
conditions has been satisfied:

1. Value-added tax collection as a percentage ofGross Domestic Product (GDP) of

the previous year exceeds 2 4/5%; or
2. National government deficit as a percentage ofGP of the previous year exceeds 1
%.437

14.Zero-rated sale of services438

1) Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP.

2) Services other than those mentioned in the preceding paragraph rendered to a person
engaged in business conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed,the consideration for which
is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP.

3) Services rendered to persons or entities whose exemption under special laws or

international agreements to which thePhilippines is a signatory effectively subjects the supply of
such services to zero percent (0%) rate.

4) Services rendered to persons engaged in international shipping or international air

transport operations, including leases of property for use thereof;439Provided, however, that the
services referred to herein shall not pertain to those made to common carriers by air and sea relative
to their transport ofpassengers, goods or cargoes from one place in the Phil. to another place in the
Phil., the same being subject to 12% VAT under Sec. 108.440

5) Services performed by subcontractors and/or contractors in processing, converting, of

manufacturing goods for an enterprise whoseexport sales exceed seventy percent (70%) of total
annual production.

6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign
country and;

7) Sale of power or fuel generated through renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy

437
Sec. 108 (A)
438
Sec. 108 (B)
439
Ibid.
440
supra

127
sources using technologies such as fuel cells and hydrogen fuels.441Zero-rating shall applystrictly to
the sale of power or fuel generated through renewable sources of energy, and shall not extend to the
sale of services related to the maintenance or operation of plants generating said power.

15.VAT exempt transactions442

a. VAT exempt transactions, in general

Refer to sale of goods or properties and/or services and the use or lease of properties that is
not subject to VAT443 and the seller is not allowed any tax credit of VAT444 on purchases. The
person making the exempt sale of goods, properties or services shall not bill anyoutput tax to his
customers because the said transaction is not subject to VAT.

1. Sale/ import of agricultural, marine food products in original state;445 of livestock and
poultry.446

Original state even if they have undergone the simple processes of preparation or
preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and
copra shall be considered in their original state.

2. Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and
poultry feeds.

3. Import of personal and household effects of Phil resident returning from abroad and
nonresident citizens coming to resettle in the Philippines

4. Import of professional instruments and implements, wearing apparel, domestic animals,

and personal household effects belonging to persons coming to settle in the Philippines, for their
own use and not for sale, barter or exchange.

5. Services subject to percentage tax under Title V.

6. Services by agricultural contract growers and milling for others of palay into rice, corn into
grits and sugar cane into raw sugar;

7. Medical, dental, hospital and veterinary services except those rendered by

professionals.447

441
Ibid.
442
Sec. 109
443
output tax
444
input tax
445
Original state including preservation using advanced technological means of packaging, such as shrink
wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods (RR 16-2005)
446
Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals
generally considered as pets
447
Ibid
Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale
of drugs and medicine is subject to VAT. [RR 16-2005]

128
 8. Educational services rendered by private educational institutions, duly accredited by
DEPED, CHED, TESDA, and those rendered by government educational institutions.

9. Services rendered by individuals pursuant to an employer-employee relationship;

10. Services rendered by regional or area headquarters established in the Philippines by

multinational corporations which act as supervisory, communications and coordinating centers for
their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive
income from the Philippines;

11. Transactions which are exempt under international agreements to which the Philippines
is a signatory or under special laws, except those under Presidential Decree No. 529 [Petroleum
Exploration Concessionaires under the Petroleum Act of 1949]

12. Sales by agricultural cooperatives duly registered with the Cooperative Development
Authority to their members as well as sale of their produce. Exemption includes importation of
direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and
exclusively in the production and/or processing of their produce.

13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly
registered with the Cooperative Development Authority.

14. Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with
the Cooperative Development Authority are exempt BUT their importation of machineries and
equipment, including spare parts thereof, to be used by them are subject to vat.

15. Export sales by persons who are not VAT- registered;

16. Sale of real properties the ff. sales are exempt:

1) Sale of real properties NOT primarily held for sale to customers or held for lease
in the ordinary course of trade or business.

2) Sale of real properties utilized for low-cost housing as defined by RA No.

7279, otherwise known as the "Urban Development and Housing Act of 1992" andother
related laws, such as RA No. 7835 and RA No. 8763. Low-cost housing" refers to housing
projects intended for homeless low- income family beneficiaries, undertaken by the
Government or private developers, which may either be a subdivision or a
condominium registered and licensed by the Housing and Land Use Regulatory
Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein
the unit selling price is within the selling price ceiling per unit of P750,000.00 under RA No.
7279, and other laws, such as RA No. 7835 and RA No. 8763.

3) Sale of real properties utilized for socialized housing as defined under RA No.
7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the price
ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC
and the NEDA and other related laws. "Socialized housing" refers to housing programs and
projects covering houses and lots or home lots only undertaken by the Government or the
private sector for the underprivileged and homeless citizens which shall include sites and
services development, long-term financing, liberated terms on interest payments, and such
other benefits in accordance with the provisions of RA No. 7279and RA No. 7835 and
RA No. 8763. "Socialized housing" shall also refer to projects intended for the

129
 underprivilegedand homeless wherein the housing package selling price is within the lowest
interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing
program of the Government, the private sector or non-government organizations.

4) Sale of residential lot valued at P1.5M and below, or house & lot and other
residential dwellings valued at P2.5M and below, where the instrument of
sale/transfer/disposition was executed on or after July 1, 2005;448If two or more adjacent
residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the
lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of
the lots does not exceed P1.5M. Adjacent residential lots, although covered by
separate titles and/or separate tax declarations, when sold or disposed to one and the same
buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale
of one residential lot.449

17. Lease of residential units with a monthly rental per unit not exceeding P10K,
regardless of the amount of aggregate rentals received by the lessor during the year.
Lease of residential units where the monthly rental per unit exceeds 10K but the aggregate of
such rentals of the lessor during the year do not exceed One Million Five Hundred Pesos P1.5M
shall likewise be exempt from VAT, however, the same shall be subjected to three percent
(3%) percentage tax.

In cases where a lessor has several residential units450 for lease, some are leased out
for a monthly rental per unit of not exceeding P10K while others are leased out for more than P10K
per unit, his tax liabilitywill be as follows:

a. The gross receipts from rentals not exceeding P10K per month per unit shall be
exempt from VAT regardless of the aggregate annual gross receipts.

b. The gross receipts from rentals exceedingP10K per month per unit shall be
subject to VAT if the aggregate annual grossreceipts from said units only451exceeds
P1.5M. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section
116 of the Tax Code.

18. Sale, importation, printing or publication of books and any newspaper, magazine review
or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is
not devoted principally to the publication of paid advertisements;

19. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations.

20. Importation of fuel, goods, and supplies by persons engaged in international shipping or
air transport operations.

448
To be adjusted every 3 years from Jan 31, 2009
449
RR 16-2005
450
The term 'residential units' shall refer to apartments and houses & lots used for residential purposes,
and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed
spaces) except motels, motel rooms, hotels and hotel rooms.
The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of
residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room
in case of rooms for rent. [RR 16-2005]
451
not including the gross receipts from units leased for not more than P10K

130
 21. Services of banks, non-bank financial intermediaries performing quasi-banking functions
and other non-bank financial intermediaries; and

22. Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do
not exceed the amount of P1,500,0000.

b. Exempt transactions, enumerated

1) Subject to the provisions of subsection (2) hereof, the following shall be exempt
from the value-added tax:

(a) Sale or importation of agricultural and marine food products in their original
state, livestock and poultry of or kind generally used as, or yielding or producing foods
for human consumption; and breeding stock and genetic materials therefor.

Products classified under this paragraph and paragraph (a) shall be considered in their
original state even if they have undergone the simple processes of preparation or preservation for the
market, such as freezing, drying, salting, broiling, roasting, smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and
copra shall be considered in their original state;

(b) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including ingredients, whether locally produced or imported,
used in the manufacture of finished feeds (except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other animals generally considered as pets);

(c) Importation of personal and household effects belonging to the residents of the
Philippines returning from abroad and nonresident citizens coming to resettle in the
Philippines: Provided, That such goods are exempt from customs duties under the Tariff
and Customs Code of the Philippines;

(d) Importation of professional instruments and implements, wearing apparel,

domestic animals, and personal household effects (except any vehicle, vessel, aircraft,
machinery other goods for use in the manufacture and merchandise of any kind in
commercial quantity) belonging to persons coming to settle in the Philippines, for their own
use and not for sale, barter or exchange, accompanying such persons, or arriving within
ninety (90) days before or after their arrival, upon the production of evidence satisfactory to
the Commissioner, that such persons are actually coming to settle in the Philippines and that
the change of residence is bona fide;

(e) Services subject to percentage tax underTitle V;

(f) Services by agricultural contract growers and milling for others of palay into rice,
corn into grits and sugar cane into raw sugar;

(g) Medical, dental, hospital and veterinary services except those rendered by
professionals.

131
 (h) Educational services rendered by private educational institutions, duly
accredited by the Department of Education, Culture and Sports (DECS) Department of
Education (DEPED), the Commission on Higher Education (CHED), the Technical
Education and Skills Development Authority (TESDA), and those rendered by government
educational institutions.

(i) Services rendered by individuals pursuant to an employer-employee relationship;

(j) Services rendered by regional or area headquarters established in the Philippines

by multinational corporations which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;

(k) Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except those under Presidential DecreeNo.
529;

(l) Sales by agricultural cooperatives duly registered with the Cooperative

Development Authority to their members as well as sale of their produce, whether in its
original state or processed form, to non-members; their importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be used directly and exclusively
in the production and/or processing of their produce;
(m) Gross receipts from lending activities by credit or multi-purpose cooperatives
duly registered with the Cooperative Development Authority;

(n) Sales by non-agricultural, non- electric and non-credit cooperatives duly

registered with the Cooperative Development Authority: Provided, That the share capital
contribution of each member does not exceed Fifteen thousand pesos (P15,000) and
regardless of the aggregate capital and net surplus ratably distributed among the members;

(o) Export sales by persons who are notVAT-registered;

(p) Sale of real properties not primarily held for sale to customers or held for lease
in the ordinary course of trade or business or real property utilized for low-cost and
socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban
Development and Housing Act of 1992, and other related laws, residential lot valued at one
million five hundred thousand pesos(P1,500,000)and below, house and lot, and other
residential dwellings valued at two million five hundred thousand pesos (P2,500,000) and
below: Provided, That not later than January 31, 2009and every three (3) years thereafter,
the amounts herein stated shall be adjusted to their present values using the Consumer Price
Index, as published by the national Statistics Office (NSO);

(q) Lease of a residential unit with a monthly rental not exceeding Ten thousand
pesos (P10,000); Provided, That not later than January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be adjusted to its present value using the
Consumer Price Index as published by the National Statistics Office (NS0);

(r) Sale, importation, printing or publication of books and any newspaper,

magazine review or bulletin which appears at regular intervals with fixed prices for
subscription and sale and which is not devoted principally to the publication of paid
advertisements; and

132
 (s) Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or international transport
operations;

(t) Importation of fuel, goods, and supplies by persons engaged in international

shipping or air transport operations;

(u) Services of banks, non-bank financial intermediaries performing quasi-banking

functions and other non-bank financial intermediaries; and

(v) Sale or lease of goods or properties or the performance of services other than
the transactions mentioned in the preceding paragraphs, the gross annual sales and/or
receipts do not exceed the amount of One million five hundred thousand pesos
(P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be adjusted to its present value using the
Consumer Price Index, as published by the National Statistics Office (NSO).

(2) A vat-registered person may elect that subsection (1) not apply to its sale of goods or
properties or services: provided, that an election made under this subsection shall be irrevocable for a
period of three (3) years from the quarter the election was made.

16.Input tax and output tax, defined

Input tax- the VAT due from or paid by a VAT- registered person in the course of
his trade or business on importation of goods or local purchase of goods or services,
including lease or use of property, from a VAT-registered person. It includes the transitional
input tax determined in accordance with Section 111452 of this Code.

It includes input taxes which can be directly attributed to transactions subject to the
VAT plus a ratable portion of any input tax which cannot be directly attributed to either the
taxable or exempt activity. Input tax must be evidenced by a VAT invoice or official receipt
issued by a VAT- registered person in accordance with Secs. 113 and 237453 of the Tax.454

Output tax- the VAT due on the sale or lease of taxable goods or properties or
services by any person registered or required to register under Section 236455 of this Code.

452
See Reference
453
Ibid.
454
RR 16-2005
455
See Reference

133
 17.Sources of input tax

a. Purchase or importation of goods456

b. Purchase of real properties for which a VAT has actually

been paid

c. Purchase of services in which VAT has actually been paid

d. Transactions deemed sale

(1) Transfer, use or consumption not in the course of business of goods or

properties originally intended for sale or for use in the course of business;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered

persons; or
(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days following
the date such goods were consigned; and

(4) Retirement from or cessation of business, with respect to inventories of taxable

goods existing as of such retirement or cessation.457

e. Transitional input tax458

f. Presumptive input tax

Persons or firms engaged in the processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil and packed noodle based instant meals, shall be
allowed a presumptive input tax, creditable against the output tax, equivalent four percent (4
%) of the gross value in money of their purchases of primary agricultural products which are
used as inputs to their production.

As used in this Subsection, the term "processing" shall mean pasteurization, canning
and activities which through physical or chemical process alter the exterior texture or form

456
(i) For sale; or
(ii) For conversion into or intended to form part of a finished product for sale including packaging
materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for depreciation or amortization is allowed under
this Code, except automobiles, aircraft and yachts. (Sec. 110 (A)(1)
457
Sec. 106 (B)
458
See input tax, supra

134
or inner substance of a product in such manner as to prepare it for special use to which it
could not have been put in its original form or condition.459

g. Transitional input tax credits allowed under the transitory

and other provisions of the regulations460

A person who becomes liable to value-added tax or any person who elects to be a
VAT-registered person shall, subject to the filing of an inventory according to rules and
regulations prescribed by the Secretary of finance, upon recommendation of the
Commissioner, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to two percent (2%) of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher, which shall be
creditable against the output tax.461

18.Persons who can avail of input tax credit

The input tax on domestic purchase of goods or properties shall be creditable:

(a) To the purchaser upon consummation of sale and on importation of goods or properties;
and

(b) To the importer upon payment of the value-added tax prior to the release of the goods
from the custody of the Bureau of Customs.

However, in the case of purchase of services, lease or use of properties, the input tax shall be
creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or
fee.

A VAT-registered person who is also engaged in transactions not subject to the value-added
tax shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions subject to value-added tax;
and

(b) A ratable portion of any input tax which cannot be directly attributed to either activity.462

459
Id. (B)
460
See e) Transitional input tax, supra
461
Sec. 111 (A)
462
Sec. 110 (A)(2)(3)

135
 19.Determination of output/input tax; VAT payable; Excess input
tax credits

a. Determination of output tax

If at the end of any taxable quarter the output tax exceeds the input tax, the excess
shall be paid by the Vat-registered person. If the input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or quarters, any input tax attributable to the
purchase of capital goods or to zero-rated sales by a VAT-registered person may at his
option be refunded or credited against other internal revenue taxes, subject to the provisions
of Section 112.463
b. Determination of input tax creditable

The sum of the excess input tax carried over from the preceding month or quarter
and the input tax creditable to a VAT-registered person during the taxable month or quarter
shall be reduced by the amount of claim for refund or tax credit for value-added tax and
other adjustments, such as purchase returns or allowances and input tax attributable to
exempt sale.

The claim for tax credit referred to in the foregoing paragraph shall include not only
those filed with the Bureau of Internal Revenue but also those filed with other government
agencies, such as the Board of Investments the Bureau of Customs.464

c. Allocation of input tax on mixed transactions

A VAT-registered person who is also engaged in transactions not subject to Vat shall
be allowed to recognize input tax credit on transactions subject to Vat as follows:

All the input taxes that can be directly attributed to transactions subject to VAT may
be recognized for input tax credit; Provided, that input taxes that can be directly attributable
to VAT taxable sales of goods and services to the Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled
corporations (GOCCs) shall not be credited against output taxes arising from sales to non-
Government entities; and

2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-
exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt
transactions and only the ratable portion pertaining to transactions subject to VAT may be
recognized for input tax credit.

d. Determination of the output tax and VAT payable and

computation of VAT payable or excess tax credits465

463
See Reference
464
Sec. 110 (C)
465
See a., supra

136
 20.Substantiation of input tax credits466

a) Input taxes must be substantiated and supported by the following documents, and
must be reported in the information returns required to be submitted to the Bureau:

(1) For the importation of goods importentry or other equivalent document

showing actual payment of VAT on the imported goods.

(2) For the domestic purchase of goods and propertiesinvoice showing the
information required under Secs. 113 and 237467 of the Tax Code.
(3) For the purchase of real property - public instrument i.e., deed of absolute sale,
deed of conditional sale, contract/agreement to sell, etc., together with VAT invoice issued
by the seller.
(4) For the purchase of servicesofficialreceipt showing the information required
under Secs. 113 and 237 of the Tax Code.

A cash register machine tape issued to a registered buyer shall constitute valid proof
of substantiation of tax credit only if it shows the information required under Secs. 113 and
237 of the Tax Code.

b) Transitional input tax shall be supported by an inventory of goods as shown in a

detailed list to be submitted to the BIR.

(c) Input tax on "deemed sale" transactions shall be substantiated with the invoice
required.

(d) Input tax from payments made to non- residents (such as for services, rentals and
royalties) shall be supported by a copy of the Monthly Remittance Return of Value Added
Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of the non-resident
evidencing remittance of VAT due which was withheld by the payor.

(e) Advance VAT on sugar shall be supported by the Payment Order showing
payment of the advance VAT

21.Refund or tax credit of excess input tax

a. Who may claim for refund/apply for issuance of tax credit

certificate (TCC)

Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may
apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has
not been applied against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B)468 and Section 108 (B)(1) and (2),469 the acceptable

466
RR 16-2005
467
See Reference
468
Ibid.
469
Ibid.

137
foreign currency exchange proceeds thereof had been duly accounted for in accordance with
the rules and regulations of the BangkoSentralngPilipinas (BSP): Provided, further, That where
the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or
exempt sale of goods of properties or services, and the amount of creditable input tax due or
paid cannot be directly and entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales.470

b. Period to file claim/apply for issuance of TCC

Within two (2) years after the close of the taxable quarter when the sales were made,

c. Manner of giving refund

Refunds shall be made upon warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of being countersigned by the Chairman,
Commission on audit, the provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit
by the Commission on Audit.471

d. Destination principle or Cross-border doctrine472

Destination principle goods and services are taxed only in the country where these
are consumed.

Cross border doctrine mandates that no VAT shall be imposed to form part of the
cost of the goods destined for consumption outside the territorial border of the taxing
authority.

22.Invoicing requirements

a. Invoicing requirements in general

A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition
to the information required under Section 237, the following information shall be indicated
in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's
identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the value-added tax.

470
Sec. 112 (A)
471
Id. (E)
472
See also (D)(7), supra

138
 b. Invoicing and recording deemed sale transactions

Transaction Invoicing Requirement

Transfer, use or consumption not in Memorandum entry in the subsidiary sales
the course of business of goods or journal to record withdrawal of goods for
properties originally intended for sale personal use
or for use in the course of business
Distribution or transfer to Invoice, at the time of the transaction,
shareholders/investors or creditors which should include all the info prescribed
in Sec. 113 (B)
Consignment of goods if actual sale is Invoice, at the time of the transaction,
not made within 60 days which should include all the info prescribed
in Sec. 113 (B)
Retirement from or cessation of An inventory shall be prepared and
business with respect to all goods in submitted to the RDO who has jurisdiction
hand over the taxpayers principal place of
business not later than 30 days after
retirement or cessation from the business.
An invoice shall be prepared for the entire
inventory, which shall be the basis of the
entry into the subsidiary sales journal. The
invoice need not enumerate the specific
items appearing in the inventory regarding
the description of the goods. If the business
is to be continued by the new owners or
successors, the entire amount of output tax
on the amount deemed sold shall be allowed
as input taxes.

c. Consequences of issuing erroneous VAT invoice or VAT

official receipt

(1) If a person who is not a VAT-registered person issues an invoice or receipt

showing his Taxpayer Identification Number (TIN), followed by the word VAT:

a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:

i. The tax imposed in Section 106 or 106 without the benefit of any input
tax credit; and

ii. A 50% surcharge under Section 248 (B)473 of this code;

473
See Reference

139
 (b) The VAT shall, if the other requisite information required under Subsection (B)
hereof is shown on the invoice or receipt, be recognized as an input tax credit to the
purchaser under Section 110474 of this Code.

(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a
VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term
VAT-exempt Sale, the issuer shall be liable to account for the tax imposed in Section 106
or 108 as if Section 109475 did not apply.476

23.Filing of return and payment

Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days
following the close of each taxable quarter prescribed for each taxpayer: Provided, thatVAT-
registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236,
shall file a return and pay the tax due thereon within twenty-five (25) days from the date of
cancellation of registration: Provided, That only one consolidated return shall be filed by the
taxpayer for his principal place of business or head office and all branches.477

24.Withholding of final VAT on sales to government

The Government or any of its political subdivisions, instrumentalities or agencies,

including government-owned or -controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods from sellers and services rendered by
contractors which are subject to the value-added tax imposed in Sections 106 and 108478
deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross
payment for the purchase of goods and six percent (6%) on gross receipts for services
rendered by contractors on every sale or installment payment which shall be creditable
against the value-added tax liability of the seller or contractor: Provided, That in the case of
government public works contractors, the withholding rate shall be eight and one-half
percent (8.5%): Provided, further, That the payment for lease or use of properties or property
rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the
time of payment. For this purpose, the payor or person in control of the payment shall be
considered as the withholding agent.

The value-added tax withheld shall be remitted within ten (10) days following the
end of the month the withholding was made.479

474
See Reference
475
supra
476
Sec. 113 (D)
477
Sec. 114 (A)
478
supra
479
Sec. 114 (C)

140
 E. Compliance Requirements (Internal Revenue Taxes)

1. Administrative requirements

a. Registration requirements

1) Annual registration fee

An annual registration fee in the amount of Five hundred pesos (P500) for every
separate or distinct establishment or place of business, including facility types where sales
transactions occur, shall be paid upon registration and every year thereafter on or before the
last day of January: Provided, however, That cooperatives, individuals earning purely
compensation income, whether locally or abroad, and overseas workers are not liable to the
registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located within the
revenue district, or to the Revenue Collection Officer, or duly authorized Treasurer of the
city of municipality where each place of business or branch is registered.480

2) Registration of each type of internal revenue tax

Every person who is required to register with the Bureau of Internal Revenue shall
register each type of internal revenue tax for which he is obligated, shall file a return and
shall pay such taxes, and shall updates such registration of any changes in accordance with
Subsection (E) hereof.481

3) Transfer of registration

In case a registered person decides to transfer his place of business or his head office
or branches, it shall be his duty to update his registration status by filing an application for
registration information update in the form prescribed therefor.482

4) Other updates

Any person registered shall, whenever applicable, update his registration information
with the Revenue District Office where he is registered, specifying therein any change in type
and other taxpayer details.483

480
Sec. 236 (B)
481
Id., (C)
482
Id., (D)
483
Id., (E)

141
 5) Cancellation of registration

The registration of any person who ceases to be liable to a tax type shall be cancelled
upon filing with the Revenue District Office where he is registered an application for
registration information update in a form prescribed therefor.484

6) Power of the Commissioner to suspend the

business operations of any person who fails to
register

The Commissioner or his authorized representative is hereby empowered to suspend

the business operations and temporarily close the business establishment of any person for
any of the following violations:

(a) In the case of a VAT-registered Person. -

(1) Failure to issue receipts or invoices;

(2) Failure to file a value-added tax return as required under Section 114; or
(3) Understatement of taxable sales or receipts by thirty percent (30%) or
more of his correct taxable sales or receipts for the taxable quarter.

(b) Failure of any Person to Register as Required under Section 236. -

The temporary closure of the establishment shall be for the duration of not less than
five (5) days and shall be lifted only upon compliance with whatever requirements prescribed
by the Commissioner in the closure order.485

b. Persons required to register for VAT

1) Optional registration for VAT of exempt person

Any person whose transactions are exempt from value-added tax under Section
109(z)486 of this Code; or any person whose transactions are exempt from the value-added
tax under Section 109(a), (b), (c), and (d)487 of this Code, who opts to register as a VAT
taxpayer with respect to his export sales only, may update his registration information in
accordance with Subsection (E) hereof, not later than ten (10) days before the beginning of
the taxable quarter and shall pay the annual registration fee prescribed in Subsection (B)
hereof.488

484
Id., (F)
485
Sec. 115
486
supra
487
Id.
488
Id., (I)

142
 2) Cancellation of VAT registration489

3) Changes in or cessation of status of a VAT-

registered person490

c. Supplying taxpayer identification number (TIN)

Any person required under the authority of this Code to make, render or file a return,
statement or other document shall be supplied with or assigned a Taxpayer Identification Number
(TIN) which he shall indicate in such return, statement or document filed with the Bureau of Internal
Revenue for his proper identification for tax purposes, and which he shall indicate in certain
documents, such as, but not limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments;

(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds of Assessor's Office;
(4) Registration certificate of transportation equipment by land, sea or air;
(5) Documents to be registered with the Securities and Exchange Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of Trade & Industry; and
(10) Such other documents which may hereafter be required under rules and regulations to
be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

In cases where a registered taxpayer dies, the administrator or executor shall register the
estate of the decedent in accordance with Subsection (A) hereof and a new Taxpayer Identification
Number (TIN) shall be supplied in accordance with the provisions of this Section.

In the case of a nonresident decedent, the executor or administrator of the estate shall
register the estate with the Revenue District Office where he is registered: Provided, however, That
in case such executor or administrator is not registered, registration of the estate shall be made with
the Taxpayer Identification Number (TIN) supplied by the Revenue District Office having
jurisdiction over his legal residence.

Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any person
who shall secure more than one Taxpayer Identification Number shall be criminally liable under the
provision of Section 275 on 'Violation of Other Provisions of this Code or Regulations in General.491

d. Issuance of receipts or sales or commercial invoices

All persons subject to an internal revenue tax shall, for each sale or transfer of
merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue
duly registered receipts or sales or commercial invoices, prepared at least in duplicate,
showing the date of transaction, quantity, unit cost and description of merchandise or nature
of service: Provided, however, That in the case of sales, receipts or transfers in the amount

489
See E (1)(a)(5), under Compliance Requirements, supra
490
See (D)(11)
491
Id., (I)

143
of One hundred pesos (P100.00) or more, or regardless of the amount, where the sale or
transfer is made by a person liable to value-added tax to another person also liable to value-
added tax; or where the receipt is issued to cover payment made as rentals, commissions,
compensations or fees, receipts or invoices shall be issued which shall show the name,
business style, if any, and address of the purchaser, customer or client: Provided, further,
That where the purchaser is a VAT-registered person, in addition to the information herein
required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN)
of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or
client at the time the transaction is effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of business for a period of three (3)
years from the close of the taxable year in which such invoice or receipt was issued, while
the duplicate shall be kept and preserved by the issuer, also in his place of business, for a like
period.

The Commissioner may, in meritorious cases, exempt any person subject to internal
revenue tax from compliance with the provisions of this Section.492

1) Printing of receipts or sales or commercial invoices

All persons who are engaged in business shall secure from the Bureau of Internal
Revenue an authority to print receipts or sales or commercial invoices before a printer can
print the same.

No authority to print receipts or sales or commercial invoices shall be granted unless

the receipts or invoices to be printed are serially numbered and shall show, among other
things, the name, business style, Taxpayer Identification Number (TIN) and business address
of the person or entity to use the same, and such other information that may be required by
rules and regulations to be promulgated by the Secretary of Finance, upon recommendation
of the Commissioner.

All persons who print receipt or sales or commercial invoices shall maintain a
logbook/register of taxpayers who availed of their printing services. The logbook/register
shall contain the following information:

(1) Names, Taxpayer Identification Numbers of the persons or entities for whom the
receipts or sales or commercial invoices were printed; and

(2) Number of booklets, number of sets per booklet, number of copies per set and
theserial numbers of the receipts or invoices in each booklet.

492
Sec. 237

144
 2) Invoicing requirements for VAT

a) Information contained in the VAT invoice

or VAT official receipt

A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition
to the information required under Section 237, the following information shall be indicated
in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's
identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the value-added tax.

b) Consequences of issuing erroneous VAT

invoice or official receipts493

e. Exhibition of certificate of payment at place of business

The certificate or receipts showing payment of taxes issued to a person engaged in a

business subject to an annual registration fee shall be kept conspicuously exhibited in plain
view in or at the place where the business is conducted; and in case of a peddler or other
persons not having a fixed place of business, shall be kept in the possession of the holder
thereof, subject to production upon demand of any internal revenue officer.494

f.Continuation of business of deceased person

When any individual who has paid the annual registration fee dies, and the same
business is continued by the person or persons interested in his estate, no additional
payment shall be required for the residue of the term which the tax was paid: Provided,
however, That the person or persons interested in the estate should, within thirty (30) days
from the death of the decedent, submit to the Bureau of Internal Revenue or the regional or
revenue District Office inventories of goods or stocks had at the time of such death.

The requirement under this Section shall also be applicable in the case of transfer of
ownership or change of name of the business establishment.495

493
See (D)(22)(c), supra
494
Sec. 241
495
Sec. 242

145
 g. Removal of business to other location

Any business for which the annual registration fee has been paid may, subject to the
rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, be removed and continued in any other place without the payment of
additional tax during the term for which the payment was made.496

2. Tax returns

a. Income Tax Returns

1) Individual Tax Returns

a) Filing of individual tax returns

(1) Who are required to file

The following individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;

(b) Every Filipino citizen residing outside the Philippines, on his income from sources within
the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources within the
Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of profession in
the Philippines.497
(a) Return of husband and
wife

Married individuals, whether citizens, resident or nonresident aliens, who do not

derive income purely from compensation, shall file a return for the taxable year to include
the income of both spouses, but where it is impracticable for the spouses to file one return,
each spouse may file a separate return of income but the returns so filed shall be
consolidated by the Bureau for purposes of verification for the taxable year.498

(b) Return of parent to include

income of children

The income of unmarried minors derived from properly received from a living
parent shall be included in the return of the parent, except (1) when the donor's tax has been
paid on such property, or (2) when the transfer of such property is exempt from donor's
tax.499

496
Sec. 243
497
Sec. 51 (A)
498
Id., (D)
499
Id., (E)

146
 (c) Return of persons under
disability

If the taxpayer is unable to make his own return, the return may be made by his duly
authorized agent or representative or by the guardian or other person charged with the care
of his person or property, the principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties provided for erroneous, false or
fraudulent returns.500

(2)Who are not required to file

The following individuals shall not be required to file an income tax return;

(a) An individual whose gross income does not exceed his total personal and
additional exemptions for dependents under Section 35:501 Provided, That a citizen of the
Philippines and any alien individual engaged in business or practice of profession within the
Philippine shall file an income tax return, regardless of the amount of gross income;

(b) An individual with respect to pure compensation income, as defined in Section

32 (A)(1),502 derived from sources within the Philippines, the income tax on which has been
correctly withheld under the provisions of Section 79503 of this Code: Provided, That an
individual deriving compensation concurrently from two or more employers at any time
during the taxable year shall file an income tax return: Provided, further, That an individual
whose compensation income derived from sources within the Philippines exceeds Sixty
thousand pesos (P60,000) shall also file an income tax return;

(c) An individual whose sole income has been subjected to final withholding tax
pursuant to Section 57(A)504 of this Code; and

(d) An individual who is exempt from income tax pursuant to the provisions of this
Code and other laws, general or special.

The foregoing notwithstanding, any individual not required to file an income tax
return may nevertheless be required to file an information return pursuant to rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.505

500
Id., (F)
501
supra
502
Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items.
503
supra
504
Id.
505
Id., (A)(2)

147
 b) Where to file

Except in cases where the Commissioner otherwise permits, the return shall be filed
with an authorized agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which such person has his legal residence
or principal place of business in the Philippines, or if there be no legal residence or place of
business in the Philippines, with the Office of the Commissioner.506

c) When to file

(1) The return of any individual specified above shall be filed on or before the
fifteenth (15th) day of April of each year covering income for the preceding taxable year.

(2) Individuals subject to tax on capital gains;

(a) From the sale or exchange of shares of stock not traded thru a local stock
exchange as prescribed under Section 24(c) shall file a return within thirty (30) days
after each transaction and a final consolidated return on or before April 15 of each
year covering all stock transactions of the preceding taxable year; and

(b) From the sale or disposition of real property under Section 24(D507) shall
file a return within thirty (30) days following each sale or other disposition.508

2) Corporate Returns

a) Requirement for filing returns

Every corporation subject to the tax herein imposed, except foreign corporations not
engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate
quarterly income tax return and final or adjustment return in accordance with the provisions
of Chapter XII509 of this Title. The return shall be filed by the president, vice-president or
other principal officer, and shall be sworn to by such officer and by the treasurer or assistant
treasurer.510
(1) Declaration of quarterly corporate
income tax

Every corporation shall file in duplicate a quarterly summary declaration of its gross
income and deductions on a cumulative basis for the preceding quarter or quarters upon
which the income tax shall be levied, collected and paid. The tax so computed shall be
decreased by the amount of tax previously paid or assessed during the preceding quarters

506
Id., (B)
507
See Reference
508
Id., (C)
509
Quarterly Corporate Income Tax Annual Declaration and Quarterly Payments of Income Taxes
510
Sec. 52

148
and shall be paid not later than sixty (60) days from the close of each of the first three (3)
quarters of the taxable year, whether calendar or fiscal year.511

(a) Place of filing

Except as the Commissioner otherwise permits, the quarterly income tax declaration
required in Section 75512 and the final adjustment return required I Section 76 shall be filed
with the authorized agent banks or Revenue District Officer or Collection Agent or duly
authorized Treasurer of the city or municipality having jurisdiction over the location of the
principal office of the corporation filing the return or place where its main books of
accounts and other data from which the return is prepared are kept.513

(b)Time of fling

The corporate quarterly declaration shall be filed within sixty (60) days following the
close of each of the first three (3) quarters of the taxable year. The final adjustment return
shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth
(15th) day of the fourth (4th) month following the close of the fiscal year, as the case may
be.514

(2) Final adjustment return

Every corporation liable to tax shall file a final adjustment return covering the total
taxable
income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment return may be
carried over and credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash refund or issuance of a
tax credit certificate shall be allowed.515

511
Sec. 75
512
supra
513
Sec. 77 (A)
514
Id., (B)
515
Sec. 76

149
 (a) Place of filing

Except as the Commissioner otherwise permits, the quarterly income tax declaration
required inSection 75516 and the final adjustment return required in Section 76517 shall be filed
with:
a)the authorized agent banks or
b) Revenue District Officer or
c) Collection Agent or
d) duly authorized Treasurer of the city ormunicipality having jurisdiction over
the location of the principal office of the corporation filing the return or place where its
main books of accounts and other data from which the return is prepared are kept.518

(b)Time of filing

Quarterly declaration shall be filed within sixty (60) days following the close of
each of the first three (3) quarters of the taxable year.

The final adjustment return - shall be filed on or before the fifteenth (15th) day of
April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close
of the fiscal year, as the case may be.519

(3) Taxable year of corporations

A corporation may employ either calendar year or fiscal year as a basis for filing its
annual income tax return: Provided, the corporation shall not change the accounting period
employed without prior approval from the Commissioner in accordance with the provisions
of Section 47520 of this Code.521

(4)Extension of time to file return

The Commissioner may, in meritorious cases, grant a reasonable extension of time

for filing returns of income (or final and adjustment returns in case of corporations), subject
to the provisions of Section 56 of this Code.522

516
supra
517
Id.
518
Sec. 77 (A)
519
Id., (B)
520
See Reference
521
Sec. 52 (B)
522
Sec. 53

150
 b) Return of corporation contemplating
dissolution or reorganization

Every corporation shall, within thirty (30) days after the adoption by the corporation
of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of
its capital stock, including a corporation which has been notified of possible involuntary
dissolution by the Securities and Exchange Commission, or for its reorganization, render a
correct return to the Commissioner, verified under oath, setting forth the terms of such
resolution or plan and such other information as the Secretary of Finance, upon
recommendation of the commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the

Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as
may be defined by rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau
of Internal Revenue which certificate shall be submitted to the Securities and Exchange
Commission.523

c) Return on capital gains realized from sale of

shares of stock not traded in the local stock
exchange

Every corporation deriving capital gains from the sale or exchange of shares of stock
not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27
(E)(2), 28(A)(8)(c) and 28 (B)(5)(c),524 shall file a return within thirty (30) days after each
transactions and a final consolidated return of all transactions during the taxable year on or
before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable
year.525
3) Returns of receivers, trustees in bankruptcy or
assignees

In cases wherein receivers, trustees in bankruptcy or assignees are operating the

property or business of a corporation, subject to the tax imposed by this Title, such
receivers, trustees or assignees shall make returns of net income as and for such corporation,
in the same manner and form as such organization is hereinbefore required to make returns,
and any tax due on the income as returned by receivers, trustees or assignees shall be
assessed and collected in the same manner as if assessed directly against the organizations of
whose businesses or properties they have custody or control.526

523
Sec. 52 (C)
524
supra
525
Id., (D)
526
Sec. 54

151
 4) Returns of general partnerships

Every general professional partnership shall file, in duplicate, a return of its income,
except income exempt under Section 32 (B)527 of this Title, setting forth the items of gross
income and of deductions allowed by this Title, and the names, Taxpayer Identification
Numbers (TIN), addresses and shares of each of the partners.528

5) Fiduciary returns

Guardians, trustees, executors, administrators, receivers, conservators and all persons

or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the
income of the person, trust or estate for whom or which they act, and be subject to all the
provisions of this Title, which apply to individuals in case such person, estate or trust has a
gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such
fiduciary or person filing the return for him or it, shall take oath that he has sufficient
knowledge of the affairs of such person, trust or estate to enable him to make such return
and that the same is, to the best of his knowledge and belief, true and correct, and be subject
to all the provisions of this Title which apply to individuals: Provided, That a return made by
or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside;
under such rules and regulations as the Secretary of Finance, upon recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this
Section.529

b. Estate Tax Returns

1) Notice of death to be filed

In all cases of transfers subject to tax, or where, though exempt from tax, the gross
value of the estate exceeds Twenty thousand pesos (P20,000), the executor, administrator or
any of the legal heirs, as the case may be, within two (2) months after the decedent's death,
or within a like period after qualifying as such executor or administrator, shall give a written
notice thereof to the Commissioner.530

2) Estate tax returns

a) Requirements

In all cases of transfers subject to the tax imposed herein, or where, though exempt
from tax, the gross value of the estate exceeds Two hundred thousand pesos (P200,000), or
regardless of the gross value of the estate, where the said estate consists of registered or
registrable property such as real property, motor vehicle, shares of stock or other similar
property for which a clearance from the Bureau of Internal Revenue is required as a
condition precedent for the transfer of ownership thereof in the name of the transferee, the

527
supra
528
Sec. 55
529
Sec. 65
530
Sec. 89

152
executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return
under oath in duplicate, setting forth:

(1) The value of the gross estate of the decedent at the time of his death, or in case
of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in
the Philippines;

(2) The deductions allowed from gross estate in determining the estate as defined in
Section 86; and

(3) Such part of such information as may at the time be ascertainable and such
supplemental data as may be necessary to establish the correct taxes.

Provided, however, That estate tax returns showing a gross value exceeding Two
million pesos (P2,000,000) shall be supported with a statement duly certified to by a Certified
Public Accountant containing the following:

(a) Itemized assets of the decedent with their corresponding gross value at the time
of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of
his gross estate situated in the Philippines;

(b) Itemized deductions from gross estate allowed in Section 86; and

(c) The amount of tax due whether paid or still due and outstanding.531

b) Time of filing and extension of time

The Commissioner shall have authority to grant, in meritorious cases, a reasonable

extension not exceeding thirty (30) days for filing the return.532

c) Place of filing

Except in cases where the Commissioner otherwise permits, the return required
under Subsection (A) shall be filed with an authorized agent bank, or Revenue District
Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which
the decedent was domiciled at the time of his death or if there be no legal residence in the
Philippines, with the Office of the Commissioner.533

3) Discharge of executor or administrator from

personal liability

If the executor or administrator makes a written application to the Commissioner for

determination of the amount of the estate tax and discharge from personal liability therefore,
the Commissioner (as soon as possible, and in any event within one (1) year after the making

531
Sec. 90 (A)
532
Ibid., (C)
533
Ibid., (D)

153
of such application, or if the application is made before the return is filed, then within one
(1) year after the return is filed, but not after the expiration of the period prescribed for the
assessment of the tax in Section 203 shall not notify the executor or administrator of the
amount of the tax. The executor or administrator, upon payment of the amount of which he
is notified, shall be discharged from personal liability for any deficiency in the tax thereafter
found to be due and shall be entitled to a receipt or writing showing such discharge.534

a) Definition of deficiency

(a) The amount by which the tax imposed by this Chapter exceeds the amount
shown as the tax by the executor, administrator or any of the heirs upon his return; but the
amounts so shown on the return shall first be increased by the amounts previously assessed
(or collected without assessment) as a deficiency and decreased by the amount previously
abated, refunded or otherwise repaid in respect of such tax; or

(b) If no amount is shown as the tax by the executor, administrator or any of the
heirs upon his return, or if no return is made by the executor, administrator, or any heir,
then the amount by which the tax exceeds the amounts previously assessed (or collected
without assessment) as a deficiency; but such amounts previously assessed or collected
without assessment shall first be decreased by the amounts previously abated, refunded or
otherwise repaid in respect of such tax.535

c. Donors Tax Returns

1) Requirements

Any individual who makes any transfer by gift536shall, for the purpose of the said tax,
make a return under oath in duplicate. The return shall set forth:

(1) Each gift made during the calendar year which is to be included in computing net
gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by rules and regulations made
pursuant to law.537
2) Time and place of filing

The return of the donor required in this Section shall be filed within thirty (30) days
after the date the gift is made and the tax due thereon shall be paid at the time of filing.
Except in cases where the Commissioner otherwise permits, the return shall be filed and the
tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection
Officer or duly authorized Treasurer of the city or municipality where the donor was

534
Sec. 92
535
Sec. 93
536
except those which, under Section 101, are exempt from the tax provided for in this Chapter
537
Sec. 103 (A)

154
domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with
the Office of the Commissioner. In the case of gifts made by a nonresident, the return may
be filed with the Philippine Embassy or Consulate in the country where he is domiciled at
the time of the transfer, or directly with the Office of the Commissioner.538

d. VAT Returns

1) In general

Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days
following the close of each taxable quarter prescribed for each taxpayer: Provided, however,
That VAT-registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236,
shall file a return and pay the tax due thereon within twenty-five (25) days from the date of
cancellation of registration: Provided, that only one consolidated return shall be filed by the
taxpayer for his principal place of business or head office and all branches.539

2) Where to file the return540

Except as the Commissioner otherwise permits, the return shall be filed with and the
tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or
municipal Treasurer in the Philippines located within the revenue district where the taxpayer
is registered or required to register.541

e. Withholding Tax Returns

1) Quarterly returns and payments of taxes withheld

Taxes deducted and withheld under Section 57 by withholding agents shall be

covered by a return and paid to, except in cases where the Commissioner otherwise permits,
an authorized Treasurer of the city or municipality where the withholding agent has his legal
residence or principal place of business, or where the withholding agent is a corporation,
where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special
fund in trust for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within
twenty-five (25) days from the close of each calendar quarter, while the return for creditable
withholding taxes shall be filed and the payment made not later than the last day of the
month following the close of the quarter during which withholding was made: Provided,

538
Id., (B)
539
Sec. 114 (A)
540
and pay the tax
541
Id., (B)

155
That the Commissioner, with the approval of the Secretary of Finance, may require these
withholding agents to pay or deposit the taxes deducted or withheld at more frequent
intervals when necessary to protect the interest of the government.542

2) Annual information return

Every withholding agent required to deduct and withhold taxes under Section 57
shall submit to the Commissioner an annual information return containing the list of payees
and income payments, amount of taxes withheld from each payee and such other pertinent
information as may be required by the Commissioner. In the case of final withholding taxes,
the return shall be filed on or before January 31 of the succeeding year, and for creditable
withholding taxes, not later than March 1 of the year following the year for which the annual
report is being submitted. This return, if made and filed in accordance with the rules and
regulations approved by the Secretary of Finance, upon recommendation of the
Commissioner, shall be sufficient compliance with the requirements of Section 68 of this
Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required in this Subsection.543

3. Tax payments

a. Income Taxes

1) Payment, in general; time of

payment

The total amount of income tax imposed shall be paid by the person subject thereto
at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the
husbanding agents, and in their absence, the captains thereof are required to file the return
herein provided and pay the tax due thereon before their departure. Upon failure of the said
agents or captains to file the return and pay the tax, the Bureau of Customs is hereby
authorized to hold the vessel and prevent its departure until proof of payment of the tax is
presented or a sufficient bond is filed to answer for the tax due.544

2) Installment payment

When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other
than a corporation may elect to pay the tax in two (2) equal installments in which case, the
first installment shall be paid at the time the return is filed and the second installment, on or
before July 15 following the close of the calendar year. If any installment is not paid on or
before the date fixed for its payment, the whole amount of the tax unpaid becomes due and
payable, together with the delinquency penalties.545

542
Sec. 58
543
Id., (C)
544
Sec. 56 (A)(1)
545
Id., (A)(2)

156
 3) Payment of capital gains tax

The total amount of tax imposed and prescribed under Section 24 (c), 24(D),
27(E)(2), 28(A)(8)(c) and 28(B)(5)(c)546 shall be paid on the date the return prescribed
therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his
intention to avail himself of the benefit of exemption of capital gains under existing special
laws, no such payments shall be required : Provided, further, That in case of failure to qualify
for exemption under such special laws and implementing rules and regulations, the tax due
on the gains realized from the original transaction shall immediately become due and
payable, subject to the penalties prescribed under applicable provisions of this Code: Provided,
finally, That if the seller, having paid the tax, submits such proof of intent within six (6)
months from the registration of the document transferring the real property, he shall be
entitled to a refund of such tax upon verification of his compliance with the requirements
for such exemption.

In case the taxpayer elects and is qualified to report the gain by installments under
Section 49 of this Code, the tax due from each installment payment shall be paid within (30)
days from the receipt of such payments.

No registration of any document transferring real property shall be effected by the

Register of Deeds unless the Commissioner or his duly authorized representative has
certified that such transfer has been reported, and the tax herein imposed, if any, has been
paid.547

b. Estate Taxes

1) Time of payment

The estate tax imposed by Section 84 shall be paid at the time the return is filed by
the executor, administrator or the heirs.548

a) Extension of time

When the Commissioner finds that the payment on the due date of the estate tax or
of any part thereof would impose undue hardship upon the estate or any of the heirs, he may
extend the time for payment of such tax or any part thereof not to exceed five (5) years, in
case the estate is settled through the courts, or two (2) years in case the estate is settled
extrajudicially. In such case, the amount in respect of which the extension is granted shall be
paid on or before the date of the expiration of the period of the extension, and the running
of the Statute of Limitations for assessment as provided in Section 203 of this Code shall be
suspended for the period of any such extension.

546
supra
547
Id., (A)(3)
548
Sec. (91) (A)

157
 Where the taxes are assessed by reason of negligence, intentional disregard of rules
and regulations, or fraud on the part of the taxpayer, no extension will be granted by the
Commissioner.

If an extension is granted, the Commissioner may require the executor, or

administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not
exceeding double the amount of the tax and with such sureties as the Commissioner deems
necessary, conditioned upon the payment of the said tax in accordance with the terms of the
extension.549

2) Liability for payment

a) Discharge of executor or
administrator from personal
liability550

b) Definition of deficiency551

3) Payment before delivery by

executor or administrator

No judge shall authorize the executor or judicial administrator to deliver a

distributive share to any party interested in the estate unless a certification from the
Commissioner that the estate tax has been paid is shown.552

a) Payment of tax antecedent

to the transfer of shares,
bonds or rights

There shall not be transferred to any new owner in the books of any corporation,
sociedadanonima, partnership, business, or industry organized or established in the Philippines
any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or
inheritance, unless a certification from the Commissioner that the taxes fixed in this Title
and due thereon have been paid is shown.

If a bank has knowledge of the death of a person, who maintained a bank deposit
account alone, or jointly with another, it shall not allow any withdrawal from the said deposit
account, unless the Commissioner has certified that the taxes imposed thereon by this Title
have been paid: Provided, however, That the administrator of the estate or any one (1) of the
heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount
not exceeding Twenty thousand pesos (P20,000) without the said certification. For this
purpose, all withdrawal slips shall contain a statement to the effect that all of the joint

549
Id., (B)
550
See (E)(2)(b)(3), under Estate Tax Returns
551
ibid
552
Sec. 94

158
depositors are still living at the time of withdrawal by any one of the joint depositors and
such statement shall be under oath by the said depositors.553

4) Duties of certain officers and

debtors

Registers of Deeds shall not register in the Registry of Property any document
transferring real property or real rights therein or any chattel mortgage, by way of gifts inter
vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that
the tax fixed in this Title and actually due thereon had been paid is show, and they shall
immediately notify the Commissioner, Regional Director, Revenue District Officer, or
Revenue Collection Officer or Treasurer of the city or municipality where their offices are
located, of the non-payment of the tax discovered by them. Any lawyer, notary public, or any
government officer who, by reason of his official duties, intervenes in the preparation or
acknowledgment of documents regarding partition or disposal of donation intervivos or mortis
causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, Regional
Director, Revenue District Officer or Revenue Collection Officer of the place where he may
have his principal office, with copies of such documents and any information whatsoever
which may facilitate the collection of the aforementioned tax. Neither shall a debtor of the
deceased pay his debts to the heirs, legatee, executor or administrator of his creditor, unless
the certification of the Commissioner that the tax fixed in this Chapter had been paid is
shown; but he may pay the executor or judicial administrator without said certification if the
credit is included in the inventory of the estate of the deceased.554

5) Restitution of tax upon satisfaction

of outstanding obligations

If after the payment of the estate tax, new obligations of the decedent shall appear,
and the persons interested shall have satisfied them by order of the court, they shall have a
right to the restitution of the proportional part of the tax paid.555

c. Donors Taxes

1) Time and place of payment

The return of the donor required in this Section shall be filed within thirty (30) days
after the date the gift is made and the tax due thereon shall be paid at the time of filing.
Except in cases where the Commissioner otherwise permits, the return shall be filed and the
tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection
Officer or duly authorized Treasurer of the city or municipality where the donor was
domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with
the Office of the Commissioner. In the case of gifts made by a nonresident, the return may

553
Sec. 97
554
Sec. 95
555
Sec. 96

159
be filed with the Philippine Embassy or Consulate in the country where he is domiciled at
the time of the transfer, or directly with the Office of the Commissioner.556

d. VAT

1) Payment of VAT

Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days
following the close of each taxable quarter prescribed for each taxpayer: Provided, however,
That VAT-registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236,
shall file a return and pay the tax due thereon within twenty-five (25) days from the date of
cancellation of registration: Provided, That only one consolidated return shall be filed by the
taxpayer for his principal place of business or head office and all branches.

2) Where to pay the VAT

Except as the Commissioner otherwise permits, the return shall be filed with and the
tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or
municipal Treasurer in the Philippines located within the revenue district where the taxpayer
is registered or required to register.557

F. Tax Remedies under the NIRC

1. Taxpayers Remedies

a. Assessment

1) Concept of assessment

1. It is the official action of an officer authorized by law in ascertaining the amount

of tax due under the law from a taxpayer. This action necessarily involves:

a. the computation of the sum due;

b. giving notice to that effect to the taxpayer; and
c. the making, simultaneously with or sometime after the giving of notice, of a
demand upon him for the payment of the tax deficiency stated.

a) Requisites for valid assessment

a. post-reporting notice or notice for an informal conference after the tax audit
b. Pre-assessment notice, if required
c. Issuance and receipt of Notice of Assessment

556
Sec. 103 (B)
557
Sec. 114 (B)

160
 i. must be issued prior to lapse of prescriptive period
ii. the written notice must state the facts and the law upon which the
assessment is based

b) Constructive methods of income

determination

c) Inventory method for income

determination558

Assessment is made when it is mailed, released or sent.

d) Jeopardy assessment

An assessment made demanding immediate payment of the tax due without the usual
formalities in instances when the Commissioner believes that if the tax will be collected
under normal procedures, the collection of such tax is at risk which might result in loss to
the government.

Instances when jeopardy assessment may be issued:

When it shall come to the knowledge of the Commissioner that a taxpayer is:

a. retiring from business subject to tax; or

b. intending
1. to leave the Philippines or remove his property therefrom; or
2. to hide or conceal his property;
c. performing any act tending
1. to obstruct the proceedings for the collection of the tax for the past or
current quarter or year; or
2. to render the same totally or partly ineffective unless such proceedings
are begun immediately.559
3.
e) Tax delinquency and tax deficiency

Tax delinquency the taxpayer did not file a return

Tax deficiency the taxpayer filed a return but the same was deficient. Deficiency is
the difference between the tax due and the tax paid.

558
also called Net Investigatory Method
559
Sec. 6D, R.A. 8424

161
 2) Power of the Commissioner to make assessments
and prescribe additional requirements for tax
administration and enforcement

a) Power of the Commissioner to obtain

information, and to summon/examine, and
take testimony of persons

In ascertaining the correctness of any return, or in making a return when none has
been made, or in determining the liability of any person for any internal revenue tax, or in
collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or
material to such inquiry;

(B) To Obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subject to audit or investigation, or from any office or officer
of the national and local governments, government agencies and instrumentalities, including
the BangkoSentralngPilipinas and government-owned or -controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional operating headquarters
of multinational companies, joint accounts, associations, joint ventures of consortia and
registered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books of
accounts and other accounting records containing entries relating to the business of the
person liable for tax, or any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons and to produce such
books, papers, records, or other data, and to give testimony;

D) To take such testimony of the person concerned, under oath, as may be relevant
or material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time of
any revenue district or region and inquire after and concerning all persons therein who may
be liable to pay any internal revenue tax, and all persons owning or having the care,
management or possession of any object with respect to which a tax is imposed.

The provisions of the foregoing paragraphs notwithstanding, nothing in this Section

shall be construed as granting the Commissioner the authority to inquire into bank deposits
other than as provided for in Section 6(F) of this Code.560

560
Sec. 5

162
 3) When assessment is made

a) Prescriptive period for assessment

(1) False, fraudulent, and non-filing of returns

Ten (10) years after the discovery of the falsity, fraud or omission.561

b) Suspension of running of statute of

limitations

1) Periods suspended:

(a)periods for assessment in Secs. 203562 and 222563

(b) beginning of distraint or levy
(c) proceeding in court for collection

2) Grounds for suspension ofprescriptive periods:

a) Commissioner is prohibited from making the assessment or beginning

distraint or levy or a proceeding in court and for 60 days thereafter

b) Taxpayer requests for Reinvestigation which is granted

c) Taxpayer cannot be located in the address given in the return filed, except
if the taxpayer informs the Commissioner of a change in address the prescriptive
period will not be suspended

d) When the warrant is duly served upon the taxpayer and no property could
be located

e) When the taxpayer is out of the Phils.564

4) General provisions on additions to the tax

561
Sec. 222
562
See Reference
563
Ibid.
564
Sec. 223

163
 a) Civil penalties
b) Interest565

Additions to the tax consist of the:

(1) civil penalty, otherwise known as surcharge, which may either be 25% or 50 % of
the tax depending upon the nature of the violation;

(2) interesteither for a deficiency tax or delinquency as to payment;

(3) other civil penalties or administrative fines such as for failure to file certain
information returns and violations committed by withholding agents.566

5) Assessment process567

a) Tax audit

The process of examining, going over, or scrutinizing the books and records of the
taxpayer to ascertain the correctness of the tax declared and paid by the taxpayer. It can only
be performed upon a Letter of Authority issued by the Commissioner or Regional Director.

b) Notice of informal conference

565
This is an increment on any unpaid amount of tax, assessed at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed y rules and regulations, from the date prescribed for
payment until the amount is fully paid. (Sec. 249 [A], 1997 NIRC)
Interest is classified into:
1.Deficiency interest
Any deficiency in the tax due, as the term is defined in this code, shall be subject to the interest of 20%
per annum, or such higher rate as may be prescribed by rules and regulations, which shall be assessed and
collected from the date prescribed for its payment until the full payment thereof (Sec. 249 [B], 1997 NIRC)
2.Delinquency interest
This kind of interest is imposed in case of failure to pay:
(1)The amount of the tax due on any return required to be filed, or
(2)The amount of the tax due for which no return is required, or
(3)A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and
demand of the Commissioner.
566
General Considerations on the Addition to tax
a. Additions to the tax or deficiency tax apply to all taxes, fees, and charges imposed in the Tax Code.
b. The amount so added to the tax shall be collected at the same time, in the same manner, and as part
of the tax.
c. If the withholding agent is the government or any of its agencies, political subdivisions or
instrumentalities, or a government owned or controlled corporation, the employee thereof responsible
for the withholding and remittance of the tax shall be personally liable for the additions to the tax
prescribed (Sec. 247[b], 1997 NIRC) such as the 25% surcharge and the 20% interest per annum on the
delinquency (Secs. 248 and 249 [C], 1997 NIRC)
567
Assessments Prima facie correct Tax assessments by tax examiners are presumed correct and made in
good faith. The taxpayer has the duty to prove otherwise. (Sy Po v. CTA, GRN L- 81446 August 18, 1988.)

164
 A written notice informing a taxpayer that the findings of the audit conducted on his
books of accounts and accounting records indicate that additional taxes or deficiency
assessments have to be paid

- If, after the culmination of an audit, a Revenue Officer recommends the imposition
of deficiency tax assessments, this recommendation is communicated by the Bureau to the
taxpayer concerned during an informal conference called for this purpose, the taxpayer shall
have 15 days from receipt of the notice of informal conference to explain his side.

c) Issuance of preliminary assessment notice

(PAN)

Communication issued by the Regional Assessment Division or any other concerned

BIR office, informing a taxpayer who has been audited of the findings of the Revenue
Officer, following the review of these findings. The assessment shall be in writing, and
should inform the taxpayer of the law and the facts on which the assessment is made;
otherwise, the assessment is void.

- If the taxpayer disagrees with the findings in the PAN, he has 15 days to file a
written reply contesting the proposed assessment.

d) Exceptions to Issuance of PAN

(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and automatically
applied the same amount claimed against the estimated tax liabilities for the taxable quarter
or quarters of the succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) When the article locally purchased or imported by an exempt person, such as, but
not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded
or transferred to non-exempt persons.568

e) Reply to PAN
568
Sec. 228

165
 Within a period to be prescribed by implementing rules and regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall issue an assessment based on his
findings.569

f) Issuance of formal letter of demand and

assessment notice/final assessment notice570

Notice of Assessment is a formal letter of demand where a declaration of deficiency

taxes is issued to a taxpayer who fails to respond to a pre-assessment notice within the
prescribed period of time, or whose reply to the PAN was found to be without merit. This is
commonly known as the Final Assessment Notice. An assessment contains not only a
computation of under declaration of taxable sales, receipts or income, OR a substantial
overstatement of deductions.
g) Disputed assessment

Taxpayer or his duly authorized representative may administratively protest against a

Formal Letter of Demand and Assessment notice within thirty (30) days from date of receipt
thereof.

If the protest is denied in whole or part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by the
decision or inaction may appeal to the CTA within 30 days from receipt of the said decision,
or from lapse of the one hundred (180)-day period: otherwise, the decision shall become
final and executor.

j) Administrative decision on a disputed

assessment

Adverse decision or ruling rendered by theCommissioner of Internal Revenue

indisputed assessment or claim for taxrefund or credit, taxpayer may appeal thesame
within thirty (30) days after receipt.571

Appeal equivalent to a judicial action.

569
570
GENERAL RULE: Taxes are self-assessing and do
not require the issuance of an assessment notice in
order to establish the tax liability of a taxpayer.
Exceptions:
1. Tax period of a taxpayer is terminated (sec.
6d, NIRC)
2. Deficiency tax liability arising from a tax audit conducted by a BIR (sec 56b, NIRC)
3. Tax lien (sec. 219, NIRC)
4. Dissolving Corporation (sec. 52c, NIRC
571
Sec. 11, R.A. No. 1125

166
 In the absence of appeal, the decision becomes final and executory. But where the
taxpayer adversely affected has not received the decision or ruling, he could not appeal the
same to the CTA within 30 days from notice. Hence, it could not become final and
executory.572

Motion for reconsideration suspends the running of the 30 - day period of

perfectingan appeal. Must advance new grounds notpreviously alleged to toll the
reglementaryperiod; otherwise, it would be merely pro-forma.573

6) Protesting assessment

a) Protest574 of assessment by taxpayer

(1) Protested assessment

(2) When to file a protest

Filing a request for reconsideration575 or reinvestigation576within 30 days from receipt

of assessment.

(3) Forms of protest

1. It is made in writing, and addressed to the Commissioner of Internal Revenue.

2. It contains information as specified in RR12-85.

3. It states the facts, applicable law, rules and regulations or jurisprudence on which
his protest is based, otherwise the protest shall be considered void and without force and
effect.
4. It is filed within the period prescribed by law.

b) Submission of documents within 60 days

from filing of protest

Within 60 days from filing, all relevant documents should be filed, otherwise
assessment becomes final and cannot be appealed.577

572
Republic vs. De la Rama, 18 SCRA 861
573
Roman Catholic Archbishop vs. Coll., L-16683, Jan. 31, 1962
574
A protest is a vital document which is a formal declaration of resistance of the taxpayer. It is a
repository of all arguments. It can be used in court in case of administrative remedies have been
exhausted. It is also the formal act of the taxpayer questioning the official actuations of the CIR. This is
equivalent to a pleading.
575
a plea for re-evaluation of the assessment on the basis of existing records without need of additional
evidence.Involves a question of fact or law or both. (Revenue Regulation No. 12-85)
576
a plea for re-evaluation of an assessment on the basis of newly discovered or additional evidence that a
taxpayer intends to present in the reinvestigation. Involves a question of fact or law or both
577
Sec 228
Submission of documents within the 60 days period is optional to the taxpayer. The relevant supporting
documents mentioned in the law refers to such documents which the taxpayer feels would be necessary

167
 c) Effect of failure to protest578

7) Rendition of decision by Commissioner

a) Denial of protest579

(1) CIRs actions equivalent to denial

of protest

(a) Filing of criminal action

against taxpayer
(b) Issuing a warrant of
distraint and levy

These actions of the CIR serve as bases for appeal to the CTA.

(2)Inaction by Commissioner

The protest is not acted upon by the Commissioner within 180 days from
submission of documents.

8) Remedies of taxpayer to action by Commissioner

a) In case of denial of protest

Appeal of Protest to the Court of Tax Appeals (CTA) within 30 days from receipt of
decision denying the protest.

to support his protest and not what the Commissioner feels should be submitted, otherwise the taxpayer
would always be at the mercy of the BIR which may require production of such documents which taxpayer
could not produce. (Standard Chartered Bank v. CTA, Case No. 5696, Aug. 16, 2001)
578
See b), supra
579
1. Direct Denial
The decision of the Commissioner or his duly rep shall (a) state the facts, applicable law, rules and
regulations or jurisprudence on which his protest is based, otherwise the protest shall be considered void
and without force and effect, in which case the same shall not be considered a decision a disputed
assessment and (b) that the same is his final decision. (sec. 3.1.5, RR 12-99)
2. Indirect Denial
a. Commissioner did not rule on the taxpayers MR of the assessment it was only when respondent
received summons on the civil action for the collection of deficiency income tax that the period to appeal
commenced to run. (CIR vs. Union Shipping Corp.)
b. Referral by the Commissioner of request for reinvestigation to the Solicitor General (Republic vs. Lim
TianTeng Sons)
c. Reiterating the demand for immediate payment of the deficiency tax due to taxpayers continued
refusal to execute waiver (CIR vs. Ayala Securities Corp.)
d. Preliminary collection letter may serve as assessment notice (United Intl Pictures vs. CIR)

168
 b) In case of inaction by Commissioner within
180 days from submission of documents

Appeal of Protest to the Court of Tax Appeals (CTA)30 days from the lapse of 180
day period.

c) Effect of failure to appeal

The decision shall be final, executory and demandable.

b. Collection

1) Requisites

2) Prescriptive periods

Local taxes, fees or charges may be collected within five years from the date of
assessment by administrative or judicial action. No such action shall be instituted after the
expiration of such period.580

3) Distraint of personal property including

garnishment

a) Summary remedy of distraint of personal

property
(1) Procedure for distraint and
garnishment

The officer serving the warrant of distraint shall make or cause to be made an
account of the goods, chattels, effects or other personal property distrained, a copy of which,
signed by himself, shall be left either with the owner or person from whose possession such
goods, chattels, or effects or other personal property were taken, or at the dwelling or place
of business of such person and with someone of suitable age and discretion, to which list
shall be added a statement of the sum demanded and note of the time and place of sale.

Stocks and other securities shall be distrained by serving a copy of the warrant of
distraint upon the taxpayer and upon the president, manager, treasurer or other responsible
officer of the corporation, company or association, which issued the said stocks or securities.

Debts and credits shall be distrained by leaving with the person owing the debts or
having in his possession or under his control such credits, or with his agent, a copy of the
warrant of distraint. The warrant of distraint shall be sufficient authority to the person
owning the debts or having in his possession or under his control any credits belonging to
the taxpayer to pay to the Commissioner the amount of such debts or credits.

580
sec. 194, LGC

169
 Bank accounts shall be garnished by serving a warrant of garnishment upon the
taxpayer and upon the president, manager, treasurer or other responsible officer of the bank.
Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner
so much of the bank accounts as may be sufficient to satisfy the claim of the Government.581

(2) Sale of property distrained and

disposition of proceeds

The Revenue District Officer or his duly authorized representative, other than the
officer referred to in Section 208 of this Code shall, according to rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
forthwith cause a notification to be exhibited in not less than two (2) public places in the
municipality or city where the distraint is made, specifying; the time and place of sale and the
articles distrained. The time of sale shall not be less than twenty (20) days after notice. One
place for the posting of such notice shall be at the Office of the Mayor of the city or
municipality in which the property is distrained.

At the time and place fixed in such notice, the said revenue officer shall sell the
goods, chattels, or effects, or other personal property, including stocks and other securities
so distrained, at public auction, to the highest bidder for cash, or with the approval of the
Commissioner, through duly licensed commodity or stock exchanges.

In the case of Stocks and other securities, the officer making the sale shall execute a
bill of sale which he shall deliver to the buyer, and a copy thereof furnished the corporation,
company or association which issued the stocks or other securities. Upon receipt of the copy
of the bill of sale, the corporation, company or association shall make the corresponding
entry in its books, transfer the stocks or other securities sold in the name of the buyer, and
issue, if required to do so, the corresponding certificates of stock or other securities.

Any residue over and above what is required to pay the entire claim, including
expenses, shall be returned to the owner of the property sold. The expenses chargeable upon
each seizure and sale shall embrace only the actual expenses of seizure and preservation of
the property pending ;the sale, and no charge shall be imposed for the services of the local
internal revenue officer or his deputy.582

(a) Release of distrained

property upon payment prior
to sale

If at any time prior to the consummation of the sale all proper charges are paid to
the officer conducting the sale, the goods or effects distrained shall be restored to the
owner.583

581
Sec. 208
582
Sec. 209
583
Sec. 210

170
 (3)Purchase by the government at sale
upon distraint

When the amount bid for the property under distraint is not equal to the amount of
the tax or is very much less than the actual market value of the articles offered for sale, the
Commissioner or his deputy may purchase the same in behalf of the national Government
for the amount of taxes, penalties and costs due thereon.

Property so purchased may be resold by the Commissioner or his deputy, subject to

the rules and regulations prescribed by the Secretary of Finance, the net proceeds therefrom
shall be remitted to the National Treasury and accounted for as internal revenue.584

(4) Report of sale to BIR

Within two (2) days after the sale, the officer making the same shall make a report of
his proceedings in writing to the Commissioner and shall himself preserve a copy of such
report as an official record.585
(5) Constructive distraint to protect
the interest of the government

To safeguard the interest of the Government, the Commissioner may place under
constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his
opinion, is retiring from any business subject to tax, or is intending to leave the Philippines
or to remove his property therefrom or to hide or conceal his property or to perform any act
tending to obstruct the proceedings for collecting the tax due or which may be due from
him.

The constructive distraint of personal property shall be affected by requiring the

taxpayer or any person having possession or control of such property to sign a receipt
covering the property distrained and obligate himself to preserve the same intact and
unaltered and not to dispose of the same ;in any manner whatever, without the express
authority of the Commissioner.

In case the taxpayer or the person having the possession and control of the property
sought to be placed under constructive distraint refuses or fails to sign the receipt herein
referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a
list of such property and, in the presence of two (2) witnessed, leave a copy thereof in the
premises where the property distrained is located, after which the said property shall be
deemed to have been placed under constructive distraint.586

584
Sec. 212
585
Sec. 211
586
Sec. 206

171
 4) Summary remedy of levy on real property

a) Advertisement and sale

Within twenty (20) days after levy, the officer conducting the proceedings shall
proceed to advertise the property or a usable portion thereof as may be necessary to satisfy
the claim and cost of sale; and such advertisement shall cover a period of a least thirty (30)
days. It shall be effectuated by posting a notice at the main entrance of the municipal
building or city hall and in public and conspicuous place in the barrio or district in which the
real estate lies and ;by publication once a week for three (3) weeks in a newspaper of general
circulation in the municipality or city where the property is located. The advertisement shall
contain a statement of the amount of taxes and penalties so due and the time and place of
sale, the name of the taxpayer against whom taxes are levied, and a short description of the
property to be sold. At any time before the day fixed for the sale, the taxpayer may
discontinue all proceedings by paying the taxes, penalties and interest. If he does not do so,
the sale shall proceed and shall be held either at the main entrance of the municipal building
or city hall, or on the premises to be sold, as the officer conducting the proceedings shall
determine and as the notice of sale shall specify.

Within five (5) days after the sale, a return by the distraining or levying officer of the
proceedings shall be entered upon the records of the Revenue Collection Officer, the
Revenue District officer and the Revenue Regional Director. The Revenue Collection
Officer, in consultation with the Revenue district Officer, shall then make out and deliver to
the purchaser a certificate from his records, showing the proceedings of the sale, describing
the property sold stating the name of the purchaser and setting out the exact amount of all
taxes, penalties and interest: Provided, however, That in case the proceeds of the sale
exceeds the claim and cost of sale, the excess shall be turned over to the owner of the
property.

The Revenue Collection Officer, upon approval by the Revenue District Officer
may, out of his collection, advance an amount sufficient to defray the costs of collection by
means of the summary remedies provided for in this Code, including ;the preservation or
transportation in case of personal property, and the advertisement and subsequent sale, both
in cases of personal and real property including improvements found on the latter. In his
monthly collection reports, such advances shall be reflected and supported by receipts.587

b) Redemption of property sold

Within one (1) year from the date of sale, the delinquent taxpayer, or any one for
him, shall have the right of paying to the Revenue District Officer the amount of the public
taxes, penalties, and interest thereon from the date of delinquency to the date of sale,
together with interest on said purchase price at the rate of fifteen percent (15%) per annum
from the date of purchase to the date of redemption, and such payment shall entitle the
person paying to the delivery of the certificate issued to the purchaser and a certificate from
the said Revenue District Officer that he has thus redeemed the property, and the Revenue
District Officer shall forthwith pay over to the purchaser the amount by which such
587
Sec. 213

172
property has thus been redeemed, and said property thereafter shall be free form the lien of
such taxes and penalties.

The owner shall not, however, be deprived of the possession of the said property
and shall be entitled to the rents and other income thereof until the expiration of the time
allowed for its redemption.588

c) Final deed of purchaser

In case the taxpayer shall not redeem the property as herein provided the Revenue
District Officer shall, as grantor, execute a deed conveying to the purchaser so much of the
property as has been sold, free from all liens of any kind whatsoever, and the deed shall
succintly recite all the proceedings upon which the validity of the sale depends.589

5) Forfeiture to government for want of bidder

a) Remedy of enforcement of forfeitures

(1)Action to contest forfeiture of

chattel

In case of the seizure of personal property under claim of forfeiture, the owner
desiring to contest the validity of the forfeiture may, at any time before sale or destruction of
the property, bring an action against the person seizing the property or having possession
thereof to recover the same, and upon giving proper bond, may enjoin the sale; or after the
sale and within six (6) months, he may bring an action to recover the net proceeds realized at
the sale.590

b) Resale of real estate taken for taxes

The Commissioner shall have charge of any real estate obtained by the Government
of the Philippines in payment or satisfaction of taxes, penalties or costs arising under this
Code or in compromise or adjustment of any claim therefore, and said Commissioner may,
upon the giving of not less than twenty (20) days notice, sell and dispose of the same of
public auction or with prior approval of the Secretary of Finance, dispose of the same at
private sale. In either case, the proceeds of the sale shall be deposited with the National
Treasury, and an accounting of the same shall rendered to the Chairman of the Commission
on Audit.591

c) When property to be sold or destroyed

Sales of forfeited chattels and removable fixtures shall be effected, so far as

practicable, in the same manner and under the same conditions as the public notice and the

588
Sec. 214
589
Sec. 202
590
Sec. 231
591
Sec. 216

173
time and manner of sale as are prescribed for sales of personal property distrained for the
non-payment of taxes.

Distilled spirits, liquors, cigars, cigarettes, other manufactured products of tobacco,

and all apparatus used I or about the illicit production of such articles may, upon forfeiture,
be destroyed by order of the Commissioner, when the sale of the same for consumption or
use would be injurious to public health or prejudicial to the enforcement of the law.

All other articles subject to excise tax, which have been manufactured or removed in
violation of this Code, as well as dies for the printing or making of internal revenue stamps
and labels which are in imitation of or purport to be lawful stamps, or labels may, upon
forfeiture, be sold or destroyed in the discretion of the Commissioner.

Forfeited property shall not be destroyed until at least twenty (20) days after
seizure.592

d) Disposition of funds recovered in legal

proceedings or obtained from forfeiture

All judgments and monies recovered and received for taxes, costs, forfeitures, fines
and penalties shall be paid to the Commissioner or his authorized deputies as the taxes
themselves are required to be paid, and except as specially provided, shall be accounted for
and dealt with the same way.593

6) Further distraint or levy

The remedy by distraint of personal property and levy on realty may be repeated if
necessary until the full amount due, including all expenses, is collected.594

7) Tax lien

A legal claim or charge on property, either real or personal, established by law as a

security in default of the payment of taxes.

1. Nature:

A lien in favor of the government of the Philippines when a person liable to pay a
tax neglects or fails to do so upon demand.

592
Sec. 225
593
Sec. 226
594
Sec. 217
Otherwise, a clever taxpayer who is also able to conceal most of the valuable part of his property
would escape payment of his tax liability by sacrificing an insignificant portion of his holdings.

174
 2. Duration:

Exists from time assessment is made by the CIR until paid, with interests, penalties
and costs.

1. Extent:
Upon all property and rights to property belonging to the taxpayer.

2. Effectivity against third persons:

Only when notice of such lien is filed by the CIR in the Register of Deeds concerned.

8) Compromise

a) Authority of the Commissioner to

compromise and abate taxes

(A) Compromise the payment of any internal revenue tax, when:

(1) A reasonable doubt as to the validity of the claim against the taxpayer
exists; or
(2) The financial position of the taxpayer demonstrates a clear inability to pay
the assessed tax.

The compromise settlement of any tax liability shall be subject to the following
minimum amounts:

For cases of financial incapacity, a minimum compromise rate equivalent to ten

percent (10%) of the basic assessed tax; and

For other cases, a minimum compromise rate equivalent to forty percent (40%) of
the basic assessed tax.

Where the basic tax involved exceeds One million pesos (P1,000.000) or where the
settlement offered is less than the prescribed minimum rates, the compromise shall be
subject to the approval of the Evaluation Board which shall be composed of the
Commissioner and the four (4) Deputy Commissioners

(B) Abate or cancel a tax liability, when:

(1) The tax or any portion thereof appears to be unjustly or excessively

assessed; or

(2) The administration and collection costs involved do not justify the
collection of the amount due.

175
 All criminal violations may be compromised except: (a) those already filed in court,
or (b) those involving fraud.595

9) Civil and criminal actions

a) Suit to recover tax based on false or

fraudulent returns

If tax is collected under an assessment that the list, statement or return is

false/fraudulently made, it cannot be recovered by any suit unless it is proved that the said
list, statement or return was not false nor fraudulent & did not contain any understatement
or undervaluation

Not applicable to statements or returns made or to be made in good faith regarding

annual depreciation of oil or gas wells & mines.

c. Refund596

1) Grounds and requisites for refund

a) Taxes erroneously or illegally received

b)Penalties imposed without authority
c) Any sum alleged to have been excessively or in any manner wrongfully collected
d) Refund the value of internal revenue stamps when returned in good condition
by the purchaser
e) Redeem or change unused stamps renderedunfit for use and refund their value
upon proof of destruction, in the discretion of the Commission

2) Requirements for refund as laid down by cases

a) Necessity of written claim for refund

This requirement is mandatory.597

595
Sec. 204 (A)(B)
596
A suit or proceedings for tax refund may be maintained whether or not such tax, penalty or sum has
been paid under protest or duress (Sec. 229)
Similarly, payment under protest is not necessary in refund for local taxes. (Sec. 196 LGC),
however, under protest is necessary to claim for
(a)real property taxes (Sec. 252 LGC)
(b)custom duties (Sec 2308 TCC
597
Reasons:
a) to afford the commissioner an opportunity to correct the action of subordinate officer and
(b) to notify the government that the taxes sought to be refunded are under question and that,
therefore, such notice should then be borne in mind in estimating the revenue available for
expenditure(Bermejo vs. CIR 87 Phil 96)

176
 Except:

Tax credit or tax refund where onthe face of the return upon which paymentis made,
such payment appears clearly tohave been erroneous.598

b) Claim containing a categorical demand for

reimbursement

Categorical demand for reimbursement.

c) Filing of administrative claim for refund

and the suit/proceeding before the CTA
within 2 years from date of payment
regardless of any supervening cause599

Requirement a condition precedent andnon-compliance therewith bars recovery.600

Refers not only to the administrativeclaim that the taxpayer should file within
2years from date of payments with the BIR,but also the judicial claim or the action forrefund
the taxpayer should commencewith the CTA.601

3) Legal basis of tax refunds

Legal principle of quasi-contracts or solutioindebiti.602

The Government is within the scope of the principle of solutioindebiti.603

4) Statutory basis for tax refund under the Tax Code

a) Scope of claims for refund

The Commissioner may credit or refund taxes:

a) Erroneously or illegally assessed or collected internal revenue taxes

b) Penalties imposed without authority
c) Any sum alleged to have been excessive or in any manner wrongfully collected.604

b) Necessity of proof for claim or refund

Refund claim partakes of the nature of an exemption which cannot be allowed unless
granted in the most explicit and categorical language.605

598
Sec. 229
599
Secs.204 (c) & 229
600
Phil. Acetylene Co. Inc, vs. Commissioner,CTA Case No. 1321, Nov. 7, 1962
601
seeGibbs vs.. Collector of Internal Revenue, 107 Phil 232
602
see Art. 2142 & 2154, CC
603
CIR vs. Firemans Fund Insurance Co
604
Secs. 204 and 209

177
 Failure to discharge burden of giving proof is fatal to claim.

It must be shown that payment was an independent single act of voluntary

payment of a tax believed to be due, collectible and accepted by the government, and
which therefore, become part of the state moneys subject to expenditure and perhaps
already spent or appropriated.606

c) Burden of proof for claim of refund

Written claim for refund or tax creditfiled by the taxpayer with the Commissioner.

d) Nature of erroneously paid tax/illegally

assessed collected

Taxpayer pays under the mistake of fact, as for instance in a case where he is not
aware of the existing exemption in his favor at the time payments were made.

A tax is illegally collected if payments are made under duress.

e) Tax refund vis--vis tax credit607

A tax refund requires a physical return of the sum erroneously paid by the taxpayer.

The taxpayer to whom the tax is refunded would have the option, among others, to
invest for profit the returned sum, an option not proximately available if the taxpayer
chooses instead to receive a tax credit.608

Tax credit generally refers to an amount that is subtracted directly from ones total
tax liability, an allowance against the tax itself, or a deduction from what is owned.

A tax credit reduces the tax due, including whenever applicable the income tax
that is determined after applying the corresponding tax rates to taxable income.609

f) Essential requisites for claim of refund

a. The claim is filed with the Commissioner of Internal Revenue within the two-year
period from the date of the payment of the tax.
b. It is shown on the return of the recipient that the income payment received was
declared as part of the gross income; and

605
CIR vs. Johnson and Sons
606
CIR vs. Li Yao, L-11875,Dec. 28, 1963
607
It may be that there is no essential difference between a tax refund and a tax credit since both are
moves of recovering taxes erroneously or illegally paid to the government. (Commissioner of Customs v.
Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004)
608
Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, ibid.
609
Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15,2005

178
 c. The fact of withholding is established by a copy of a statement duly issued by the
payee showing the amount paid and the amount of tax withheld therefrom.610

5) Who may claim/apply for tax refund/tax credit

a) Taxpayer/withholding agents of non-

resident foreign corporation

A withholding agent is subject to and liable for deficiency assessments, surcharges

and penalties should the amount of the tax withheld be finally found to be less than the
amount that should have been withheld under the law. A person liable for tax has been
held to be a person subject to tax and properly considered a taxpayer. xxx By any
reasonable standard, such a person should be regarded as a party in interest, or as a person
having sufficient legal interest, to bring a suit for refund of taxes.611

6) Prescriptive period for recovery of tax erroneously

or illegally collected

Two (2) years from the date of payment of the tax or penalty.

7) Other consideration affecting tax refunds

a) Taxpayer may file an action for refund inthe CTA even before the
Commissionerdecides his pending claim in the BIR.612

b) Suspension of the 2-year prescriptive period may be had when:

i. there is a pending litigation between the two parties (government and taxpayer) as
to the proper tax to be paid and of the proper interpretation of the taxpayers charter in
relation to the disputed tax; and

ii.the commissioner in that litigated case agreed to abide by the decision of the
Supreme Court as to the collection of taxes relative thereto.613

c) Even if the 2-year period has lapsed thesame is not jurisdictional and may
besuspended for reasons of equity and other special circumstances.614

d) 2-year prescriptive period for filing of tax refund or credit claim computed from
date of payment of tax of penalty except in the following:

610
Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007
611
CIR vs. Procter and Gamble PMC, 204 SCRA 377
612
Commissioner of Internal Revenue vs. Palanca, Jr., L-16626, Oct. 29, 1966
613
Panay Electric Co., Inc. vs. Collector of Internal Revenue, 103 Phil. 819
614
CIR vs. Phil. American Life Ins. Co., G.R. No. 105208, May 29, 1995

179
 i. Corporations:

2-year prescriptive period for overpaid quarterly income tax is counted not
from the date the corporation files its quarterly income tax return, but from the date
the final adjusted return is filed after the taxable year.615

ii. Taxes payable in installment:

2-year period is counted form the payment of the last installment.616

iii. Withholding Taxes

Prescriptive period counted not from the date the tax is withheld and
remitted to the BIR, but from the end of the taxable year.617

iv. VAT Registered Person whose sales are zero-rated or effectively zero-rated

2-year period computed from the end of the taxable quarter when the sales
transactions were made.618

e) Interest on Tax Refund:

The Government cannot be required topay interest on taxes refunded to the

taxpayerunless:

i.The Commissioner acted with patent arbitrariness619

ii. In case of Income Tax withheld on the wages of employees.620

615
Commissioner of Internal Revenue vs. TMX Sales, Inc., G.R. No.83736, Jan. 15, 1992
616
CIR vs. Palanca, Jr., supra
617
Gibbs vs. Commissioner of Internal Revenue, supra
618
Sec. 112 (A)
619
Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions (CIR vs.Victorias
Milling Corp., Inc. L-19607, Nov. 29,1966)
620
Any excess of the taxes withheld over the tax due from the taxpayer shall be returned orcredited within
3 months from the fifteenth (15th)day of April. Refund or credit after such time earn interest at the rate
of 6% per annum, starting after the lapse of the 3-month period to the date the refund or credit is made
(Sec 79 (c) (2))

180
 2. Government Remedies

a. Administrative remedies

1) Tax lien621

2) Levy and sale of real property

Levy Act of seizure of real property in order to enforce the payment of taxes. The
property may be sold at public sale, if after seizure; the taxes are not voluntarily paid.

The requisites are the same as that of distraint.

Procedure:

1.
International Revenue officer shall prepare a duly authenticated certificate showing
a. Name of taxpayer
b. Amount of tax and
c. Penalty due.
- enforceable throughout the Philippines
2. Officer shall write upon the certificate a description of the property upon which levy is made.
3. Service of written notice to:
a. The taxpayer, and
b. RD where property is located.
4. Advertisement of the time and place of sale.
5. Sale at public auction to highest bidder.
6. Disposition of proceeds of sale.
The excess shall be turned over to owner

3) Forfeiture of real property to the government for

want of bidder

Forfeiture: Implies a divestiture of property without compensation, in consequence

of a default or offense.

Includes the idea of not only losing but also having the property transferred to another
without the consent of the owner and wrongdoer.

1. Effect: Transfer the title to the specific thing from the owner to the government.
2. When available:
a. No bidder for the real property exposed for sale.
b. If highest bid is for an amount insufficient to pay the taxes, penalties and costs.
- Within two days thereafter, a return of the proceeding is duly made.
3. How enforced:
a. In case of personal property by seizure and sale or destruction of the specific
forfeited property.
b. In case of real property by a judgment of condemnation and sale in a legal action
or proceeding, civil or criminal, as the case may require.

621
See (F)(1)(b)(7), supra

181
 4) Further distraint and levy622

5) Suspension of business operation623

6) Non-availability of injunction to restrain collection

of tax

No court shall have the authority to grant an injunction to restrain the collection of
any national internal revenue tax, fee or charge imposed by this Code.624

Exception:

Injunction may be issued by the CTA in aid of its appellate jurisdiction.625

b. Judicial remedies

Civil and Criminal Actions:

1. Brought in the name of the Government of the Philippines.

2. Conducted by Legal Officer of BIR
3. Must be with the approval of the CIR, in case of action, for recovery of
taxes, or enforcement of a fine, penalty or forfeiture.

A. Civil Action

Actions instituted by the government to collect internal revenue taxes in

regular courts (RTC or MTCs, depending on the amount involved)
When assessment made has become final and executory for failure or
taxpayer to:
a. Dispute same by filing protest with CIR
b. Appeal adverse decision of CIR to CTA

B. Criminal Action
A direct mode of collection of taxes, the judgment of which shall not only
impose the penalty but also order payment of taxes.
An assessment of a tax deficiency is not necessary to a criminal prosecution
for tax evasion, provided there is a prima facie showing of willful attempt to evade.

622
See (F)(1)(b)(6), supra
623
See (E)(1)(a)(6), supra
624
Sec. 218
625
under Sec. 11 of RA 1125, as amended by RA 9282 (when in the opinion of the Court the collection
may jeopardize the interest of the Government and/or the taxpayer, the Court any stage of the
proceeding may suspend the said collection and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than double the amount with the Court).

182
 3. Statutory Offenses and Penalties

a. Civil penalties

1) Surcharge

A civil penalty imposed by law as an addition to the main tax required to be paid. It
is not a criminal penalty but a civil administrative sanction provided primarily as safeguard
for the protection of the State revenue and to reimburse the government for the expenses of
investigation and the loss resulting from the taxpayers fraud. A surcharge added to the main
tax is subject to interest.

2) Interest

a) In General

There shall be assessed and collected on any unpaid amount of tax, interest at the
rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules
and regulations, from the date prescribed for payment until the amount is fully paid.626

b) Deficiency interest

Any deficiency in the tax due, as the term is defined in this Code, shall be subject to
the interest prescribed in Subsection (A) hereof, which interest shall be assessed and
collected from the date prescribed for its payment until the full payment thereof.627

c) Delinquency interest

In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing
in the notice and demand of the Commissioner, there shall be assessed and collected on the
unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is
fully paid, which interest shall form part of the tax.628

d) Interest on extended payment

If any person required to pay the tax is qualified and elects to pay the tax on
installment under the provisions of this Code, but fails to pay the tax or any installment
hereof, or any part of such amount or installment on or before the date prescribed for its

626
Sec. 249 (A)
627
Id., (B)
628
Id., (C)

183
payment, or where the Commissioner has authorized an extension of time within which to
pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest
at the rate hereinabove prescribed on the tax or deficiency tax or any part thereof unpaid
from the date of notice and demand until it is paid.629

4. Compromise and Abatement of taxes

a. Compromise630

Involves a mere reduction of the tax.

b. Abatement

There is a cancelation of the entire liability.

G. Organization and Function of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a. Authority of secretary of finance to promulgate rules and

regulations

The Secretary of Finance, upon recommendation of the Commissioner, shall

promulgate all needful rules and regulations for the effective enforcement of the provisions
of this Code.631

b. Specific provisions to be contained in rules and regulations

The rules and regulations of the Bureau of Internal Revenue shall, among other things,
contain provisions specifying, prescribing or defining:

(a) The time and manner in which Revenue Regional Director shall canvass their respective
Revenue Regions for the purpose of discovering persons and property liable to national internal
revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects
shall be made and kept;

(b) The forms of labels, brands or marks to be required on goods subject to an excise tax,
and the manner in which the labelling, branding or marking shall be effected;

(c) The conditions under which and the manner in which goods intended for export, which
if not exported would be subject to an excise tax, shall be labelled, branded or marked;

(d) The conditions to be observed by revenue officers respecting the institutions and
conduct of legal actions and proceedings;

629
Id., (D)
630
See I. (A)(7), under General Principles of Taxation, supra
631
Sec. 244

184
 (e) The conditions under which goods intended for storage in bonded warehouses shall be
conveyed thither, their manner of storage and the method of keeping the entries and records in
connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made
by them in connection with their supervision of such houses;

(f) The conditions under which denatured alcohol may be removed and dealt in, the
character and quantity of the denaturing material to be used, the manner in which the process of
denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake,
the bonds to be given, the books and records to be kept, the entries to be made therein, the reports
to be made to the Commissioner, and the signs to be displayed in the business ort by the person for
whom such denaturing is done or by whom, such alcohol is dealt in;

(g) The manner in which revenue shall be collected and paid, the instrument, document or
object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in
which the proper books, records, invoices and other papers shall be kept and entries therein made by
the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up
and returned after serving their purposes;

(h) The conditions to be observed by revenue officers respecting the enforcement of Title
III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts and
such other rules and regulations which the Commissioner may consider suitable for the enforcement
of the said Title III;

(i) The manner in which tax returns, information and reports shall be prepared and reported
and the tax collected and paid, as well as the conditions under which evidence of payment shall be
furnished the taxpayer, and the preparation and publication of tax statistics;

(j) The manner in which internal revenue taxes, such as income tax, including withholding
tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and documentary
stamp taxes shall be paid through the collection officers of the Bureau of Internal Revenue or
through duly authorized agent banks which are hereby deputized to receive payments of such taxes
and the returns, papers and statements that may be filed by the taxpayers in connection with the
payment of the tax: Provided, however, That notwithstanding the other provisions of this Code
prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and
regulations, require that the tax returns, papers and statements that may be filed by the taxpayers in
connection with the payment of the tax. Provided, however, That notwithstanding the other
provisions of this Code prescribing the place of filing of returns and payment of taxes, the
Commissioner may, by rules and regulations require that the tax returns, papers and statements and
taxes of large taxpayers be filed and paid, respectively, through collection officers or through duly
authorized agent banks: Provided, further, That the Commissioner can exercise this power within six
(6) years from the approval of Republic Act No. 7646 or the completion of its comprehensive
computerization program, whichever comes earlier: Provided, finally, That separate venues for the
Luzon, Visayas and Mindanao areas may be designated for the filing of tax returns and payment of
taxes by said large taxpayers.

c. Non-retroactivity of rulings

Any revocation, modification or reversal of any of the rules and regulations

promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the

185
revocation, modification or reversal will be prejudicial to the taxpayers, except in the
following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.632

2. Power of the Commissioner to suspend the business operation of

a taxpayer633

III. Local Government Code of 1991, as amended

A. Local Government Taxation634

1. Fundamental principles

1. Taxation shall be uniform635 in each LGU

2. Taxes, fees, charges and other impositions shall be:

a. Equitable and based on the taxpayers ability to pay.

b. For public purpose.636
c. Not unjust, excessive, oppressive or confiscatory.
d. Not contrary to law, public policy, national economic policy, or in
restraint of trade.

3. Not let to any private person

4.Not inure solely to the local government levying
5. Each LGU shall, as far as practicable, evolve a progressive system of taxation.

632
Sec. 246
633
See (E)(1)(a)(6), under Compliance Requirements (Internal Revenue Taxes), supra
634
The power to tax which may be exercised by local legislative bodies is no longer merely by nature of a
valid delegation as before but pursuant to direct authority conferred by Sec. 5, Art X of the Constitution
(MactanCebyIntnl Airport vs Marcos, G.R. No. 120082, Sept 11, 1996)
Where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines. The basic rationale for the current
rule is to safeguard the viability and self-sufficiency of local government units by directly granting them
general and broad tax power (MERALCO vs Prov. of Laguna, G.R. No 131359, May 5, 1999
635
Uniformity of Taxation Equality and uniformity of local taxation is that all taxable articles of the same
class shall be taxed at the same rate within the same territorial jurisdiction of the taxing authority.
636
Public Purpose Proceeds obtained are to be used to support the existence of the
LGU.

186
 Just Taxation Municipal corporations are allowed a wide range in determining tax
rates of imposable taxes and license fees.

2. Nature and source of taxing power

a. Grant of local taxing power under the Local Government

Code

Each local government unit shall exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with
the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to
the local government units.637

b. Authority to prescribe penalties for tax violations

The sanggunian of a local government unit is authorized to prescribe fines or other

penalties for violation of tax ordinances but in no case shall such fines be less than One
thousand pesos (P1,000.00) nor more than Five thousand pesos (P5,000.00), nor shall
imprisonment be less than one (1) month nor more than six (6) months. Such fine or other
penalty, or both, shall be imposed at the discretion of the court. The sangguniang barangay may
prescribe a fine of not less than One hundred pesos (P100.00) nor more than One thousand
pesos (P1,000.00).638

c. Authority to grant local tax exemptions

Local government units may, through ordinances duly approved, grant tax
exemptions, incentives or reliefs under such terms and conditions as they may deem
necessary.639

d. Withdrawal of exemptions

Unless otherwise provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical, including government-owned
or -controlled corporations, except local water districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.640

637
Sec. 129
638
Sec. 516
639
Sec. 192, LGC
640
Sec. 193

187
 e. Authority to adjust local tax rates

LGUs are given authority to adjust the tax rates, but the adjustment should be made
not oftener than once every 5 years but in no case shall the adjustment exceed 10% of the
rates fixed under the LGC 10% of the rates fixed under the LGC.641

f. Residual taxing power of local governments

The power to tax which may be exercised by local legislative bodies is no longer
merely by nature of a valid delegation as before but pursuant to direct authority conferred by
Sec. 5, Art X of the Constitution.642
Where there is neither a grant nor a prohibition by statute, the tax power must be
deemed to exist althoughCongress may provide statutory limitations and guidelines. The
basic rationale for the current rule is to safeguard the viability and self-sufficiency of local
government units by directly granting them general and broad tax power.643

g. Authority to issue local tax ordinances

The power to impose a tax, fee, or charge or to generate revenue under this
Codeshall be exercised by the sanggunian of the local government unit concerned through an
appropriate ordinance.644

3. Local taxing authority

a. Power to create revenues exercised thru LGUs

Local governments are authorized to impose and collect the following charges:

1. Reasonable fees and charges for services rendered.645

2. Public Utility Charges if:

a. Owned, operated and maintained

b. Within their jurisdiction646

3. Tools, Fees or Charges for:

a. Use of public road, pier or wharf, waterway bridge, ferry or

telecommunicatio system
b. Funded and constructed by the local government647
641
Sec 191

642
MactanCebyIntnl Airport vs Marcos, G.R. No. 120082, Sept 11, 1996
643
MERALCO vs Prov. of Laguna, G.R. No 131359, May 5, 1999
644
Sec. 132
645
Sec. 153
646
Sec. 154

188
 b. Procedure for approval and effectivity of tax ordinances

The procedure for approval of local tax ordinances and revenue measures shall be in
accordance with the provisions of this Code: Provided, That public hearings shall be
conducted for the purpose prior to the enactment thereof: Provided, further, That any
question on the constitutionality or legality of tax ordinances or revenue measures may be
raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice
who shall render a decision within sixty (60) days from the date of receipt of the appeal:
Provided, however, That such appeal shall not have the effect of suspending the effectivity
of the ordinance and the accrual and payment of the tax, fee, or charge levied therein:
Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the
sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party
may file appropriate proceedings with a court of competent jurisdiction.648

4. Scope of taxing power

Not Inherent Unlike a sovereign state, municipal corporations have no inherent

power to tax. Being mere creatures of law, they may exercise the power only if delegated to
them by the national legislature or conferred by the Constitution itself.

Limitations of Local Tax Power Sec. 5, Art X of the Constitution sought to

safeguard the viability and self-sufficiency of local government units. It expressly provides
the power to be subject to such limitations and guidelines as the Congress may provide.

1. The taxpayer will not be over-burdened with unreasonable impositions

2. Local taxation is to be fair, uniform and just.
3. Each LGU will have its fair share of available

5. Specific taxing power of local government unit (LGUs)

a. Taxing powers of provinces

1) Tax on transfer of real property ownership

Real Property Refers only to lands, buildings, and machineries intended by the
owner of the land or building for an industry or works which may by carried on in a building
or on a piece of land and which tend directly to meet the needs
of the industry or works.

Transaction taxed - sale, barter, or any other mode of transferring ownership of, or
title to, real property.

Rate At not more than 50% of 1% total consideration.

647
Sec. 155
648
Sec. 187

189
 Tax base
1) total consideration or
2) fair market value, whichever is higher

Exception from tax The sale, transfer or other disposition of real property
pursuant to RA 6657649is exempt from tax.

2) Tax on business of printing and publication

Transaction taxed business of printing and publication of books, cards, posters,

leaflets, handbills, certificates, receipts, pamphlets, and other similar nature

Tax Rate Not exceeding 50% of 1% of the gross annual receipts for the preceding
calendar year, in the case of newly started business, not to exceed 1/20 of 1% of the capital
investment

Exception The receipts from the printing and/ or publishing of books or other
reading materials prescribed by the DECS as school text or references are not subject to the
tax imposed

3) Franchise tax

Franchise Generally refers to a privilege conferred by the government on an

individual or corporation, which does not belong to the citizens by common right

Purpose of Franchise Tax to be in addition to the franchise tax imposed by the

national government on business which are holders of franchise except when otherwise
prohibited by law.650

Tax Rate not exceeding 50% of 1% , if newly started business, 1/20 of 1 %

Tax base gross annual receipts of preceding calendar year based on:

a) Incoming receipts, or
b) Realized within territorial jurisdiction.

4) Tax on sand, gravel and other quarry services

Tax Rate not more than 10% of fair market value

649
Comprehensive Agrarian Reform Law
650
Sec 267 (b), NIRC

190
 Issuance of Permit To permit to extract the sand, gravel and other quarry resources
shall be issued exclusively by the provincial governor pursuant to the ordinance of the
sangguniangpanlalawigan

Distribution of the Proceeds The proceeds of the tax shall be distributed as follows

a) Province 30%
b) Component city or municipality where the sand, etc are extracted 30%
c) Barangay where the sand, etc. are extracted 40%

5) Professional tax

Tax rate in such as Sanggunian may determine in no case to exceed P300

Profession a calling w/c requires the passing of an appropriate government board

or bar examination, such as the practice of law, medicine, public accounting, engineering,
etc.

Nature of Tax Professional tax applies only to natural or physical persons and not
to juridical entities. Said tax is fixed on the privilege of exercising or engaging in a profession.
The tax is not based on the amount of earnings of the taxpayer .

When paid on or before Jan. 20

Where: paid on the place where you practice your profession.651

6) Amusement tax

Amusement Pleasurable diversion and entertainment

Amusement Place Includes theaters, cinemas, concert halls, circuses and other
places of amusement where one seeks admission to entertain himself by seeing or viewing
the show or performance.652

Tax Rate not more than 30% of the gross receipt from admission fees
Exemption operas, concerts, dramas, recitals, painting and art exhibitions, flower shows,
musical programs, literary and oratorical presentation.

Exceptions to exemption pop, rock, or similar concert.

7) Tax on delivery truck/van

Transaction taxed use of truck, van vehicle in the delivery or distribution of

distilled spirits, fermented liquors, softdrinks, cigar and cigarettes and other products,
determined by the Sanggunian to sales outlets or consumers.

651
government employees are exempted from paying PT
652
Sec 131 (c)

191
 Tax rate not exceeding P500 for every truck, van or any vehicle used

Exemption exempt from tax on peddlers.

b. Taxing powers of cities

Cities are authorized specifically to impose taxes, fees and charges that provinces and
municipalities may levy.

Rate: That may be above the maximum established for provinces and municipalities
but not exceeding 50% of such maximum rates except the rates of professional and
amusement taxes

c. Taxing powers of municipalities

Municipality may levy taxes, fees and charges not otherwise levied by provinces and
cities

1) Tax on various types of businesses

Municipal Taxes Municipalities may impose taxes on the following business653

1. Manufacturers, assemblers, repackers of liquors, distilled spirits and wines

2. Rate: At graduated annual fixed tax based on gross sales or receipts for the preceding
calendar year in an amount not to exceed P6.5 M or more, a rate not exceeding 37 of 1%
is imposed

3. Wholesalers, distributors or dealers in any article of Commerce

Rate: Graduated annual fixed rate based on gross sales or receipts not exceeding P2M or
more, the rate not exceeding 50% of 1%

4. Exporters, manufacturers, millers, producers of essential commodities

Rate: Not exceeding of the rates prescribed in (a) and (b)

5. Contractors and other independent contractors

Rate: Graduated annual fixed rate when the gross receipts exceeds P2M the rate is not
exceeding 50% of 1%

6. Banks and other financial institutions

Rate: Not exceeding 50% of 1% on the gross receipts of preceding calendar year

653
Sec 143, LGC

192
 7. Peddlers

Rate: Not exceeding 50% per peddler annually

8. Any business not otherwise specified

Rate: As the Sanggunian may deem proper. When subject to excise, VAT or
percentage tax, it shall not exceed 2% of gross receipts of the preceding calendar year

2) Ceiling on business tax impossible on

municipalities within Metro Manila

The municipalities within the Metropolitan Manila Area may levy taxes at rates which
shall not exceed by fifty percent (50%) the maximum rates prescribed in the preceding
Section.654

3) Tax on retirement on business

A business subject to tax pursuant to the preceding sections shall, upon termination
thereof, submit a sworn statement of its gross sales or receipts for the current year. If the tax
paid during the year be less than the tax due on said gross sales or receipts of the current
year, the difference shall be paid before the business is considered officially retired.655

4) Rules on payment of business tax

a. It shall be payable for every separate or distinct establishment or place where the
business subject to the tax is conducted and one line of business does not become exempt
by being conducted with some other business for which such tax has been paid.

b. The tax on a business must be paid by the person conducting the same.

c. In cases where a person conducts or operates 2 or more of the businesses

mentioned in Section 143656 of LGC:

a. Which are subject to the same rate of tax, the tax shall be computed on the
combined total gross sales or receipts of the said 2 or more related businesses.

b. Which are subject to different rates of tax, the gross sales or receipts of
each business shall be separately reported for the purpose of computing the tax due
from each business.

654
Sec. 144
655
Sec. 145
656
See Reference

193
 5) Fees and charges for regulation & licensing

(a) Municipalities shall have the exclusive authority to grant fishery privileges in the
municipal waters and impose rentals, fees or charges therefor in accordance with the
provisions of this Section.

(b) The sangguniangbayan may:

(1) Grant fishery privileges to erect fish corrals, oysters, mussels or other aquatic
beds or bangus fry areas, within a definite zone of the municipal waters, as determined by it:
Provided, however, That duly registered organizations and cooperatives of marginal
fishermen shall have the preferential right to such fishery privileges: Provided, further, That
the sangguniangbayan may require a public bidding in conformity with and pursuant to an
ordinance for the grant of such privileges: Provided, finally, That in the absence of such
organizations and cooperatives or their failure to exercise their preferential right, other
parties may participate in the public bidding in conformity with the above cited procedure.

(2) Grant the privilege to gather, take or catch bangus fry, prawn fry or kawag-kawag
or fry of other species and fish from the municipal waters by nets, traps or other fishing
gears to marginal fishermen free of any rental, fee, charge or any other imposition
whatsoever.

(3) Issue licenses for the operation of fishing vessels of three (3) tons or less for
which purpose the sangguniangbayan shall promulgate rules and regulations regarding the
issuances of such licenses to qualified applicants under existing laws.

Provided, however, That the sanggunian concerned shall, by appropriate ordinance,

penalize the use of explosives, noxious or poisonous substances, electricity, muro-ami, and
other deleterious methods of fishing and prescribe a criminal penalty therefor in accordance
with the provisions of this Code: Provided, finally, That the sanggunian concerned shall have
the authority to prosecute any violation of the provisions of applicable fishery laws.657

6) Situs of tax collected

Rule 1: For purposes of collection of the taxes underSection 143 (tax on business),
businesses maintaining or operating branch or sales outlet elsewhere shall record the sale in
the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and
shall be paid to the municipality where such branch or sales outlet is located.

Rule 2: In case there is no branch or sales outlet inthe city or municipality where the
sale is made, the sale shall be recorded in the principal office and the taxes due shall accrue
and be paid to such city or municipality.

Rule 3: The following sales allocation for salesrecorded in the principal office of
businesses with factories, project offices, plants, and plantations:

657
Sec. 149

194
 30% of all sales recorded in the principaloffice shall be taxable by the city
ormunicipality where the principal office is located; and 70% of all sales recorded in
the principal office shall be taxable by the city or municipality where the factory,
project office, plant, or plantation is located.

Rule 4: Where the plantation located at a place other than the place where the factory
is located, the abovementioned 70% shall be divided as follows:

60% - to the city or municipality where the factory is located; and

40% - to the city or municipality where the plantation is located.

Rule 5: Where there are 2 or more factories, project offices, plants, or plantations
located in different localities, the above mentioned 70% shall be prorated among the
localities where the factories, project offices, plants, and plantations are located in
proportion to their respective volumes of production during the period for which the tax is
due.658

d. Taxing powers of barangays

1) Taxes on stores / retailers with fixed business establishment with gross sales or receipts of
the preceeding calendar year of P50,000 or less in the cities & municipalities

Rate: Not exceeding 1% on such gross sales or receipts

2) Service Fees/ Charges it may collect reasonable fees or charges for services rendered in
connection with the regulation or the use of barangay owned property or service facilities

3) Barangay Clearance no city municipality may issue any license/ permit for any business /
activity is located. For such clearance, the sangguniangbrgy. May impose reasonable fee.
4) Other fees & charges the brgy. May levy reasonable fees & charges

a) On commercials breeding of fighting cocks & cockpits;

b) On places of recreation w/c charge admission fees; and
c) On billboards, signs boards, neon signs and outdoor advertisement

e. Common revenue raising powers

1) Service fees and charges

Reasonable fees and charges for services rendered.659

2) Public utility charges

3)Public Utility Charges if:

i. Owned, operated and maintained

ii. Within their jurisdiction660

658
Sec. 150
659
Sec. 153

195
 4) Toll fess or charges

5)Tools, Fees or Charges for:

i. Use of public road, pier or wharf, Waterway Bridge, ferry or telecommunication
system
ii. Funded and constructed by the local government661

f. Community tax

Nature: The community tax, w/c replaced the residence tax, is essentially a poll or capitalization
tax. It is of fixed amount imposed upon certain inhabitants of the Phil. Without regard to the
property/ occupation in w/c they may be engaged.

Who are authorized to levy cities or municipalities may levy a community tax, as well as the
rates & accrual of the proceeds thereof.662

Persons liable to tax

1) Individuals
Rate: P5.00 an annual additional tax of P1.00 for every P1,000 income regardless of whether
from business, exercise of profession or from property w/c in no case shall exceed P5,000

2) Corporations
Rate: Annual community tax of P500 and an annual additional tax w/c in no case shall
exceed P10,000

Exemptions from the Tax Community

1) Diplomatic and consular representatives and

2) Transient visitors when their stay in the Phil. Does not exceed 3 mos.

Estates of deceased persons, being neither corporations nor individuals, are not subject to the
tax, but the heirs must declare their proportionate shares of their income.

Community Tax Certificate shall be issued to every person or corporation upon payment of
the community tax. It may also be issued to any corporation / person not subject to the community
tax upon payment of P1.00663

660
Sec. 154
661
Sec. 155
662
Sec 156
663
Sec 162

196
 6. Common limitations on the taxing powers of LGUs664

Unless otherwise provided herein, the exercise of the taxing power of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

1.Income tax
Exception: banks and other financial institutions

2. Documentary Stamp Tax

3.Tax on estates, inheritance, gifts, legacies and other acquisitions mortis causa
Exception: tax on transfer of real property ownership

4. Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or
charges on petroleum products.

Taxable Articles embodied in the NIRC are:

1) Alcoholic products
2) Tobacco products
3) Petroleum products
4) Miscellaneous articles
5) Mineral products

Local governments can tax the selling of these finished products or the raw materials.

5. Percentage or VAT on sales, barters or exchanges or similar transactions on goods or

services exchanges or similar transactions on goods or services except as otherwise provided herein

Percentage of taxes imposed when there is set of ration between the amount of tax and the
volume of sales.

6. Taxes on the gross receipts of transportation of contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water except as
provided by the code.

On the other hand, transportation contractors including persons who transport passengers
for hire and other domestic carriers by land, air or water for transport of passengers, except owners
of bancas and owners of animal drawn two-wheeled vehicle are subject to 3% percentage tax on their
gross quarterly receipt.665

Sec 117 of NIRC, also, specifies that the gross receipt of common carriers derived from their
incoming and outgoing freight shall not be subjected to local taxes imposed under LGC.

7. Taxes, fees and charges imposed under the Tariff and Customs Code and other Special
Laws

664
Sec 133
665
Sec 117, NIRC

197
 8. Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues and all
other kinds of customs fees, charges and due except wharfage on wharves constructed and
maintained by LGU concerned.

9. Taxes, fees and charges and other Impositions which contravene Existing Government
Policies or which are Violative of the Fundamental Principles of Taxation.

10.Taxes, fees, and charges and other impositions upon goods carried into or out of, or
passing through, the territorial jurisdiction of LGU in the guise of charges for wharfage, tolls for
bridges or otherwise, or other taxes, fees or charges in any form whatever upon such goods or
merchandise.

11. Taxes, fees, or charges on agricultural and aquatic products when sold by marginal
farmers of\r fishermen.

12. Taxes on business enterprises certified to by the Board of Investment as pioneer or non-
pioneer who enjoy tax holidays for a period of 6 and 4 years, respectively from the date of
registration

+tax holidays refer to exemption from income tax only.

13. Taxes on premiums paid by way of reinsurance or retrocession.

14. Taxes, fees or other charges on Philippine products actually exported, excepted
otherwise provided herein in the LGC.

15. Taxes, fees or charges on Countryside and Baranggay Business Enterprises and
Cooperative duly registered under RA No. 6810 and RA 6938 otherwise known as the Cooperative
Code of the Phil. Respectively.

16. Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and LGU.

17. Taxes, fees, and charges imposed under special laws.

18.Taxes, fees or charges for registration of motor vehicles.

Exception: Tricycles

7. Collection of business tax

a. Tax period and manner of payment

Unless otherwise provided in the LGC, the tax period of all local taxes, fees and
charges shall be the calendar year

Such, taxes, fees and charges may be paid in quarterly installments.666

666
Sec. 165

198
 b. Accrual of tax

Unless otherwise provided in the Code, all local taxes, fees and charges shall accrue
on the 1st day of January of each year.

New taxes, fees or charges or changes in the rates thereof, shall accrue on the 1st day
of the quarter next following the effectively of the ordinance imposing such new rates.667

c. Time of payment

Unless otherwise provided in the Code, all local taxes, fees & charges shall be paid
within the first 20 days of January or of each subsequent quarter.

The sanggunian concerned may, for a justifiable reason or cause, extend the time for
payment of such charges but only for a period not exceeding 6 months.668
d. Penalties on unpaid taxes, fees or charges

Surcharges & penalties on unpaid taxes, fees or charges

The Sanggunian may impose a surcharge not exceeding 27% of the amount of taxes,
fees or charges not paid on time and an interest at the rate not exceeding 2% per month of
unpaid taxes, fees or charges including surcharges, until such amount is fully paid

In no case shall the total interest on the unpaid amount or portion thereof exceed 36
months669
e. Authority of treasurer in collection and inspection of books

All local taxes, fees, and charges shall be collected by the provincial, city, municipal, or
barangay treasurer, or their duly authorized deputies. The provincial, city or municipal treasurer may
designate the barangay treasurer as his deputy to collect local taxes, fees, or charges. In case a bond is
required for the purpose, the provincial, city or municipal government shall pay the premiums
thereon in addition to the premiums of bond that may be required under this Code.670

The provincial, city, municipal or barangay treasurer may, by himself or through any of his
deputies duly authorized in writing, examine the books, accounts, and other pertinent records of any
person, partnership, corporation, or association subject to local taxes, fees and charges in order to
ascertain, assess, and collect the correct amount of the tax, fee, or charge. Such examination shall be
made during regular business hours, only once for every tax period, and shall be certified to by the
examining official. Such certificate shall be made of record in the books of accounts of the taxpayer
examined. In case the examination herein authorized is made by a duly authorized deputy of the local
treasurer, the written authority of the deputy concerned shall specifically state the name, address, and
business of the taxpayer whose books, accounts, and pertinent records are to be examined, the date
and place of such examination, and the procedure to be followed in conducting the same. For this

667
Sec 166
668
Sec 167
669
Sec 168
670
Sec. 170

199
purpose, the records of the revenue district office of the Bureau of Internal Revenue shall be made
available to the local treasurer, his deputy or duly authorized representative.671

8. Taxpayers remedies

a. Periods of assessment and collection of local taxes, fees or

charges672

1. Prescriptive period of assessment within five years from the date they become
due.
- in case of fraud of intent to evade payment within 10 years

2. Prescriptive period of collection within 5 years from the date of assessment by

administrative or judicial action

b. Protest of assessment

a. Assessment made by the local Treasurer

b. Taxpayer has 60 days from receipt to file written protest with Treasurer, otherwise
it shall become final and executory

c. Treasurer has 10 days within which to decide.

Treasurer cancels assessment

Treasurer denies protest
Taxpayer appeals within 30 days after receipt of denial
Treasurer does not act within 60 days
Taxpayer has 30 days from the lapse of 60 days to appeal

c. Claim for refund of tax credit for erroneously or illegally

collected tax, fee or charge

A written claim for refund or credit is filed with the local Treasurer within 2 years
from the date of payment of such tax, fee, or charge, or from the date the taxpayer is entitled
to a refund or credit

671
Sec. 171
672
Suspension of the running of the prescriptive Period -
a. Treasurer legally prevented from the making the assessment or collection
b. Taxpayer requests for reinvestigation and executes waiver in writing
c. Taxpayer out of the country
d. Taxpayer cannot be located

200
 9. Civil remedies by the LGU for collection of revenues

a. Local governments lien for delinquent taxes, fees or

charges

1. Superior to all items, charges or encumbrances in favor of any person, enforceable

by the administrative of judicial action
2. Covers not only property or rights subject to the lien but also upon property used
in business.

b. Civil remedies, in general

1) Administrative action

a. Distraint of goods, chattels or effects and other personal property of

whatever character
b. Levy upon real property and interest in or rights to real property

2) Judicial action

Either of these remedies or all may be pursued concurrently or simultaneously at the

discretion of local government unit concerned.673

c. Procedure for administrative action

1) Distraint of personal property

(a) Seizure - Upon failure of the person owing any local tax, fee, or charge to pay the same at
the time required, the local treasurer or his deputy may, upon written notice, seize or confiscate any
personal property belonging to that person or any personal property subject to the lien in sufficient
quantity to satisfy the tax, fee, or charge in question, together with any increment thereto incident to
delinquency and the expenses of seizure. In such case, the local treasurer or his deputy shall issue a
duly authenticated certificate based upon the records of his office showing the fact of delinquency
and the amounts of the tax, fee, or charge and penalty due. Such certificate shall serve as sufficient
warrant for the distraint of personal property aforementioned, subject to the taxpayer's right to claim
exemption under the provisions of existing laws. Distrained personal property shall be sold at public
auction in the manner hereon provided for.

(b) Accounting of distrained goods. - The officer executing the distraint shall make or cause
to be made an account of the goods, chattels or effects distrained, a copy of which signed by himself
shall be left either with the owner or person from whose possession the goods, chattels or effects are
taken, or at the dwelling or place or business of that person and with someone of suitable age and
discretion, to which list shall be added a statement of the sum demanded and a note of the time and
place of sale.

(c) Publication - The officer shall forthwith cause a notification to be exhibited in not less
than three (3) public and conspicuous places in the territory of the local government unit where the

673
Sec 174

201
distraint is made, specifying the time and place of sale, and the articles distrained. The time of sale
shall not be less than twenty (20) days after the notice to the owner or possessor of the property as
above specified and the publication or posting of the notice. One place for the posting of the notice
shall be at the office of the chief executive of the local government unit in which the property is
distrained.

(d) Release of distrained property upon payment prior to sale - If at any time prior to the
consummation of the sale, all the proper charges are paid to the officer conducting the sale, the
goods or effects distrained shall be restored to the owner.

(e) Procedure of sale - At the time and place fixed in the notice, the officer conducting the
sale shall sell the goods or effects so distrained at public auction to the highest bidder for cash.
Within five (5) days after the sale, the local treasurer shall make a report of the proceedings in writing
to the local chief executive concerned.

Should the property distrained be not disposed of within one hundred and twenty (120) days
from the date of distraint, the same shall be considered as sold to the local government unit
concerned for the amount of the assessment made thereon by the Committee on Appraisal and to
the extent of the same amount, the tax delinquencies shall be cancelled.

Said Committee on Appraisal shall be composed of the city or municipal treasurer as

chairman, with a representative of the Commission on Audit and the city or municipal assessor as
members.

(f) Disposition of proceeds - The proceeds of the sale shall be applied to satisfy the tax,
including the surcharges, interest, and other penalties incident to delinquency, and the expenses of
the distraint and sale. The balance over and above what is required to pay the entire claim shall be
returned to the owner of the property sold. The expenses chargeable upon the seizure and sale shall
embrace only the actual expenses of seizure and preservation of the property pending the sale, and
no charge shall be imposed for the services of the local officer or his deputy. Where the proceeds of
the sale are insufficient to satisfy the claim, other property may, in like manner, be distrained until the
full amount due, including all expenses, is collected.674

2) Levy of real property, procedure

After the expiration of the time required to pay the delinquent tax, fee, or charge, real
property may be levied on before, simultaneously, or after the distraint of personal property
belonging to the delinquent taxpayer. To this end, the provincial, city or municipal treasurer, as the
case may be, shall prepare a duly authenticated certificate showing the name of the taxpayer and the
amount of the tax, fee, or charge, and penalty due from him. Said certificate shall operate with the
force of a legal execution throughout the Philippines. Levy shall be effected by writing upon said
certificate the description of the property upon which levy is made. At the same time, written notice
of the levy shall be mailed to or served upon the assessor and the Register of Deeds of the province
or city where the property is located who shall annotate the levy on the tax declaration and certificate
of title of the property, respectively, and the delinquent taxpayer or, if he be absent from the
Philippines, to his agent or the manager of the business in respect to which the liability arose, or if
there be none, to the occupant of the property in question.

In case the levy on real property is not issued before or simultaneously with the warrant of
distraint on personal property, and the personal property of the taxpayer is not sufficient to satisfy

674
Sec. 165

202
his delinquency, the provincial, city or municipal treasurer, as the case may be, shall within thirty (30)
days after execution of the distraint, proceed with the levy on the taxpayer's real property.

A report on any levy shall, within ten (10) days after receipt of the warrant, be submitted by
the levying officer to the sanggunian concerned.675

3) Further distraint or levy

The remedies by distraint and levy may be repeated if necessary until the full amount
due, including all expenses, is collected.676

4) Exemption of personal property from distraint or

levy

The following property shall be exempt from distraint and the levy, attachment or
execution thereof for delinquency in the payment of any local tax, fee or charge, including
the related surcharge and interest:

(a) Tools and implements necessarily used by the delinquent taxpayer in his trade or
employment;

(b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer
may select, and necessarily used by him in his ordinary occupation;

(c) His necessary clothing, and that of all his family;

(d) Household furniture and utensils necessary for housekeeping and used for that purpose
by the delinquent taxpayer, such as he may select, of a value not exceeding Ten thousand pesos
(P10,000.00);

(e) Provisions, including crops, actually provided for individual or family use sufficient for
four (4) months;

(f) The professional libraries of doctors, engineers, lawyers and judges;

(g) One fishing boat and net, not exceeding the total value of Ten thousand pesos
(P10,000.00), by the lawful use of which a fisherman earns his livelihood; and

(h) Any material or article forming part of a house or improvement of any real property.677

5) Penalty on local treasurer for failure to issue and

execute warrant of distraint or levy

Without prejudice to criminal prosecution under the Revised Penal Code and other
applicable laws, any local treasurer who fails to issue or execute the warrant of distraint or
levy after the expiration of the time prescribed, or who is found guilty of abusing the

675
Sec. 166
676
Sec. 184
677
Sec. 185

203
exercise thereof by competent authority shall be automatically dismissed from the service
after due notice and hearing.678

d. Procedure for judicial action

1) In any court of competent jurisdiction

2) Filed by local Treasurer
3) Within 5 years from the date taxes, fees or charges become due

B. Real Property Taxation

1. Fundamental principles

a.) Real property shall be appraised at its current and fair market value.
b.) Real property shall be classified for assessment purposes on the basis of its actual
use.
c.) Real property shall be assessed on the basis of a uniformstandard within each local
government unit.
d.) The appraisal, assessment, and collection of real property tax shall not be let to any
private person; and
e. ) The appraisal and assessment of real property shall be equitable679

2. Nature of real property tax

Property taxes are assessed on all property, or all property of a certain class located
within a certain territory on a specified date in proportion to its value or in accordance with
some other reasonable method of apportionment.680

In the Philippines, a real property tax is an annual ad valorem tax imposed by LGUs on
real property within their jurisdiction, determined on the basis of a fixed proportion of the
value of the property.

3. Imposition of real property tax

a. Power to levy real property tax

A province or city or a municipality within the Metropolitan Manila Area my levy an

annual ad valorem tax on real property such as land, building, machinery, and other
improvement not hereinafter specifically exempted.681

678
Sec. 177
679
Sec. 198, id.
680
The function of a property tax is to raise revenue. Such tax does not impose any condition nor does it
place any restriction upon the use of the property taxed.
681
Sec. 232

204
 b. Exemption from real property tax682

1. Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person;
2. Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques,
non profit or religious cemeteries, and all lands, buildings, and improvements actually, directly
andexclusively used for religious, charitable, or educational purposes.

3. All pieces of machinery and equipment that are actually, directly, and exclusively used
by local water districts, and government owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of electric power.

4. All real property owned by duly registered cooperatives as provided for under RA 6938,
and
5. Machinery and equipment used for pollution control and environmental protection.

4. Appraisal and assessment of real property tax

a. Rule on appraisal of real property at fair market value

All real property, whether taxable or exempt, shall be appraised at the current and
fair market value prevailing in the locality where the property is situated. The Department of
Finance shall promulgate the necessary rules and regulations for the classification, appraisal,
and assessment of real property pursuant to the provisions of this Code.683

b. Declaration of real property

It shall be the responsibility of the owner, administrator or their representatives to

declare, under oath, the true value of real property, taxable or exempt, within 60 days after
the acquisition. The sworn declaration shall be filed once every 3 years before June 30th of
the year commencing 1992. The failure or refusal to make that declaration within the
prescribed period would authorize the provincial or city assessor to declare the property in
the name of the defaulting owner, if known, or against an unknown owner as the case may
be, and to assess the property for taxation.684

682
Real properties of review schools are subject to tax (why? Considered an ordinary corporation)
Non-stock, nonprofit private schools are exempt.
Proprietary schools (stock and profit) duly accredited by DECS or CHED are exempt, if property is
actually, directly and exclusively used for educational purposes.
The term exclusively under the Constitution does not mean solely butonly primarily (Roman
Catholic Church v. Hastings, 5 Phil 701, Province of Abra v. Hernando, 107 SCRA 104 & other cases).
683
Sec. 201
684
Secs. 201-204

205
 c. Listing of real property in assessment rolls

(a) In every province and city, including the municipalities within the Metropolitan Manila
Area, there shall be prepared and maintained by the provincial, city or municipal assessor an
assessment roll wherein shall be listed all real property, whether taxable or exempt, located within the
territorial jurisdiction of the local government unit concerned. Real property shall be listed, valued
and assessed in the name of the owner or administrator, or anyone having legal interest in the
property.

(b) The undivided real property of a deceased person may be listed, valued and assessed in
the name of the estate or of the heirs and devisees without designating them individually; and
undivided real property other than that owned by a deceased may be listed, valued and assessed in
the name of one or more co-owners: Provided, however, That such heir, devisee, or co-owner shall
be liable severally and proportionately for all obligations imposed by this Title and the payment of
the real property tax with respect to the undivided property.

(c) The real property of a corporation, partnership, or association shall be listed, valued and
assessed in the same manner as that of an individual.

(d) Real property owned by the Republic of the Philippines, its instrumentalities and political
subdivisions, the beneficial use of which has been granted, for consideration or otherwise, to a
taxable person, shall be listed, valued and assessed in the name of the possessor, grantee or of the
public entity if such property has been acquired or held for resale or lease.685

d. Preparation of schedules of fair market value

Before any general revision of property assessment is made pursuant to the

provisions of this Title, there shall be prepared a schedule of fair market values by the
provincial, city and municipal assessor of the municipalities within the Metropolitan Manila
Area for the different classes of real property situated in their respective local government
units for enactment by ordinance of the sanggunian concerned. The schedule of fair market
values shall be published in a newspaper of general circulation in the province, city or
municipality concerned or in the absence thereof, shall be posted in the provincial capitol,
city or municipal hall and in two other conspicuous public places therein.686

1) Authority of assessor to take evidence

For the purpose of obtaining information on which to base the market value of any
real property, the assessor of the province, city or municipality or his deputy may summon
the owners of the properties to be affected or persons having legal interest therein and
witnesses, administer oaths, and take deposition concerning the property, its ownership,
amount, nature, and value.687

685
Sec. 205
686
Sec. 212
687
Sec. 213

206
 2) Amendment of schedule of fair market value

The provincial, city or municipal assessor may recommend to the sanggunian

concerned amendments to correct errors in valuation in the schedule of fair market values.
The sanggunian concerned shall, by ordinance, act upon the recommendation within ninety
(90) days from receipt thereof.688

e. Classes of real property

For purposes of assessment, real property shall be classified as residential,

agricultural, commercial, industrial, mineral, timberland or special.

The city or municipality within the Metropolitan Manila Area, through their
respective sanggunian, shall have the power to classify lands as residential, agricultural,
commercial, industrial, mineral, timberland, or special in accordance with their zoning
ordinances.689

f. Actual use of property as basis of assessment

Real property shall be classified, valued and assessed on the basis of its actual use
regardless of where located, whoever owns it, and whoever uses it.690

g. Assessment of real property

1) Assessment levels

The assessment levels to be applied to the fair market value of real property to
determine its assessed value shall be fixed by ordinances of the sangguniangpanlalawigan,
sangguniangpanlungsod or sangguniangbayan of a municipality within the Metropolitan
Manila Area, at the rates not exceeding the following:

(a) On Lands:

CLASS ASSESSMENT LEVELS

Residential 20%
Agricultural 40%
Commercial 50%
Industrial 50%
Mineral 50%
Timberland 20%

688
Sec. 214
689
Sec. 215
690
Sec. 217

207
(b) On Buildings and Other Structures:

(1) Residential
Fair market Value

Over Not Over Assessment Levels

P175,000.00 0%
P175,000.00 300,000.00 10%
300,000.00 500,000.00 20%
500,000.00 750,000.00 25%
750,000.00 1,000,000.00 30%
1,000,000.00 2,000,000.00 35%
2,000,000.00 5,000,000.00 40%
5,000,000.00 10,000,000.00 50%
10,000,000.00
60%

(2) Agricultural

Fair Market Value

Over Not Over Assessment Levels

P300,000.00 25%
P300,000.00 500,000.00 30%
500,000.00 750,000.00 35%
750,000.00 1,000,000.00 40%
1,000,000.00 2,000,000.00 45%
2,000,000.00 50%

(3) Commercial / Industrial

Fair Market Value

Over Not Over Assessment Levels

P300,000.00 30%
P300,000.00 500,000.00 35%
500,000.00 750,000.00 40%
750,000.00 1,000,000.00 50%
1,000,000.00 2,000,000.00 60%
2,000,000.00 5,000,000.00 70%
5,000,000.00 10,000,000.00 75%
10,000,000.00 80%

(4) Timberland

Fair Market Value

Over Not Over Assessment Levels

P300,000.00 45%
P300,000.00 500,000.00 50%

208
 500,000.00 750,000.00 55%
750,000.00 1,000,000.00 60%
5,000,000.00 2,000,000.00 65%
2,000,000.00 70%

(c) On Machineries

Class Assessment Levels

Agricultural 40%
Residential 50%
Commercial 80%
Industrial 80%

(d) On Special Classes: The assessment levels for all

lands buildings, machineries and other improvements;

Actual Use Assessment Level

Cultural 15%
Scientific 15%
Hospital 15%
Local water districts 10%
Government-owned or controlled corporations engaged in the
supply and distribution of water and/or generation and
transmission of electric power 10%691

2) General revisions of assessments and property

classification

The provincial, city or municipal assessor shall undertake a general revision of real
property assessments within two (2) years after the effectivity of this Code and every three
(3) years thereafter.692

3) Date of effectivity of assessment or reassessment

All assessments or reassessments made after the first (1st) day of January of any year
shall take effect on the first (1st) day of January of the succeeding year: Provided, however,
That the reassessment of real property due to its partial or total destruction, or to a major
change in its actual use, or to any great and sudden inflation or deflation of real property
values, or to the gross illegality of the assessment when made or to any other abnormal
cause, shall be made within ninety (90) days from the date any such cause or causes
occurred, and shall take effect at the beginning of the quarter next following the
reassessment.

691
Sec. 218
692
Sec. 219

209
 4) Assessment of property subject to back taxes

Real property declared for the first time shall be assessed for taxes for the period
during which it would have been liable but in no case of more than ten (10) years prior to
the date of initial assessment: Provided, however, That such taxes shall be computed on the
basis of the applicable schedule of values in force during the corresponding period.693

5) Notification of new or revised assessment

When real property is assessed for the first time or when an existing assessment is
increased or decreased, the provincial, city or municipal assessor shall within thirty (30) days
give written notice of such new or revised assessment to the person in whose name the
property is declared. The notice may be delivered personally or by registered mail or through
the assistance of the punong barangay to the last known address of the person to be served.

h. Appraisal and assessment of machinery

(a) The fair market value of a brand-new machinery shall be the acquisition cost. In
all other cases, the fair market value shall be determined by dividing the remaining economic
life of the machinery by its estimated economic life and multiplied by the replacement or
reproduction cost.

(b) If the machinery is imported, the acquisition cost includes freight, insurance,
bank and other charges, brokerage, arrastre and handling, duties and taxes, plus charges at
the present site. The cost in foreign currency of imported machinery shall be converted to
peso cost on the basis of foreign currency exchange rates as fixed by the Central Bank.

5. Collection of real property tax

a. Date of accrual of real property tax

The real property tax for any year shall accrue on the first day of January and from
that date it shall constitute a lien on the property which shall be superior to any other lien,
mortgage, or encumbrance of any kind whatsoever, and shall be extinguished only upon the
payment of the delinquent tax.694

b. Collection of tax

1) Collecting authority

The collection of the real property tax with interest thereon and related expenses,
and the enforcement of the remedies provided for in this Title or any applicable laws, shall
be the responsibility of the city or municipal treasurer concerned.

693
Sec. 222
694
Sec. 246

210
 The city or municipal treasurer may deputize the barangay treasurer to collect all
taxes on real property located in the barangay: Provided, That the barangay treasurer is
properly bonded for the purpose: Provided, further, That the premium on the bond shall be
paid by the city or municipal government concerned.695

2) Duty of assessor to furnish local treasurer with

assessment rolls

The provincial, city or municipal assessor shall prepare and submit to the treasurer of
the local government unit, on or before the thirty-first (31st) day of December each year, an
assessment roll containing a list of all persons whose real properties have been newly
assessed or reassessed and the values of such properties.696

3) Notice of time for collection of tax

The city or municipal treasurer shall, on or before the thirty-first (31st) day of
January each year, in the case of the basic real property tax and the additional tax for the
Special Education Fund (SEF) or any other date to be prescribed by the sanggunianconcerned
in the case of any other tax levied under this title, post the notice of the dates when the tax
may be paid without interest at a conspicuous and publicly accessible place at the city or
municipal hall. Said notice shall likewise be published in a newspaper of general circulation in
the locality once a week for two (2) consecutive weeks.

c. Periods within which to collect real property tax

The basic real property tax and any other tax levied under this Title shall be collected
within five (5) years from the date they become due. No action for the collection of the tax,
whether administrative or judicial, shall be instituted after the expiration of such period. In
case of fraud or intent to evade payment of the tax, such action may be instituted for the
collection of the same within ten (10) years from the discovery of such fraud or intent to
evade payment.

The period of prescription within which to collect shall be suspended for the time
during which:

(1) The local treasurer is legally prevented from collecting the tax;

(2) The owner of the property or the person having legal interest therein requests for
reinvestigation and executes a waiver in writing before the expiration of the period within
which to collect; and

(3) The owner of the property or the person having legal interest therein is out of the
country or otherwise cannot be located.697

695
Sec. 247
696
Sec. 248
697
Sec. 270

211
 d. Special rules on payment

1) Payment of real property tax in installments

The owner of the real property or the person having legal interest therein may pay
the basic real property tax and the additional tax for Special Education Fund (SEF) due
thereon without interest in four (4) equal installments; the first installment to be due and
payable on or before March Thirty-first (31st); the second installment, on or before June
Thirty (30); the third installment, on or before September Thirty (30); and the last
installment on or before December Thirty-first (31st), except the special levy the payment of
which shall be governed by ordinance of the sanggunianconcerned.

The date for the payment of any other tax imposed under this Title without interest
shall be prescribed by the sanggunian concerned.

Payments of real property taxes shall first be applied to prior years delinquencies,
interests, and penalties, if any, and only after said delinquencies are settled may tax payments
be credited for the current period.698

2) Interests on unpaid real property tax

In case of failure to pay the basic real property tax or any other tax levied under this
Title upon the expiration of the periods as provided in Section 250, or when due, as the case
may be, shall subject the taxpayer to the payment of interest at the rate of two percent (2%)
per month on the unpaid amount or a fraction thereof, until the delinquent tax shall have
been fully paid: Provided, however, That in no case shall the total interest on the unpaid tax
or portion thereof exceed thirty-six (36) months.699

3) Condonation of real property tax

In case of a general failure of crops or substantial decrease in the price of agricultural

or agri-based products, or calamity in any province, city or municipality, the
sanggunianconcerned, by ordinance passed prior to the first (1st) day of January of any year
and upon recommendation of the Local Disaster Coordinating Council, may condone or
reduce, wholly or partially, the taxes and interest thereon for the succeeding year or years in
the city or municipality affected by the calamity.700

The President of the Philippines may, when public interest so requires, condone or
reduce the real property tax and interest for any year in any province or city or a municipality
within the Metropolitan Manila Area.701

698
Sec. 250
699
Sec. 255
700
Sec. 276
701
Sec. 277

212
 e. Remedies of LGUs for collection of real property tax

1) Issuance of notice of delinquency for real property

tax payment

(a) When the real property tax or any other tax imposed under this Title becomes
delinquent, the provincial, city or municipal treasurer shall immediately cause a notice of the
delinquency to be posted at the main hall and in a publicly accessible and conspicuous place
in each barangay of the local government unit concerned. The notice of delinquency shall
also be published once a week for two (2) consecutive weeks, in a newspaper of general
circulation in the province, city, or municipality.

(b) Such notice shall specify the date upon which the tax became delinquent and
shall state that personal property may be distrained to effect payment. It shall likewise state
that any time before the distraint of personal property, payment of the tax with surcharges,
interests and penalties may be made in accordance with the next following Section, and
unless the tax, surcharges and penalties are paid before the expiration of the year for which
the tax is due except when the notice of assessment or special levy is contested
administratively or judicially pursuant to the provisions of Chapter 3, Title II, Book II of this
Code, the delinquent real property will be sold at public auction, and the title to the property
will be vested in the purchaser, subject, however, to the right of the delinquent owner of the
property or any person having legal interest therein to redeem the property within one (1)
year from the date of sale.702

2) Local governments lien

The basic real property tax and any other tax levied under this Title constitutes a lien
on the property subject to tax, superior to all liens, charges or encumbrances in favor of any
person, irrespective of the owner or possessor thereof, enforceable by administrative or
judicial action, and may only be extinguished upon payment of the tax and the related
interests and expenses.703

3) Remedies in general

For the collection of the basic real property tax and any other tax levied under this
Title, the local government unit concerned may avail of the remedies by administrative
action thru levy on real property or by judicial action.704

4) Resale of real estate taken for taxes, fees or charges

The sanggunian concerned may, by ordinance duly approved, and upon notice of not
less than twenty (20) days, sell and dispose of the real property acquired under the preceding

702
Sec. 254
703
Sec. 257
704
Sec. 256

213
section at public auction. The proceeds of the sale shall accrue to the general fund of the
local government unit concerned.705

5) Further levy until full payment of amount due

Levy may be repeated if necessary until the full amount due, including all expenses, is
collected.706

6. Refund or credit of real property tax

a. Payment under protest

(a) No protest shall be entertained unless the taxpayer first pays the tax. There shall
be annotated on the tax receipts the words "paid under protest". The protest in writing must
be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or
municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall
decide the protest within sixty (60) days from receipt.

(b) The tax or a portion thereof paid under protest, shall be held in trust by the
treasurer concerned.

(c) In the event that the protest is finally decided in favor of the taxpayer, the
amount or portion of the tax protested shall be refunded to the protestant, or applied as tax
credit against his existing or future tax liability.

(d) In the event that the protest is denied or upon the lapse of the sixty day period
prescribed in subparagraph (a), the taxpayer may avail of the remedies as provided for in
Chapter 3, Title II, Book II of this Code.707

b. Repayment of excessive collections

When an assessment of basic real property tax, or any other tax levied under this
Title, is found to be illegal or erroneous and the tax is accordingly reduced or adjusted, the
taxpayer may file a written claim for refund or credit for taxes and interests with the
provincial or city treasurer within two (2) years from the date the taxpayer is entitled to such
reduction or adjustment.

The provincial or city treasurer shall decide the claim for tax refund or credit within
sixty (60) days from receipt thereof. In case the claim for tax refund or credit is denied, the
taxpayer may avail of the remedies as provided in Chapter 3, Title II, Book II of this Code.708

705
Sec. 264
706
Sec. 265
707
Sec. 252
708
Sec. 253

214
 7. Taxpayers remedies

a. Contesting an assessment of value of real property

1) Appeal to the Local Board of Assessment Appeals

(LBAA)

Any owner or person having legal interest in the property who is not satisfied with
the action of the provincial, city or municipal assessor in the assessment of his property may,
within sixty (60) days from the date of receipt of the written notice of assessment, appeal to
the Board of Assessment Appeals of the provincial or city by filing a petition under oath in
the form prescribed for the purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal.709

2) Appeal to the Central Board of Assessment

Appeals (CBAA)

The owner of the property or the person having legal interest therein or the assessor
who is not satisfied with the decision of the Board, may, within thirty (30) days after receipt
of the decision of said Board, appeal to the Central Board of Assessment Appeals, as herein
provided. The decision of the Central Board shall be final and executory.710

3) Effect of payment of tax

Appeal on assessments of real property made under the provisions of this Code
shall, in no case, suspend the collection of the corresponding realty taxes on the property
involved as assessed by the provincial or city assessor, without prejudice to subsequent
adjustment depending upon the final outcome of the appeal.711

b. Payment of real property under protest

1) File protest with local treasurer712

2) Appeal to the LBSS713

3) Appeal to the CBAA714

4) Appeal to the CTA

709
Sec. 226
710
Sec. 229 (c), last par.
711
Sec. 231
712
See B. (6)(a), under Refund or credit of real property tax, supra
713
See (a)(1), supra
714
See (a)(2), supra

215
 Appeal shall be made by filing a petition for review715 with the CTA within thirty (30)
days from the receipt of the decision or ruling or in the case of inaction, from the expiration
of the period fixed by law to act thereon.716

5) Appeal to the SC

No judicial proceeding against the Government involving matters arising under the
National Internal Revenue Code, the Customs Law or the Assessment Law shall be
maintained, except as herein provided, until and unless an appeal has been previously filed
with the Court of Tax Appeals and disposed of in accordance with the provisions of this
Act.

Any party adversely affected by any ruling, order or decision of the Court of tax
Appeals may appeal therefrom to the Supreme Court by filing with the said Court a notice of
appeal and with the Supreme Court a petition for review, within thirty days from the date he
receives notice of said ruling, order or decision. If, within the aforesaid period, he fails to
perfect his appeal, the said ruling, order or decision shall become final and conclusive against
him

If no decision is rendered by the Court within thirty days from the date a case is
submitted for decision, the party adversely affected by said ruling, order or decision may file
with said Court a notice of his intention to appeal to the Supreme Court, and if, within thirty
days from the filing of said notice of intention to appeal, no decision has as yet been
rendered by the Court, the aggrieved party may file directly with the Supreme Court an
appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this
section.

If any ruling, order or decision of the Court of Tax Appeals be adverse to the
Government, the Collector of Internal Revenue, the Commissioner of Customs, or the
provincial or city Board of Assessment Appeals concerned may likewise file an appeal
therefrom to the Supreme Court in the manner and within the same period as above
prescribed for private parties.

Any proceeding directly affecting any ruling, order or decision of the Court of Tax
Appeals shall have preference over all other civil proceedings except habeas corpus,
workmen's compensation and election cases.

715
under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure
716
Sec. 11, RA No. 1125

216
IV. Tariff and Customs Code of 1978, as amended (TCC)

A. Tariff and duties, defined

1. Custom duties:

Are duties which are one charged upon commodities on their being imported into or
exported out of a country.

2. Tariff:

Means a book of rates, a table or catalogue drawn usually in alphabetical order

containing the names of several kinds of merchandise with the duties to be paid for
the same as settled or agreed upon between several states that holds commerce
together.

B. General rule: All imported articles are subject to duty. Importation by the
government taxable.

All articles when imported from a foreign country including those previously
exported from the Philippines are subject to duty unless otherwise specifically
provided for in the Tariff and Customs Code or other laws. (Sec. 100, TCS)

C. Purpose for imposition

For the protection of consumers and manufacturers, as well as Phil. products from
undue competition posed by foreign-made products.

D. Flexible tariff clause

The flexible tariff clause is a provision in the Tariff and Customs Code,717 which
implements the constitutionally delegated power to the Congress to further delegate to the
President of the Philippines, in the interest of national economy, general welfare and/or
national security upon recommendation of the NEDA (a) to increase, reduce or remove
existing protective rates of import duty, provided that, the increase should not be higher
than 100% ad valorem; (b) to establish import quota or to ban imports of any commodity,
and (c) to impose additional duty on all imports not exceeding 10% ad valorem, among
others.

717
Sec. 401

217
 E. Requirements of importation

1. Beginning and ending of importation

Importation begins when the carrying vessel or aircraft enters the jurisdiction of the
Philippines with the intention to unload718 therein.

Importation is deemed terminated upon payment of duties, taxes and other charges
due upon the articles or secured to be paid at a port of entry and the legal permit for
withdrawal shall gave been granted or in case said articles are free of duties, taxes and other
charges, until they have legally left the jurisdiction of the customs.719

2. Obligations of importer

a. Cargo manifest

A cargo manifest shall in no case be changed or altered, except after entry of the
vessel, by means of an amendment by the master, consignee, or agent thereof, under oath,
and attached to the original manifest.720

b. Import entry

It is a declaration to the BOC showing particulars of the imported article that will
enable the customs authorities to determine the correct duties. An importer is required to
file an import entry. It must be accomplished from disembarking of last cargo from vessel.

c. Declaration of correct weight or value

The declaration, ascertainment or verification of the correct weight of the cargo at

the port of loading is the duty or obligation of the master, pilot, owner, officer or employee
of the vessel.721 If he omits or disregards this duty and a punishable discrepancy between the
declared weight and actual weight of the cargo exists, the inevitable conclusion is that he is
negligent or careless.722Similarly, if in the exercise or performance of this duty, he is negligent
or careless resulting in the commission of excessive discrepancy in the weight of the ship's
cargo penalized under the law, carelessness or incompetency is, nonetheless, imputable to
him.

d. Liability for payment of duties

718
Even if not yet unloaded, and there is unmanifested cargo, forfeiture may take place because
importation has already begun.
719
Sec. 1202
720
Sec. 1228, 3rd par., Rev. Adm. Code
721
Sec. 2523
722
See Delgado Shipping Agencies, Inc. vs. Commissioner of Customs, C.T.A. Case No. 2685, Feb. 15, 1977;
Macondray& Co., Inc. vs. Commissioner of Customs, C.T.A. Case No. 274 1, Feb. 3, 1977; Macondray& Co.,
Inc, vs. Commissioner of Customs, C.T.A. Case No. 2656, January 21, 1977 and cases cited therein.

218
 Unless relieved by laws or regulations, the liability for duties, taxes, fees and other
charges attaching on importation constitutes a personal debt due from the importer to the
government which can be discharged only by payment in full of all duties, taxes, fees and
other charges legally accruing. It also constitutes a lien upon the articles imported which may
be enforced while such articles are in custody or subject to the control of the government.723

e. Liquidation of duties

If the Collector shall approve the returns of the appraiser and the report of the
weights, gauge or quantity, the liquidation shall be made on the face of the entry showing the
particulars thereof, initiated by the liquidating clerk, approved by the chief liquidator, and
recorded in the record of liquidations.

A daily record of all entries liquidated shall be posted in the public corridor of the
customhouse, stating the name of the vessel or aircraft, the port from which she arrived, the
date of her arrival, the name of the importer, and the serial number and date of the entry. A
daily record must also be kept by the Collector of all additional duties, taxes and other
charges found upon liquidation, and notice shall promptly be sent to the interested parties.724

If to determine the exact amount due under the law in whole or in part some future
action is required, the liquidation shall be deemed to be tentative as to the item or items
affected and shall to that extent be subject to future and final readjustment and settlement.
The entry in such case shall be stamped "Tentative liquidation".725

When articles have been entered and passed free of duty or final adjustment of duties
made, with subsequent delivery, such entry and passage free of duty or settlement of duties
will, after the expiration of one year, from the date of the final payment of duties, in the
absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of
the import entry was merely tentative.726

In determining the total amount of duties, taxes, surcharges, wharfage and/or other
charges to be paid on entries, a fraction of a peso less than fifty centavos shall be
disregarded, and a fraction of a peso amounting to fifty centavos or more shall be considered
as one peso. In case of overpayment or underpayment of duties, taxes, surcharges, wharfage
and/or other charges paid on entries, where the amount involved is less than five pesos, no
refund or collection shall be made.727

f. Keeping of records

723
Sec. 1204
724
Sec. 1601
725
Sec. 1602
726
Sec. 1603
727
Sec. 1604

219
 F. Importation in violation of TCC

1. Smuggling

1. An act of any person who shall:

a. Fraudulently import any article contrary to law, or

b. Assist in so doing, or
c. Receive, conceal, buy, sell, facilitate, transport, conceal or sell such
article knowing its illegal importation.728
d. Export contrary to law.729

2. The Philippines is divided into various ports of entry entry other than port of
entry, will be smuggling.

2. Other fraudulent practices

Any person who makes or attempts to make any entry of imported or exported
article by means of any false or fraudulent invoice, declaration, affidavit, letter, paper, or by
means of any false statement, written or verbal, or by means of any false or fraudulent
practice whatsoever, or shall be guilty of any willful act or omission by means of whereof the
Government might be deprived of the lawful duties, taxes and other charges, or any portion
thereof, accruing from the article or any portion thereof, embraced or referred to in such
invoice, declaration, affidavit, letter, paper, or statement, or affected by such act or omission,
shall, for each offense, be punished by a fine of not less than six hundred pesos nor more
than five thousand pesos and by imprisonment for not less than six months nor more than
two years and if the offender is an alien, he shall be deported after serving the sentence.730

G. Classification of goods

1. Taxable importation

All articles, when imported from any foreign country into the Philippines, shall be
subject to duty upon each importation, even though previously exported from the
Philippines, except as otherwise specifically provided for in this Code or in other laws.731

2. Prohibited importation

The importation into the Philippines of the following articles is prohibited:

a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons of

war, and detached parts thereof, except when authorized by law.1awphil

728
Sec. 3601
729
Sec. 3514
730
Sec. 3602
731
Sec. 101

220
 b. Written or printed article in any form containing any matter advocating or inciting
treason, rebellion, insurrection or sedition against the Government of the Philippines, of
forcible resistance to any law of the Philippines, or containing any threat to take the life of or
inflict bodily harm upon any person in the Philippines.

c. Written or printed articles, photographs, engravings, lithographs, objects,

paintings, drawings or other representation of an obscene or immoral character.

d. Articles, instruments, drugs and substances designed, intended or adapted for

preventing human conception or producing unlawful abortion, or any printed matter which
advertises or describes or gives directly or indirectly information where, how or by whom
human conception is prevented or unlawful abortion produced.

e. Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus
or mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes or
other articles when such distribution is dependent upon chance, including jackpot and
pinball machines or similar contrivances.

f. Lottery and sweepstakes tickets except those authorized by the Philippine

Government, advertisements thereof and lists of drawings therein.

g. Any article manufactured in whole or in part of gold silver or other precious metal,
or alloys thereof, the stamps brands or marks of which do not indicate the actual fineness or
quality of said metals or alloys.

h. Any adulterated or misbranded article of food or any adulterated or misbranded

drug in violation of the provisions of the "Food and Drugs Act."

i. Marihuana, opium poppies, coca leaves, or any other narcotics or synthetic drugs
which are or may hereafter be declared habit forming by the President of the Philippines,
any compound, manufactured salt, derivative, or preparation thereof, except when imported
by the Government of the Philippines or any person duly authorized by the Collector of
Internal Revenue, for medicinal purposes only.

j. Opium pipes and parts thereof, of whatever material.

k. All other articles the importation of which is prohibited by law.732

732
Sec. 102, id.

221
 H. Classification of duties

1. Ordinary/Regular duties

These are duties imposed on imported articles that enter the country of the
Philippines in avoidance with the schedules and classifications provided under the Tariff and
Customs Code.

a. Ad valorem; Methods of valuation

1) Transaction value

The price actually paid or payable for the goods when sold for export to the Philippines,
adjusted by adding:

(1) The following to the extent that they are incurred by the buyer but are not included in the
price actually paid or payable for the imported goods:

(a) Commissions and brokerage fees (except buying commissions);

(b) Cost of containers;

(c) The cost of packing, whether for labour or materials;

(d) The value, apportioned as appropriate, of the following goods and services:
materials, components, parts and similar items incorporated in the imported goods; tools;
dies; moulds and similar items used in the production of imported goods; materials
consumed in the production of the imported goods; and engineering, development, artwork,
design work and plans and sketches undertaken elsewhere than in the Philippines and
necessary for the production of imported goods, where such goods and services are supplied
directly or indirectly by the buyer free of charge or at a reduced cost for use in connection
with the production and sale for export of the imported goods;

(e) The amount of royalties and license fees related to the goods being valued that
the buyer must pay, either directly or indirectly, as a condition of sale of the goods to the
buyer;

(2) The value of any part of the proceeds of any subsequent resale, disposal or use of the
imported goods that accrues directly or indirectly to the seller;

(3) The cost of transport of the imported goods from the port of exportation to the port of
entry in the Philippines;

(4) Loading, unloading and handling charges associated with the transport of the imported
goods from the country of exportation to the port of entry in the Philippines; and

(5) The cost of insurance.733

733
Sec. 1 (A), R.A. 9135, amending Sec. 201 of TCC

222
 2) Transaction value of identical goods

Where the dutiable value cannot be determined under method one, the dutiable
value shall be the transaction value of identical goods sold for export to the Philippines and
exported at or about the same time as the goods being valued. "Identical goods" shall mean
goods which are the same in all respects, including physical characteristics, quality and
reputation. Minor differences in appearances shall not preclude goods otherwise conforming
to the definition from being regarded as identical.734

3) Transaction value of similar goods

Where the dutiable value cannot be determined under the preceding method, the
dutiable value shall be the transaction value of similar goods sold for export to the
Philippines and exported at or about the same time as the goods being valued. "Similar
goods" shall mean goods which, although not alike in all respects, have like characteristics
and like component materials which enable them to perform the same functions and to be
commercially interchangeable. The quality of the goods, their reputation and the existence of
a trademark shall be among the factors to be considered in determining whether goods are
similar.

If the dutiable value still cannot be determined through the successive application of
the two immediately preceding methods, the dutiable value shall be determined under
method four or, when the dutiable value still cannot be determined under that method,
under method five, except that, at the request of the importer, the order of application of
methods four and five shall be reversed: Provided, however, That if the Commissioner of
Customs deems that he will experience real difficulties in determining the dutiable value
using method five, the Commissioner of Customs may refuse such a request in which event
the dutiable value shall be determined under method four, if it can be so determined.735

4) Deductive value

The dutiable value of the imported goods under this method shall be the deductive value
which shall be based on the unit price at which the imported goods or identical or similar imported
goods are sold in the Philippines, in the same condition as when imported, in the greatest aggregate
quantity, at or about the time of the importation of the goods being valued, to persons not related to
the persons from whom they buy such goods, subject to deductions for the following:

(1) Either the commissions usually paid or agreed to be paid or the additions usually made
for profit and general expenses in connection with sales in such country of imported goods of the
same class or kind;

(2) The usual costs of transport and insurance and associated costs incurred within the
Philippines; and

734
Sec. 1 (B),Id.
735
Sec. 1 (C), id.

223
 (3) Where appropriate, the costs and charges referred to in subsection (A) (3), (4) and (5);
and

(4) The customs duties and other national taxes payable in the Philippines by reason of the
importation or sale of the goods.

If neither the imported goods nor identical nor similar imported goods are sold at or about
the time of importation of the goods being valued in the Philippines in the conditions as imported,
the customs value shall, subject to the conditions set forth in the preceding paragraph hereof, be
based on the unit price at which the imported goods or identical or similar imported goods sold in
the Philippines in the condition as imported at the earliest date after the importation of the goods
being valued but before the expiration of ninety (90) days after such importation.

If neither the imported goods nor identical nor similar imported goods are sold in the
Philippines in the condition as imported, then, if the importer so requests, the dutiable value shall be
based on the unit price at which the imported goods, after further processing, are sold in the greatest
aggregate quantity to persons in the Philippines who are not related to the persons from whom they
buy such goods, subject to allowance for the value added by such processing and deductions
provided under Subsections (D)(1), (2), (3) and (4) hereof.736

5) Computed value

The dutiable value under this method shall be the computed value which shall be the sum of:

(1) The cost or the value of materials and fabrication or other processing employed in
producing the imported goods;

(2) The amount for profit and general expenses equal to that usually reflected in the sale of
goods of the same class or kind as the goods being valued which are made by producers in the
country of exportation for export to the Philippines;

(3) The freight, insurance fees and other transportation expenses for the importation of the
goods;

(4) Any assist, if its value is not included under paragraph (1) hereof; and

(5) The cost of containers and packing, if their values are not included under paragraph (1)
hereof.

The Bureau of Customs shall not require or compel any person not residing in the
Philippines to produce for examination, or to allow access to, any account or other record for the
purpose of determining a computed value. However, information supplied by the producer of the
goods for the purposes of determining the customs value may be verified in another country with the
agreement of the producer and provided they will give sufficient advance notice to the government
of the country in question and the latter does not object to the investigation.737

736
Sec. 1 (D), id.
737
Sec. 1 (E), id.

224
 6) Fallback value

If the dutiable value cannot be determined under the preceding methods described
above, it shall be determined by using other reasonable means and on the basis of data
available in the Philippines.

If the importer so requests, the importer shall be informed in writing of the dutiable
value determined under Method Six and the method used to determine such value.

No dutiable value shall be determined under Method Six on the basis of:

(1) The selling price in the Philippines of goods produced in the Philippines;
(2) A system that provides for the acceptance for customs purposes of the higher of
two alternative values;
(3) The price of goods in the domestic market of the country of exportation;
(4) The cost of production, other than computed values, that have been determined
for identical or similar goods in accordance with Method Five hereof;
(5) The price of goods for export to a country other than the Philippines;
(6) Minimum customs values; or
(7) Arbitrary or fictitious values.738

b. Specific

Duty based on the dutiable weight of goods number or measurement.

2. Special duties

Imposed in addition to regular or ordinary duties principally in order to protect local

industries against unfair competition from foreign manufacturers or procedures; consumer
against possible deceptions; and national interest.

a. Dumping duties

Imposed by the Secretary of Finance upon the recommendation of the Tariff

Commission when:

a. The price of the imported article is deliberately or continually fixed at less

than the fair market value or cost of production; and

b. Importation would cause or likely cause and injury to local industries engaged
in the manufacture or production of the same or similar articles or prevent
their establishment.

Amount of special duty: extent of the underpricing.

738
Sec. 1 (F), id.

225
 b. Countervailing duties

Special duty imposed on imported articles which are granted any kind or form of
subsidy by the government in the country or origin or exportation, the importation of which
has caused or threatens to cause material injury to a domestic industry or has materially
relaided the growth or, prevents the establishment of a domestic industry.739

c. Marking duties

Special duty of five percent (5%) advalorem imposed or articles properly marked,
collected by the commissioner, except when such article is exported or destroyed under the
customs supervision and prior to final liquidation of the corresponding entry.

Purpose: To prevent possible deception of the consumers.

d. Retaliatory/Discriminatory duties

Imposed on imported goods whenever it is found as a fact that the country of origin
discriminates against the commerce of the Philippines in such a manner as to place the
commerce of the Philippines at a disadvantage compared with the commerce of any foreign
country.

e. Safeguard

Safeguard measures are emergency measures, including tariffs, to protect domestic

industries and producers from increased imports which inflict or could inflict serious injury
on them.740
The CTA is vested with jurisdiction to review decisions of the Secretary of Trade
and Industry imposing safeguard measures as provided under Rep. Act No. 8800 the
Safeguard Measures Act (SMA).741

The DTI Secretary cannot impose the safeguard measures if the Tariff Commission
does not favorably recommend its imposition.

I.Drawbacks

739
RA 8751
Requisites:
1.The levy of an excise tax or inland tax or local goods of the same or similar class as the article
imported or the grant of subsidy to the foreign exporter by his government; and
2.The importation is likely to insure materially established local industries or prevent their
establishments.
Amount of special duty: Equal to the bounty or subsidy or subvention.
740
Safeguards measures that may be imposed. Additional tariffs, import quotas or banning of imports.
741
Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No.
158540, July 8, 2004

226
 A drawback is a device resorted to for enabling a commodity affected by taxes to be
exported and sold in foreign markets upon the same terms as if it had not been taxed at all.
It refers to duties or taxes paid back or remitted by the government on the exportation of
that on which they were levied under the Tariff and Customs Code. It refers to refund of
duties on imported fuel used for provision of vessels.

J.Remedies

1. Government

a. Administrative/Extrajudicial

1) Search, seizure, forfeiture, arrest

For the enforcement of the customs and tariff laws, the following persons are
authorized to effect searches, seizures and arrests conformably with the provisions of said
laws:

a. Officials of the Bureau of Customs, collectors, assistant collectors, deputy collectors,

surveyors, security and secret-service agents, inspectors, port patrol officers and guards of the Bureau
of Customs.

b. Officers of the Philippine Navy when authorized by the Commissioner.

c. Any person especially authorized in writing by the Commissioner.

d. Officers generally empowered by law to effect arrests and execute processes of courts,
when acting under direction of the Collector.

e. Any person especially authorized by a Collector, subject to the restrictions stated in the
next succeeding section.

Persons exercising the powers hereinabove conferred shall, in the exercise thereof, have the
same authority, be entitled to the proper protection, and shall be governed by the same law, not
inconsistent with the provisions of this section, as other officers exercising police authority in
general.742

Place Where Authority May Be Exercised. Persons acting under authority conferred
pursuant to subsection (e) of the preceding section may exercise their authority within the limits of
the collection district only and in or upon the particular vessel or aircraft, or in the particular place, or
in respect to the particular article specified in the appointment. All such appointments shall be in
writing, and the original shall be filed in the customhouse of the district where made.

All other persons exercising the powers hereinabove conferred may exercise the same at any
place within the jurisdiction of the Bureau of Customs.743

742
Sec. 2203
743
Sec. 2204

227
 It shall be within the power of a customs official or person authorized as aforesaid, and it
shall be his duty, to make seizure of any vessel, aircraft, cargo, articles, animal or other movable
property when the same is subject to forfeiture or liable for any fine imposed under customs and
tariff laws, and also to arrest any person subject to arrest for violation of any customs and tariff laws,
such power to be exercised in conformity with the law and the provisions of this Code.744

It shall be the duty of any person exercising authority as aforesaid, upon being questioned at
the time of the exercise thereof, to make known his official character as an officer or official of the
Government, and if his authority is derived from special authorization in writing to exhibit the same
for inspection, if demanded.745

Any person exercising police authority under the customs and tariff laws may demand
assistance of any police officer when such assistance shall be necessary to effect any search, seizure
or arrest which may be lawfully made or attempted by him. It shall be the duty of any police officer
upon whom such requisition is made to give such lawful assistance in the matter as may be
required.746

For the more effective discharge of his official duties, any person exercising the powers
herein conferred, may at anytime enter, pass through, or search any land or enclosure or any
warehouse, store or other building, not being a dwelling house.747

A warehouse, store or other building or enclosure used for the keeping of storage of articles
does not become a dwelling house within the meaning hereof merely by reason of the fact that a
person employed as watchman lives in the place, nor will the fact that his family stays there with him
alter the case.

A dwelling house may be entered and searched only upon warrant issued by a judge or
justice of the peace, upon sworn application showing probable case and particularly describing the
place to be searched and person or thing to be seized.748

It shall be lawful for any official or person exercising police authority under the provisions
of this Code to go abroad any vessel or aircraft within the limits of any collection to go aboard any
vessel or aircraft within the limits of any collection district, and to inspect, search and examine said
vessel or aircraft and any trunk, package, box or envelope on board, and to search any person on
board the said vessel or aircraft and to this end to hail and stop such vessel or aircraft if under way,
to use all necessary force to compel compliance; and if it shall appear that any breach or violation of
the customs and tariff laws of the Philippines has been committed, whereby or in consequence of
which such vessels or aircrafts, or the article, or any part thereof, on board of or imported by such
vessel or aircraft, is liable to forfeiture, to make seizure of the same or any part thereof.

The power of search hereinabove given shall extend to the removal of any false bottom,
partition, bulkhead or other obstruction, so far as may be necessary to enable the officer to discover
whether any dutiable or forfeitable articles may be concealed therein.

No proceeding herein shall give rise to any claim for the damage thereby caused to article or
vessel or aircraft.749

744
Sec. 2205.
745
Sec. 2206
746
Sec. 2207.
747
Sec. 2208.
748
Sec. 2209

228
 It shall also be lawful for a person exercising authority as aforesaid to open and examine any
box, trunk, envelope or other container, wherever found where he has reasonable cause to suspect
the presence therein of dutiable or prohibited article or articles introduced into the Philippines
contrary to law, and likewise to stop, search and examine any vehicle, beast or person reasonably
suspected of holding or conveying such article as aforesaid.750

All persons coming into the Philippines from foreign countries shall be liable to detention
and search by the customs authorities under such regulations as may be prescribed relative thereto.

Female inspectors may be employed for the examination and search of persons of their own
sex.751

Upon making any seizure, the Collector shall issue a warrant for the detention of the
property; and if the owner or importer desires to secure the release of the property for legitimate use,
the Collector may surrender it upon the filing of a sufficient bond, in an amount to be fixed by him,
conditioned for the payment of the appraised value of the article and/or any fine, expenses and costs
which may be adjudged in the case: Provided, That articles the importation of which is prohibited by
law shall not be released under bond.752

When a seizure is made for any cause, the Collector of the district wherein the seizure is
effected shall immediately make report thereof to the Commissioner and to the Auditor General.753

The Collector shall give the owner or importer of the property or his agent a written notice
of the seizure and shall give him an opportunity to be heard in reference to the delinquency which
was the occasion of such seizure.

For the purpose of giving such notice and of all other proceedings in the matter of such
seizure, the importer, consignee or person holding the bill of lading shall be deemed to be the
"owner" of the article included in the bill.

For the same purpose, "agent" shall be deemed to include not only any agent in fact of the
owner of the seized property but also any person having responsible possession of the property at
the (missing) of the seizure, if the owner or his agent in fact is unknown or cannot be reached.754

Notice to an unknown owner shall be effected by posting a notice for fifteen days in the
public corridor of the customhouse of the district in which the seizure was made, and, in the
discretion of the Commissioner, by publication in a newspaper or by such other means as he shall
consider desirable.755

The Collector shall also cause a list and particular description of the property seized to be
prepared and an appraisement or classification of the same at its wholesale value in the local market
in the usual wholesale quantities to be made by at least two appraising officials, if there are such
officials at or near the place of seizure; in the absence of such officials, then by two competent and

749
Sec. 2210
750
Sec. 2211
751
Sec. 2212
752
Sec. 2301
753
Sec. 2302
754
Sec. 2303
755
Sec. 2304

229
disinterested citizens of the Philippines, to be selected by him for that purpose, residing at or near the
place of seizure, which list and appraisement shall be properly attested to by such Collector and the
persons making the appraisal.756

If, within fifteen days after the notification prescribed in section twenty-three hundred and
four of this Code, no owner or agent can be found or appears before the Collector, the latter shall
declare the property forfeited to the government to be sold at auction in accordance with law.757

If, in any seizure case, the owner or agent shall, while the case is yet before the Collector of
the district of seizure, pay to such Collector the fine imposed by him or, in case of forfeiture, shall
pay the appraised value of the property, or, if after appeal of the case, he shall pay to the
Commissioner the amount of the fine as finally determined by him, or, in case of forfeiture, shall pay
the appraised value of the property, such property shall be forthwith surrendered, and all liability
which may or might attach to the property by virtue of the offense which was the occasion of the
seizure and all liability which might have been incurred under any bond given by the owner or agent
in respect to such property shall thereupon be deemed to be discharged.

Redemption of forfeited property shall not be allowed in any case where the importation is
absolutely prohibited or where the surrender of the property to the person offering to redeem the
same would be contrary to law.758

b. Judicial

1) Rules on appeal including jurisdiction

The party aggrieved by a ruling of the Commissioner in any matter brought before
him upon protest or by his action or ruling in any case of seizure may appeal to the Court of
Tax Appeals, in the manner and within the period prescribed by law and regulations.

Unless an appeal is made to the Court of Tax Appeals in the manner and within the
period prescribed by laws and regulations, the action or ruling of the Commissioner shall be
final and conclusive.759

2) Taxpayer

a. Protest

When a ruling or decision of the Collector is made whereby liability for duties, fees, or other
money charge is determined, except the fixing of fines in seizure cases, the party adversely affected
may protest such ruling or decision by presenting to the Collector at the time when payment of the
amount claimed to be due the Government is made, or within thirty days thereafter, a written protest
setting forth his objections to the ruling or decision in question, together with the reasons therefor.
No protest shall be considered unless payment of the amount due after final liquidation has first been
made.760

756
Sec. 2305
757
Sec. 2306.
758
Sec. 2307
759
Sec. 2402
760
Sec. 2308

230
 In all cases subject to protest, the interested party who desires to have the action of the
Collector reviewed, shall make a protest, otherwise, the action of the Collector shall be final and
conclusive against him, except as to matters correctible for manifest error in the manner prescribed
in section one thousand seven hundred and seven hereof.761

Every protest shall be filed in accordance with the prescribed rules and regulations
promulgated under this section and shall point out the particular decision or ruling of the Collector
to which exception is taken or objection made, and shall indicate with reasonable precision the
particular ground or grounds upon which the protesting party bases his claim for relief.

The scope of a protest shall be limited to the subject matter of a single adjustment or other
independent transaction; but any number of issue may be raised in a protest with reference to the
particular item or items constituting the subject matter of the protest.

"Single adjustment", as hereinabove used, refers to the entire content of one liquidation,
including all duties, fees, surcharges or fines incident thereto.762

If the nature of the articles permit, importers filing protests involving questions of fact must,
upon demand, supply the Collector with samples of the articles which are the subject matter of the
protests. Such samples shall be verified by the custom official who made the classification against
which the protest are filed.763

When a protest in proper form is presented in a case where protest in required, the Collector
shall reexamine the matter thus presented, and if the protest is sustained, in whole or in part, he shall
enter the appropriate order, the entry reliquidated if necessary.

In seizure cases, the Collector, after a hearing, shall in writing make a declaration of
forfeiture or fix the amount of the fine or take such other action as may be proper.764

The person aggrieved by the decision or action of the Collector in any matter presented
upon protest or by his action in any case of seizure may, within fifteen days after notification in
writing by the Collector of his action or decision, give written notice to the Collector of his desire to
have the matter reviewed by the Commissioner. Thereupon the Collector shall forthwith transmit all
the records of the proceedings to the Commissioner, who shall approve, modify or reverse the action
or decision of the Collector and take such steps and make such orders as may be necessary to give
effect to his decision.765

Notice of the decision of the Commissioner shall be given to the party by whom the case
was brought before him for review, and in seizure cases such notice shall be effected by personal
service if practicable.766

If in any case involving the assessment of duties the importer shall fail to protest the ruling
of the Collector, and the Commissioner shall be of the opinion that the ruling was erroneous and
unfavorable to the Government, the latter may order a reliquidation; and if the ruling of the

761
Sec. 2309
762
Sec. 2310.
763
Sec. 2311
764
Sec. 2312
765
Sec. 2313
766
Sec. 2314

231
Commissioner in any unprotested case should, in the opinion of the department head, be erroneous
and unfavorable to the Government, the department head may require the Commissioner to order a
reliquidation.

Except as in the preceding paragraph provided, the supervisory authority of the department
head over the Bureau of Customs shall not extend to the administrative review of the ruling of the
Commissioner in matters appealed to theCourt of Tax Appeals.767

b. Abandonment

Abandonment is express when it is made direct to the Collector by the interested

party in writing, and it is implied when, from the action or omission of the interested party,
an intention to abandon can be clearly inferred. The failure of any interested party to file the
import entry within fifteen days or any extension thereof from the discharge of the vessel or
aircraft, shall be implied abandonment. An implied abandonment shall not be effective until
the article is declared by the Collector to have been abandoned after notice thereof is given
to the interested party as in seizure cases.

Any person who abandons an imported article renounces all his interests and
property rights therein.768

The owner or importer of any articles may, within ten days after filing of the import entry,
abandon to the Government all or a part of the articles included in an invoice, and, thereupon, he
shall be relieved from the payment of duties, taxes and all other charges and expenses due thereon:
Provided, That the portion so abandoned is not less than ten per cent of the total invoice and is not
less than one package, except in cases of articles imported for personal or family use. The article so
abandoned shall be delivered by the owner or importer at such place within the port of arrival as the
Collector shall designate, and upon his failure to so comply, the owner or importer shall be liable for
all expenses that may be incurred in connection with the disposition of the articles.

Nothing in this section shall be construed as relieving such owner or importer from any
criminal liability which may arise from any violation of law committed in connection with the
importation of the abandoned article.769

The owner or importer of an article impliedly abandoned may, at any time before it is sold or
otherwise disposed of, reclaim such article provided all legal requirements regarding its importation
are complied with and the corresponding duties, taxes and other charges as well as all expenses
incurred as a consequence of the abandonment, are paid.770

c. Abatement and refund

Except as herein specially provided, no abatement of duties shall be made on account of

damage incurred or deterioration suffered during the voyage of importation; and duties will be

767
Sec. 2315
768
Sec. 1801
769
Sec. 1802
770
Sec. 1803

232
assessed on the actual quantity imported, as shown by the return of weighers, gaugers, measures,
examiners or appraisers, as the case may be.771

When any package or packages appearing on the manifest or bill of lading are missing, a
remission or refund of the duty thereon shall be made if it is shown by proof satisfactory to the
Collector that the package or packages in question have not been imported into the Philippines.772

If, upon opening any package, a deficiency or absence of any article, or of part of the
contents thereof, as called for by the invoice shall be found to exist, such deficiency shall be certified
to the Collector by the appraiser; and upon the production of proof satisfactory to the Collector
showing that the shortage occurred before the arrival of the article in the Philippines, the proper
abatement or refund of the duty shall be made.773

A Collector may abate or refund the amount of duties accruing or paid, and may likewise
make a corresponding allowance or credit on the entry bond, or other document, upon satisfactory
proof of the injury, destruction, or loss by theft, fire or other causes of any article as follows:

a. While within the limits of any port of entry prior to unlading under customs supervision.

b. While remaining in customs custody after unlading.

c. While in transit under bond from the port of entry to any port in the Philippines.

d. While released under bond to export, except in case of loss by theft.774

Where it is satisfactorily shown to the Collector that an animal which is the subject of
importation dies or suffers injury before arrival, or while in customs custody, the duty shall be
correspondingly abated by him, provided the carcass of any dead animal remaining on board or in
customs custody be removed in the manner required by the Collector and at the expense of the
importer.775

The Collector shall in all cases of allowances, abatements or refunds of duties, cause an
examination and report in writing to be made as to any fact discovered during such examination
which tends to account for the discrepancy or difference and cause the corresponding adjustment to
be made on the import entry.776

Manifest clerical errors made in an invoice or entry, errors in return of weight, measure and
gauge, when duly certified to by the surveyor or examining official (when there are such officials at
the port), and errors in the distribution of charges on invoices not involving any question of law and
certified to by the examining official, may be corrected in the computation of duties, if such errors be
discovered before the payment of duties, or, if discovered within one year after the final liquidation,
upon written request and notice of error from the importer, or upon statement of error certified by
the Collector.

771
Sec. 1701
772
Sec. 1702
773
Sec. 1703
774
Sec. 1704
775
Sec. 1705
776
Sec. 1706

233
 For the purpose of correcting errors specified in the next preceding paragraph the Collector
is authorized to reliquidate entries and collect additional charges, or to make refunds on statement of
error within the statutory time limit.777

All claims for refund of duties shall be made in writing, and forwarded to the Collector to
whom such duties are paid, who upon receipt of such claim shall verify the same by the records of
his office, and if found to be correct and in accordance with law, shall certify the same to
theCommissioner with his recommendation together with all necessary papers and documents. Upon
receipt by the Commissioner of such certified claim he shall cause the same to be paid if found
correct.778

V. Judicial Remedies; Republic Act 1125 The Act that Created the Court of Tax
Appeals (CTA),779 as amended, and the Revised Rules of the Court of Tax Appeals

A. Jurisdiction of the Court of Tax Appeals

1. Exclusive appellate jurisdiction over civil tax cases

a. Cases within the jurisdiction of the Court en banc

The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the
following:

(a) Decisions or resolutions on motions for reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive appellate jurisdiction over:

(1) Cases arising from administrative agencies Bureau of Internal Revenue, Bureau
of Customs, Department of Finance, Department of Trade and Industry, Department of
Agriculture;

(2) Local tax cases decided by the Regional Trial Courts in the exercise of their
original jurisdiction; and

(3) Tax collection cases decided by the Regional Trial Courts in the exercise of their
original jurisdiction involving final and executory assessments for taxes, fees, charges and

777
Sec. 1707
778
Sec. 1708
779
The Court of Tax Appeals is a court of special appellate jurisdiction and a part of our judicial system.
The proceedings therein are judicial in nature although the Court is not bound by the technical rules of
evidence. (Purakan Plantation Co. vs. Domingo L-18571, 29 Oct. 1966)
It is a regular court vested with exclusive appellate jurisdiction over cases arising under the:
1.National Internal Revenue Code
2.Tariff and Customs Code
3.Assessment law
The CTA is a highly specialized body specially created for the purpose of reviewing tax cases, its findings
will not be ordinarily be reviewed absent a showing of gross error or abuse on its part. These findings are
binding upon the Supreme Court and in the absence of strong reasons for the court to delve on fatcs, only
questions of law are open for determination.

234
 penalties, where the principal amount of taxes and penalties claimed is less than one million
pesos;

(b) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or
resolved by them in the exercise of their appellate jurisdiction;

(c) Decisions, resolutions or orders of the Regional Trial Courts in tax collection cases
decided or resolved by them in the exercise of their appellate jurisdiction;

(d) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court
in Division in the exercise of its exclusive original jurisdiction over tax collection cases;

(e) Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise of its
appellate jurisdiction over cases involving the assessment and taxation of real property originally
decided by the provincial or city board of assessment appeals;

(f) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court
in Division in the exercise of its exclusive original jurisdiction over cases involving criminal offenses
arising from violations of the National Internal Revenue Code or the Tariff and Customs Code and
other laws administered by the Bureau of Internal Revenue or Bureau of Customs;

(g) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court
in Division in the exercise of its exclusive appellate jurisdiction over criminal offenses mentioned in
the preceding subparagraph; and

(h) Decisions, resolutions or orders of the Regional trial Courts in the exercise of their
appellate jurisdiction over criminal offenses mentioned in subparagraph (f).780

b. Cases within the jurisdiction of the Court in divisions

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where the National Internal Revenue Code
or other applicable law provides a specific period for action: Provided, that in case of
disputed assessments, the inaction of the Commissioner of Internal Revenue within the one
hundred eighty day-period under Section 228 of the National Internal revenue Code shall be
deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and
does not necessarily constitute a formal decision of the Commissioner of Internal Revenue
on the tax case; Provided, further, that should the taxpayer opt to await the final decision of
the Commissioner of Internal Revenue on the disputed assessments beyond the one
hundred eighty day-period abovementioned, the taxpayer may appeal such final decision to

780
Rule 4, Sec. 2, Revised Rules of the Court Of Tax Appeals

235
 the Court under Section 3(a), Rule 8 of these Rules; and Provided, still further, that in the
case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a
petition for review with the Court prior to the expiration of the two-year period under
Section 229 of the National Internal Revenue Code;

(3) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases
decided or resolved by them in the exercise of their original jurisdiction;

(4) Decisions of the Commissioner of Customs in cases involving liability for

customs duties, fees or other money charges, seizure, detention or release of property
affected, fines, forfeitures of other penalties in relation thereto, or other matters arising
under the Customs Law or other laws administered by the Bureau of Customs;

(5) Decisions of the Secretary of Finance on customs cases elevated to him

automatically for review from decisions of the Commissioner of Customs adverse to the
Government under Section 2315 of the Tariff and Customs Code; and

(6) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural
product, commodity or article, and the Secretary of Agriculture, in the case of agricultural
product, commodity or article, involving dumping and countervailing duties under Section
301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under
Republic Act No. 8800, where either party may appeal the decision to impose or not to
impose said duties;

(b) Exclusive jurisdiction over cases involving criminal offenses, to wit:

(1) Original jurisdiction over all criminal offenses arising from violations of the
National internal Revenue Code or Tariff and Customs Code and other laws administered by
the Bureau of Internal Revenue of the Bureau of Customs, where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions or orders of
the Regional Trial Courts in their original jurisdiction in criminal offenses arising from
violations of the National Internal Revenue Code or Tariff and Customs Code and other
laws administered by the Bureau of Internal Revenue or Bureau of Customs, where the
principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than
one million pesos or where there is no specified amount claimed;

(c) Exclusive jurisdiction over tax collections cases, to wit:

(1) Original jurisdiction in tax collection cases involving final and executory
assessments for taxes, fees, charges and penalties, where the principal amount of taxes and
fees, exclusive of charges and penalties, claimed is one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions or orders of
the Regional Trial Courts in tax collection cases originally decided by them within their
respective territorial jurisdiction.781

781
Sec. 3, id.,

236
 2. Criminal cases

a. Exclusive original jurisdiction

(a) Exclusive original jurisdiction over all criminal cases arising from violations of the NIRC
or Tariff and Customs Code and other laws administered by the BIR or the Bureau of Customs

Provided however, where the principal amount of taxes and fees, exclusive of charges and
penalties claimed is less than one million pesos (P1,000, 000. 00) or where there is no specified
amount claimed - the offenses or penalties shall be tried by the regular courts and the jurisdiction of the
CTA shall be appellate.

Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal
action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall
at all times be simultaneously instituted with, and jointly determined in the same proceeding by the
CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil
action, and no right to reserve the filing of such civil action separately from the criminal action will
be recognized.

b. Exclusive appellate jurisdiction in criminal cases

Over appeals from the judgments, resolutions or orders of the RTC in tax cases
originally decided by them, in their respective territorial jurisdiction.

Over petitions for review of the judgments, resolutions, or orders of the RTC in the
exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan
Trial Courts, Municipal Trial Courts, and Municipal Circuit Trial Courts in their respective
jurisdiction.

B. Judicial Procedures

1. Judicial action for collection of taxes

a. Internal revenue taxes

Upon the issuance of any ruling, order or decision by the CTA favorable to the
national government, the CTA shall issue an order authorizing the Bureau of Internal
Revenue, through the Commissioner to seize and distraint any goods, chattels, or effects,
and the personal property, including stocks and other securities, debts, credits, bank
accounts, and interests in and rights to personal property and/or levy the real property of
such persons in sufficient quantity to satisfy the tax or charge together with any increment
thereto incident to delinquency. This remedy shall not be exclusive and shall not preclude
the Court from availing of other means under the Rules of Court.782

782
Sec. 13 of RA No. 1125, as amended by Sec. 9 of RA No. 9282

237
 b. Local taxes

1) Prescriptive period

Five (5) years from date of assessment.

2. Civil cases

a. Who may appeal, mode of appeal, effect of appeal

Any party adversely affected by a decision, ruling or inaction of the Commissioner of

Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade
and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the
Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of
such decision or ruling or after the expiration of the period fixed by law for action as referred to in
Section 7(a)(2) herein.

Appeal shall be made by filing a petition for review under a procedure analogous to that
provided for under Rule 42783 of the 1997 Rules of Civil Procedure with the CTA within thirty (30)
days from the receipt of the decision or ruling or in the case of inaction as herein provided, from the
expiration of the period fixed by law to act thereon. A Division of the CTA shall hear the appeal:
Provided, however, That with respect to decisions or rulings of the Central Board of Assessment
Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction appeal shall be made
by filing a petition for review under a procedure analogous to that provided for under Rule 43 of the
1997 Rules of Civil Procedure with the CTA, which shall hear the case en banc.

All other cases involving rulings, orders or decisions filed with the CTA as provided for in
Section 7 shall be raffled to its Divisions. A party adversely affected by a ruling, order or decision of
a Division of the CTA may file a motion for reconsideration of new trial before the same Division of
the CTA within fifteens (15) days from notice thereof: Provide, however, That in criminal cases, the
general rule applicable in regular Courts on matters of prosecution and appeal shall likewise apply.

No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or
the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or
the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case
may be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing law: Provided, however, That when in the
opinion of the Court the collection by the aforementioned government agencies may jeopardize the
interest of the Government and/or the taxpayer the Court any stage of the proceeding may suspend
the said collection and require the taxpayer either to deposit the amount claimed or to file a surety
bond for not more than double the amount with the Court.

In criminal and collection cases covered respectively by Section 7(b) and (c) of this Act, the
Government may directly file the said cases with the CTA covering amounts within its exclusive and
original jurisdiction.784

783
See Reference
784
Sec. 11 of RA No. 1125,id.

238
 1) Suspension of collection of tax

a) Injunction not available to restrain

collection

Sec. 11 of RA No. 1125785 grants CTA power to suspend collection of tax if such
collection works to serious prejudice of either taxpayer or government.

However, Sec. 218 of the Tax Code provides that no court may grant injunction to
restrain collection of any tax, fee or charge imposed by Tax Code.

The provision in Tax Code refers to courts other than the CTA.786

Appeal to the CTA does not automatically suspend collection unless CTA issues
suspension order at any stage of proceedings.

2) Taking of evidence

The Court may, upon proper motion on or its initiative, direct that a case, or any
issue thereof, be assigned to one of its members for the taking of evidence, when the
determination of a question of fact arises upon motion or otherwise in any stage of the
proceedings, or when the taking of an account is necessary, or when the determination of an
issue of fact requires the examination of a long account. The hearing before such member
shall proceed in all respects as though the same had been made before the Court.

Upon the recommendation of such hearing such member, he shall promptly submit
to the Court his report in writing, stating his findings and conclusions; and thereafter, the
Court shall render its decisions on the case, adopting, modifying, or rejecting the report in
whole or in part, as the case may be, or the Court may, in its discretion recommit it with
instructions, or receive further evidence.787

3) Motion for reconsideration or New trial

A party adversely affected by a decision or resolution of a Division of the Court on a

motion for reconsideration or new trial may appeal to the Court by filing before it a petition
for review within fifteen days from receipt of a copy of the questioned decision or
resolution. Upon proper motion and the payment of the full amount of the docket and other
lawful fees and deposit for costs before the expiration of the reglementary period herein
fixed, the Court may grant an additional period not exceeding fifteen days from the
expiration of the original period within which to file the petition for review.788

785
as amended by Sec. 9 of RA No. 9282
786
Blaquera vs. Rodriguez, GR No. L-11295, March 29, 1958
787
Sec. 12, R.A. 1125
788
Sec. 3 (b), Revised Rules of the CTA

239
 An appeal from a decision or resolution of the Court in Division on a motion for
reconsideration or new trial shall be taken to the Court by petition for review as provided in
Rule 43 of the Rules of Court. The Court en banc shall act on the appeal.789

b. Appeal to the CTA, en banc

No civil proceeding involving matter arising under the National Internal Revenue
Code, the Tariff and Customs Code or the Local Government Code shall be maintained,
except as herein provided, until and unless an appeal has been previously filed with the CTA
and disposed of in accordance with the provisions of this Act.790

"A party adversely affected by a resolution of a Division of the CTA on a motion for
reconsideration or new trial, may file a petition for review with the CTA en banc.

c. Petition for review on certiorari to the Supreme Court

A party adversely affected by a decision or ruling of the CTA en banc may file with
the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the
1997 Rules of Civil Procedure.791

3. Criminal cases

a. Institution and prosecution of criminal actions

1) Institution on civil action in criminal action

In cases within the jurisdiction of the Court, the criminal action and the
corresponding civil action for the recovery of civil liability for taxes and penalties shall be
deemed jointly instituted in the same proceeding. The filing of the criminal action shall
necessarily carry with it the filing of the civil action. No right to reserve the filing of such
civil action separately from the criminal action shall be allowed or recognized.792

b. Appeal and period to appeal

1) Solicitor General as counsel for the People and

government officials sued in their official capacity

The Solicitor General shall represent the People of the Philippines and government
officials sued in their official capacity in all cases brought to the Court in the exercise of its
appellate jurisdiction. He may deputized the legal officers of the Bureau of Internal Revenue
in cases brought under the National Internal Revenue Code or other laws enforced by the
Bureau of Internal Revenue, or the legal officers of the Bureau of Customs in cases brought
under the Tariff and Customs Code of the Philippines or other laws enforced by the Bureau

789
Sec. 4 (b), id.
790
SEC. 18, id.
791
Sec. 19.
792
Rule 9, Sec. 11, id.;, Rule 111, sec. 1[a], par. 1a; Rules of Court

240
of Customs, to appear in behalf of the officials of said agencies sued in their official capacity:
Provided, however, such duly deputized legal officers shall remain at all times under the
direct control and supervision of the Solicitor General.793

c. Petition for review on certiorari to the Supreme Court

A party adversely affected by a decision or ruling of the Court en banc may appeal
therefrom by filing with the Supreme Court a verified petition for review on certiorari within
fifteen days from receipt of a copy of the decision or resolution, as provided in Rule 45 of
the Rules of Court. If such party has filed a motion for reconsideration or for new trial, the
period herein fixed shall run from the partys receipt of a copy of the resolution denying the
motion for reconsideration or for new trial.794

C. Taxpayers suit impugning the validity of tax measures or acts of taxing

authorities

a. Taxpayers suit, defined

Taxpayers suit is a case where the act complained of directly involves the illegal
disbursement of public funds derived from taxation.795

b. Distinguished from citizens suit

The plaintiff in a taxpayers suit is in a different category from the plaintiff in a

citizens suit. In the former, the plaintiff is affected by the expenditure of public funds, while
in the latter, he is but the mere instrument of the public concern.796

As held by the New York Supreme Court in People ex rel Case v. Collins: "In matter
of mere public right, howeverthe people are the real partiesIt is at least the right, if not
the duty, of every citizen to interfere and see that a public offence be properly pursued and
punished, and that a public grievance be remedied." With respect to taxpayers suits, Terr v.
Jordan held that "the right of a citizen and a taxpayer to maintain an action in courts to
restrain the unlawful use of public funds to his injury cannot be denied."

793
Sec. 10, id.
794
Rule 16, Sec. 1, id.
795
Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110
Requisites for a taxpayers petition:
1) That money is being extracted and spent in violation of specific constitutional
protections against abuses of legislative power
2) That public money is being deflected to any improper purpose
3) That the petitioner seeks to restrain respondents from wasting public funds
through the enforcement of an invalid or unconstitutional law.
The Supreme Court has discretion whether or not to entertain taxpayers
suit and could brush aside lack of locus standi (Kilos Bayan vs. Guingona)
796
Beauchamp v. Silk

241
 c. Requisites for challenging the constitutionality of a tax
measure or act of taxing authority

1) Concept of locus standi as applied in taxation

It is a partys personal and substantial interest in the case, such that the party has
sustained or will sustain direct injury as a result of the government act being challenged. It
calls for more than just a generalized grievance.797

A party need not be a party to the contract to challenge its validity.798

2) Doctrine of transcendental importance

When paramount public interest is involved.

3) Ripeness for judicial determination

In our jurisdiction, the issue of ripeness is generally treated in terms of actual injury
to the plaintiff. Hence, a question is ripe for adjudication when the act being challenged has
had a direct adverse effect on the individual challenging it.799 An alternative road to review
similarly taken would be to determine whether an action has already been accomplished or
performed by a branch of government before the courts may step in.800
To be ripe for judicial adjudication, the petitioner must show a personal stake in the
outcome of the case or an injury to himself that can be redressed by a favorable decision of
the Court.801

797
Abaya v. Ebdane, G. R. No. 167919, February 14, 2007
798
Ibid.
799
Guingona, Jr. v. Court of Appeals, 354 Phil. 415, 427-428 (1998).
800
Francisco, Jr. v. House of Representatives, 460 Phil. 830, 901-902 (2003).
801
ABAKADA Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v. Secretary of Environment and
Natural Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion

242
 Reference
Sec. 24

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements; royalties, except on books, as well as other literary works and musical
compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes
amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection
(A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto
winnings), derived from sources within the Philippines: Provided, however, That interest income
received by an individual taxpayer (except a nonresident individual) from a depository bank
under the expanded foreign currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the BangkoSentralngPilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should
the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or investment certificate based on the
remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon
the cash and/or property dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies, or on the share of an individual in

243
the distributable net income after tax of a partnership (except a general professional partnership)
of which he is a partner, or on the share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium taxable as a corporation of which he
is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999; and
Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after
January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not,
even if declared or distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange.
Not over P100,000........ 5%

On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent
(6%) based on the gross selling price or current fair market value as determined in accordance
with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains
presumed to have been realized from the sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets, including pacto de retro sales and other
forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax
liability, if any, on gains from sales or other dispositions of real property to the government or
any of its political subdivisions or agencies or to government-owned or controlled corporations
shall be determined either under Section 24 (A) or under this Subsection, at the option of the
taxpayer.

Section 25

(A)
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or
Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a
General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or
Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends
from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund
company or from a regional operating headquarters of multinational company, or the share of a
nonresident alien individual in the distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or the share of a nonresident alien
individual in the net income after tax of an association, a joint account, or a joint venture taxable
as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and
prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to
tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on

244
the total amount thereof: Provided, however, that royalties on books as well as other literary
works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%)
on the total amount thereof: Provided, further, That cinematographic films and similar works
shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the BangkoSentralngPilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should
the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or investment certificate based on the
remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock
in domestic corporations not traded through the local stock exchange, and real properties shall be
subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. -
There shall be levied, collected and paid for each taxable year upon the entire income received
from all sources within the Philippines by every nonresident alien individual not engaged in trade
or business within the Philippines as interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal
to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien
individual not engaged in trade or business in the Philippines from the sale of shares of stock in
any domestic corporation and real property shall be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. - There shall be levied, collected and paid for each
taxable year upon the gross income received by every alien individual employed by regional or
area headquarters and regional operating headquarters established in the Philippines by
multinational companies as salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such regional or area headquarters and
regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying
the same position as those of aliens employed by these multinational companies. For purposes of
this Chapter, the term 'multinational company' means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and
other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and
paid for each taxable year upon the gross income received by every alien individual employed by
offshore banking units established in the Philippines as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and allowances, from such off-shore

245
banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That
the same tax treatment shall apply to Filipinos employed and occupying the same positions as
those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien
individual who is a permanent resident of a foreign country but who is employed and assigned in
the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in
petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the
salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria
and allowances, received from such contractor or subcontractor: Provided, however, That the
same tax treatment shall apply to a Filipino employed and occupying the same position as an
alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees
referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax,
as the case may be, imposed under this Code.

Section 27
xxx
(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the
rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements received by domestic corporations, and royalties, derived from sources
within the Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest
income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A
final tax at the rates prescribed below shall be imposed on net capital gains realized during the
taxable year from the sale, exchange or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the stock exchange:

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

Amount in excess of P100,000.. 10%

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the expanded foreign currency deposit system from
foreign currency transactions with local commercial banks, including branches of foreign banks
that may be authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign
currency depository system units and other depository banks under the expanded foreign currency
deposit system, including interest income from foreign currency loans granted by such depository
banks under said expanded foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with
depository banks under the expanded system shall be exempt from income tax.

246
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A
final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the
sale, exchange or disposition of lands and/or buildings which are not actually used in the business
of a corporation and are treated as capital assets, based on the gross selling price of fair market
value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such
lands and/or buildings.

Section 28

(A) Tax on Resident Foreign Corporations. -

xxx

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding,
income derived by offshore banking units authorized by the BangkoSentralngPilipinas (BSP) to
transact business with offshore banking units, including any interest income derived from foreign
currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent
(10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with said
offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head
office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof (except those
activities which are registered with the Philippine Economic Zone Authority). The tax shall be
collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided,
that interests, dividends, rents, royalties, including remuneration for technical services, salaries,
wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual
gains, profits, income and capital gains received by a foreign corporation during each taxable year
from all sources within the Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the Philippines.
xxx
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency
bank deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements and royalties derived from sources within the Philippines shall be
subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident foreign corporation from a depository bank
under the expanded foreign currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7 1/2%) of such interest income.

(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income
derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks including branches of foreign banks that may
be authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign currency
deposit system units, including interest income from foreign currency loans granted by such
depository banks under said expanded foreign currency deposit system to residents, shall be
subject to a final income tax at the rate of ten percent (10%) of such income.

247
Any income of nonresidents, whether individuals or corporations, from transactions with
depository banks under the expanded system shall be exempt from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A
final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during
the taxable year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed of through the stock exchange:

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

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

(B) Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not
engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%)
of the gross income received during each taxable year from all sources within the Philippines,
such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d):
Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1,
2000 and thereafter, the rate shall be thirty-two percent (32%).

(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A

cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of
its gross income from all sources within the Philippines.

(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A

nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4
1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. -

Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent
(20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August
1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent
(15%) is hereby imposed on the amount of cash and/or property dividends received from a
domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this
Code, subject to the condition that the country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes
deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997,
nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%)
thereafter, which represents the difference between the regular income tax of thirty-five percent
(35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and

248
thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on
dividends as provided in this subparagraph;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at
the rates prescribed below is hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange:

Not overP100,000............5%
On any amount in excess of P100,000 .10%

Sec. 32 (B)(6)(a)

Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer: Provided, That the retiring official or
employee has been in the service of the same employer for at least ten (10) years and is not less
than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits
granted under this subparagraph shall be availed of by an official or employee only once. For
purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity,
stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his
officials or employees, wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and employees the earnings
and principal of the fund thus accumulated, and wherein its is provided in said plan that at no
time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.

SEC. 33.Special Treatment of Fringe Benefit.-

(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1,
1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective
January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee (except rank and file employees as defined herein)
by the employer, whether an individual or a corporation (unless the fringe benefit is required by
the nature of, or necessary to the trade, business or profession of the employer, or when the fringe
benefit is for the convenience or advantage of the employer). The tax herein imposed is payable
by the employer which tax shall be paid in the same manner as provided for under Section 57 (A)
of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing
the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1,
1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%)
effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to
employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the
applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe

249
benefit shall be determined by dividing the actual monetary value of the fringe benefit by the
difference between one hundred percent (100%) and the applicable rates of income tax under
Subsections (B), (C), (D), and (E) of Section 25.

(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit"
means any good, service or other benefit furnished or granted in cash or in kind by an employer
to an individual employee (except rank and file employees as defined herein) such as, but not
limited to, the following:

(1) Housing;
(2) Expenseaccount;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between
themarket rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee
insocial and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
inexcess of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insuranceand hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a
collectivebargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated bythe
Secretary of Finance, upon recommendation of the Commissioner.

SEC. 58. Returns and Payment of Taxes Withheld at Source. -

(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld
under Section 57 by withholding agents shall be covered by a return and paid to, except in cases
where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality
where the withholding agent has his legal residence or principal place of business, or where the
withholding agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund
in trust for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within twenty-
five (25) days from the close of each calendar quarter, while the return for creditable withholding
taxes shall be filed and the payment made not later than the last day of the month following the
close of the quarter during which withholding was made: Provided, That the Commissioner, with
the approval of the Secretary of Finance, may require these withholding agents to pay or deposit

250
the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of
the government.

(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding
agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in
respect to his or its receipts during the calendar quarter or year, a written statement showing the
income or other payments made by the withholding agent during such quarter or year, and the
amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request
of the payee, but not late than the twentieth (20th) day following the close of the quarter in the
case of corporate payee, or not later than March 1 of the following year in the case of individual
payee for creditable withholding taxes. For final withholding taxes, the statement should be given
to the payee on or before January 31 of the succeeding year.

(C) Annual Information Return. - Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the Commissioner an annual information return
containing the list of payees and income payments, amount of taxes withheld from each payee
and such other pertinent information as may be required by the Commissioner. In the case of final
withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for
creditable withholding taxes, not later than March 1 of the year following the year for which the
annual report is being submitted. This return, if made and filed in accordance with the rules and
regulations approved by the Secretary of Finance, upon recommendation of the Commissioner,
shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the
income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required in this Subsection.

(D) Income of Recipient. - Income upon which any creditable tax is required to be
withheld at source under Section 57 shall be included in the return of its recipient but the excess
of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to
the provisions of Section 204; if the income tax collected at source is less than the tax due on his
return, the difference shall be paid in accordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its implementing rules and
regulations are hereby considered trust funds and shall be maintained in a separate account and
not commingled with any other funds of the withholding agent.

(E) Registration with Register of Deeds. - No registration of any document transferring

real property shall be effected by the Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been reported, and the capital gains
or creditable withholding tax, if any, has been paid: Provided, however, That the information as
may be required by rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, shall be annotated by the Register of Deeds in the
Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases
of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and
where the law allows deferred recognition of income in accordance with Section 40, the
information as may be required by rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds
at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real
property involved: Provided, finally, That any violation of this provision by the Register of Deeds

251
shall be subject to the penalties imposed under Section 269 of this Code.

SEC. 75.

Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in

duplicate a quarterly summary declaration of its gross income and deductions on a cumulative
basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of
this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the
amount of tax previously paid or assessed during the preceding quarters and shall be paid not later
than sixty (60) days from the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal year.

Sec. 106

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in accordance with the rules and
regulations of the BangkoSentralngPilipinas (BSP);

(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas
(BSP);

(3) Sale of raw materials or packaging materials to export-oriented enterprise whose

export sales exceed seventy percent (70%) of total annual production;

(4) Sale of gold to the BangkoSentralngPilipinas (BSP); and

(5) Those considered export sales under Executive Order NO. 226, otherwise known as
the Omnibus Investment Code of 1987, and other special laws.

(b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated
sale" means sale to a nonresident of goods, except those mentioned in Sections 149 and 150,
assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the BangkoSentralngPilipinas (BSP).

(c) Sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

252
Sec. 108

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the
Philippines by VAT- registered persons shall be subject to zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the
BangkoSentralngPilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BangkoSentralngPilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of
such services to zero percent (0%) rate; `

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, of

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total
annual production.

SEC. 111.Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or
any person who elects to be a VAT-registered person shall, subject to the filing of an inventory
according to rules and regulations prescribed by the Secretary of finance, upon recommendation
of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent for eight percent (8%) of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher, which shall be
creditable against the output tax.

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable
against the output tax, equivalent to one and one-half percent (1 1/2%) of the gross value in
money of their purchases of primary agricultural products which are used as inputs to their
production.

As used in this Subsection, the term "processing" shall mean pasteurization, canning and
activities which through physical or chemical process alter the exterior texture or form or inner
substance of a product in such manner as to prepare it for special use to which it could not have
been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one
and one-half percent (1 1/2%) of the contract price with respect to government contracts only in
lieu of actual input taxes therefrom.

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SEC. 112.Refunds or Tax Credits of Input Tax. -

(A) Zero-Rated or Effectively Zero-Rated Sales.- any VAT-registered person, whose

sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales, except transitional input tax,
to the extent that such input tax has not been applied against output tax: Provided, however, That
in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1)
and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods of properties or services, and the amount of creditable input tax
due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales.

(B) Capital Goods.- A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to the
extent that such input taxes have not been applied against output taxes. The application may be
made only within two (2) years after the close of the taxable quarter when the importation or
purchase was made.

(C) Cancellation of VAT Registration. - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input tax which may be used in payment of his
other internal revenue taxes.

(D) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of compete documents
in support of the application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision denying the claim or after
the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals.-

(E) Manner of Giving Refund.- Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative without the necessity of being
countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code
of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be
subject to post audit by the Commission on Audit.

SEC. 113.

Invoicing and Accounting Requirements for VAT-Registered Persons. -

254
 (A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an
invoice or receipt. In addition to the information required under Section 237, the following
information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's
identification number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax.

(B) Accounting Requirements. - Notwithstanding the provisions of Section 233, all

persons subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular
accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal
on which the daily sales and purchases are recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of Finance.

Section 143.Tax on Business. - The municipality may impose taxes on the following
businesses:

(a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers,

and compounders of liquors, distilled spirits, and wines or manufacturers of any article of
commerce of whatever kind or nature, in accordance with the following schedule:

With gross sales or receipts for the Amount of Tax Per

preceding calendar year in the amount of: Annum
Less than 10,000.00 165.00
P 10,000.00 or more but less than 15,000.00 220.00
15,000.00 or more but less than 20,000.00 202.00
20,000.00 or more but less than 30,000.00 440.00
30,000.00 or more but less than 40,000.00 660.00
40,000.00 or more but less than 50,000.00 825.00
50,000.00 or more but less than 75,000.00 1,320.00
75,000.00 or more but less than 100,000.00 1,650.00
100,000.00 or more but less than 150,000.00 2,200.00
150,000.00 or more but less than 200,000.00 2,750.00
200,000.00 or more but less than 300,000.00 3,850.00
300,000.00 or more but less than 500,000.00 5,500.00
500,000.00 or more but less than 750,000.00 8,000.00
750,000.00 or more but less than 1,000,000.00 10,000.00

255
 1,000,000.00 or more but less than 13,750.00
2,000,000.00
2,000,000.00 or more but less than 16,500.00
3,000,000.00
3,000,000.00 or more but less than 19,000.00
4,000,000.00
4,000,000.00 or more but less than 23,100.00
5,000,000.00
5,000,000.00 or more but less than 24,375.00
6,500,000.00
6,000,000.00 or more at a rate not exceeding thirty-seven and a half percent
(37%) of one percent (1%)

(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind

or nature in accordance with the following schedule:

With gross sales or receipts for the preceding Amount of Tax

calendar year in the amount of: Per Annum
Less than 1,000.00 18.00
P 1,000.00 or more but less than 2,000.00 33.00
2,000.00 or more but less than 3,000.00 50.00
3,000.00 or more but less than 4,000.00 72.00
4,000.00 or more but less than 5,000.00 100.00
5,000.00 or more but less than 6,000.00 121.00
6,000.00 or more but less than 7,000.00 143.00
7,000.00 or more but less than 8,000.00 165.00
8,000.00 or more but less than 10,000.00 187.00
10,000.00 or more but less than 15,000.00 220.00
15,000.00 or more but less than 20,000.00 275.00
20,000.00 or more but less than 30,000.00 330.00
30,000.00 or more but less than 40,000.00 440.00
40,000.00 or more but less than 50,000.00 660.00
50,000.00 or more but less than 75,000.00 990.00
75,000.00 or more but less than 100,000.00 1,320.00
100,000.00 or more but less than 150,000.00 1,870.00
150,000.00 or more but less than 200,000.00 2,420.00
200,000.00 or more but less than 300,000.00 3,300.00

256
 300,000.00 or more but less than 500,000.00 4,400.00
500,000.00 or more but less than 750,000.00 6,600.00
750,000.00 or more but less than 1,000,000.00 8,800.00
1,000,000.00 or more but less than 2,000,000.00 10,000.00
2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one
percent (1%).

(c) On exporters, and on manufacturers , millers, producers, wholesalers, distributors,

dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-
half () of the rates prescribed under subsection (a), (b) and (d) of this Section:

(1) Rice and corn;

(2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed
or preserved food, sugar, salt and other agricultural, marine, and fresh water
products, whether in their original state or not;

(3) Cooking oil and cooking gas;

(4) Laundry soap, detergents, and medicine;

(5) Agricultural implements. equipment and post-harvest facilities, fertilizers,

pesticides, insecticides, herbicides and other farm inputs;

(6) Poultry feeds and other animal feeds;

(7) School supplies; and

(8) Cement.

(d) On retailers.

With gross sales or receipts for the preceding Rate of Tax Per
calendar year in the amount of: Annum
P400,000.00 or less 2%
more than P400,000.00 1%

Provided, however, That barangays shall have the exclusive power to levy taxes, as
provided under Section 152 hereof, on gross sales or receipts of the preceding calendar
year of Fifty thousand pesos (P50,000.00) or less, in the case of cities, and Thirty
thousand pesos (P30,000.00) or less, in the case of municipalities.

(e) On contractors and other independent contractors, in accordance with the following
schedule:

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 With gross sales or receipts for the preceding Amount of Tax Per
calendar year in the amount of: Annum
Less than 5,000.00 27.50
P 5,000.00 or more but less than P 10,000.00 61.60
10,000.00 or more but less than 15,000.00 104.50
15,000.00 or more but less than 20,000.00 165.00
20,000.00 or more but less than 30,000.00 275.00
30,000.00 or more but less than 40,000.00 385.00
40,000.00 or more but less than 50,000.00 550.00
50,000.00 or more but less than 75,000.00 880.00
75,000.00 or more but less than 100,000.00 1,320.00
100,000.00 or more but less than 150,000.00 1,980.00
150,000.00 or more but less than 200,000.00 2,640.00
200,000.00 or more but less than 250,000.00 3,630.00
250,000.00 or more but less than 300,000.00 4,620.00
300,000.00 or more but less than 400,000.00 6,160.00
400,000.00 or more but less than 500,000.00 8,250.00
500,000.00 or more but less than 750,000.00 9,250.00
750,000.00 or more but less than 1,000,000.00 10,250.00
1,000,000.00 or more but less than 2,000,000.00 11,500.00
2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one
percent (1%)

(f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of
one percent (1%) on the gross receipts of the preceding calendar year derived from
interest, commissions and discounts from lending activities, income from financial
leasing, dividends, rentals on property and profit from exchange or sale of property,
insurance premium.

(g) On peddlers engaged in the sale of any merchandise or article of commerce, at a rate
not exceeding Fifty pesos (P50.00) per peddler annually.

(h) On any business, not otherwise specified in the preceding paragraphs, which the
sanggunian concerned may deem proper to tax: Provided, That on any business subject to
the excise, value-added or percentage tax under the National Internal Revenue Code, as
amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of
the preceding calendar year.

The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to
exceed the rates prescribed herein.

258
SEC. 236.Registration Requirements. -

(A) Requirements. - Every person subject to any internal revenue tax shall register once with the
appropriate Revenue District Officer:

(1) Within ten (10) days from date of employment, or

(2) On or before the commencement of business,or

(3) Before payment of any tax due, or

(4) Upon filing of a return, statement or declaration as required in this Code.

The registration shall contain the taxpayer's name, style, place of residence, business and such
other information as may be required by the Commissioner in the form prescribed therefor.

A person maintaining a head office, branch or facility shall register with the Revenue District
Officer having jurisdiction over the head office, brand or facility. For purposes of this Section, the
term "facility" may include but not be limited to sales outlets, places of production, warehouses
or storage places.

(B) Annual Registration Fee. - An annual registration fee in the amount of Five hundred pesos
(P500) for every separate or distinct establishment or place of business, including facility types
where sales transactions occur, shall be paid upon registration and every year thereafter on or
before the last day of January: Provided, however, That cooperatives, individuals earning purely
compensation income, whether locally or abroad, and overseas workers are not liable to the
registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located within the revenue district,
or to the Revenue Collection Officer, or duly authorized Treasurer of the city of municipality
where each place of business or branch is registered.

(C) Registration of Each Type of Internal Revenue Tax. - Every person who is required to register
with the Bureau of Internal Revenue under Subsection (A) hereof, shall register each type of
internal revenue tax for which he is obligated, shall file a return and shall pay such taxes, and
shall updates such registration of any changes in accordance with Subsection (E) hereof.

(D) Transfer of Registration. - In case a registered person decides to transfer his place of business
or his head office or branches, it shall be his duty to update his registration status by filing an
application for registration information update in the form prescribed therefor.

(E) Other Updates. - Any person registered in accordance with this Section shall, whenever
applicable, update his registration information with the Revenue District Office where he is
registered, specifying therein any change in type and other taxpayer details.

(F) Cancellation of Registration. - The registration of any person who ceases to be liable to a tax
type shall be cancelled upon filing with the Revenue District Office where he is registered an
application for registration information update in a form prescribed therefor.

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(G) Persons Commencing Business. - Any person, who expects to realize gross sales or receipts
subject to value-added tax in excess of the amount prescribed under Section 109(z) of this Code
for the next 12-month period from the commencement of the business, shall register with the
Revenue District Office which has jurisdiction over the head office or branch and shall pay the
annual registration fee prescribed in Subsection (B) hereof.

(H) Persons Becoming Liable to the Value-added Tax. - Any person, whose gross sales or
receipts in any 12-month period exceeds the amount prescribed under Subsection 109(z) of this
Code for exemption from the value-added tax shall register in accordance with Subsection (A)
hereof, and shall pay the annual registration fee prescribed within ten (10) days after the end of
the last month of that period, and shall be liable to the value-added tax commencing from the first
day of the month following his registration.

(I) Optional Registration of Exempt Person. - Any person whose transactions are exempt from
value-added tax under Section 109(z) of this Code; or any person whose transactions are exempt
from the value-added tax under Section 109(a), (b), (c), and (d) of this Code, who opts to register
as a VAT taxpayer with respect to his export sales only, may update his registration information
in accordance with Subsection (E) hereof, not later than ten (10) days before the beginning of the
taxable quarter and shall pay the annual registration fee prescribed in Subsection (B) hereof.

In any case, the Commissioner may, for administrative reasons, deny any application for
registration including updates prescribed under Subsection (E) hereof.

For purposes of Title IV of this Code, any person who has registered value-added tax as a tax
type in accordance with the provisions of Subsection (C) hereof shall be referred to as VAT-
registered person who shall be assigned only one Taxpayer Identification Number.

(J) Supplying of Taxpayer Identification Number (TIN). - Any person required under the
authority of this Code to make, render or file a return, statement or other document shall be
supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicate in such
return, statement or document filed with the Bureau of Internal Revenue for his proper
identification for tax purposes, and which he shall indicate in certain documents, such as, but not
limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments;

(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds of Assessor's Office;
(4) Registration certificate of transportation equipment by land, sea or air;
(5) Documents to be registered with the Securities and Exchange Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of Trade & Industry; and
(10) Such other documents which may hereafter be required under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

In cases where a registered taxpayer dies, the administrator or executor shall register the
estate of the decedent in accordance with Subsection (A) hereof and a new Taxpayer
Identification Number (TIN) shall be supplied in accordance with the provisions of this Section.

In the case of a nonresident decedent, the executor or administrator of the estate shall
register the estate with the Revenue District Office where he is registered: Provided, however,

260
That in case such executor or administrator is not registered, registration of the estate shall be
made with the Taxpayer Identification Number (TIN) supplied by the Revenue District Office
having jurisdiction over his legal residence.

Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any
person who shall secure more than one Taxpayer Identification Number shall be criminally liable
under the provision of Section 275 on 'Violation of Other Provisions of this Code or Regulations
in General'.

Section 237.

Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an internal

revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at
Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial
invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and
description of merchandise or nature of service: Provided, however, That in the case of sales,
receipts or transfers in the amount of One hundred pesos (P100.00) or more, or regardless of the
amount, where the sale or transfer is made by a person liable to value-added tax to another person
also liable to value-added tax; or where the receipt is issued to cover payment made as rentals,
commissions, compensations or fees, receipts or invoices shall be issued which shall show the
name, business style, if any, and address of the purchaser, customer or client: Provided, further,
That where the purchaser is a VAT-registered person, in addition to the information herein
required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of
the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client
at the time the transaction is effected, who, if engaged in business or in the exercise of profession,
shall keep and preserve the same in his place of business for a period of three (3) years from the
close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be
kept and preserved by the issuer, also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to internal
revenue tax from compliance with the provisions of this Section.

SEC. 248.Civil Penalties.

xxx

(B) In case of willful neglect to file the return within the period prescribed by this Code
or byrules and regulations, or in case a false or fraudulent return is willfully made, the penaltyto
be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case,any payment
has been made on the basis of such return before the discovery of thefalsity or fraud: Provided,
That a substantial underdeclaration of taxable sales, receiptsor income, or a substantial
overstatement of deductions, as determined by theCommissioner pursuant to the rules and
regulations to be promulgated by the Secretaryof Finance, shall constitute prima facie evidence of
a false or fraudulent return: Provided,further, That failure to report sales, receipts or income in an
amount exceeding thirtypercent (30%) of that declared per return, and a claim of deductions in an
amountexceeding (30%) of actual deductions, shall render the taxpayer liable for

261
substantialunderdeclaration of sales, receipts or income or for overstatement of deductions,
asmentioned herein.

SEC. 282.

Informer's Reward to Persons Instrumental in the Discovery of Violations of the National Internal
Revenue Code and in the Discovery and Seizure of Smuggled Goods. -

(A) For Violations of the National Internal Revenue Code. - Any person, except an
internal revenue official or employee, or other public official or employee, or his relative within
the sixth degree of consanguinity, who voluntarily gives definite and sworn information, not yet
in the possession of the Bureau of Internal Revenue, leading to the discovery of frauds upon the
internal revenue laws or violations of any of the provisions thereof, thereby resulting in the
recovery of revenues, surcharges and fees and/or the conviction of the guilty party and/or the
imposition of any of the fine or penalty, shall be rewarded in a sum equivalent to ten percent
(10%) of the revenues, surcharges or fees recovered and/or fine or penalty imposed and collected
or One Million Pesos (P1,000,000) per case, whichever is lower. The same amount of reward
shall also be given to an informer where the offender has offered to compromise the violation of
law committed by him and his offer has been accepted by the Commissioner and collected from
the offender: Provided, That should no revenue, surcharges or fees be actually recovered or
collected, such person shall not be entitled to a reward: Provided, further, That the information
mentioned herein shall not refer to a case already pending or previously investigated or examined
by the Commissioner or any of his deputies, agents or examiners, or the Secretary of Finance or
any of his deputies or agents: Provided, finally, That the reward provided herein shall be paid
under rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner.

(B) For Discovery and Seizure of Smuggled Goods. - To encourage the public to extend
full cooperation in eradicating smuggling, a cash reward equivalent to ten percent (10%) of the
fair market value of the smuggled and confiscated goods or One Million Pesos (P1,000,000) per
case, whichever is lower, shall be given to persons instrumental in the discovery and seizure of
such smuggled goods.

The cash rewards of informers shall be subject to income tax, collected as a final
withholding tax, at a rate of ten percent (10%).
The provisions of the foregoing Subsections notwithstanding, all public officials, whether
incumbent or retired, who acquired the information in the course of the performance of their
duties during their incumbency, are prohibited from claiming informer's reward.

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RULES OF COURT

RULE 42

Petition for Review From the Regional Trial Courts to the Court of Appeals

262
 Section 1.How appeal taken; time for filing. A party desiring to appeal from a
decision of the Regional Trial Court rendered in the exercise of its appellate jurisdiction may file
a verified petition for review with the Court of Appeals, paying at the same time to the clerk of
said court the corresponding docket and other lawful fees, depositing the amount of P500.00 for
costs, and furnishing the Regional Trial Court and the adverse party with a copy of the petition.
The petition shall be filed and served within fifteen (15) days from notice of the decision sought
to be reviewed or of the denial of petitioner's motion for new trial or reconsideration filed in due
time after judgment. Upon proper motion and the payment of the full amount of the docket and
other lawful fees and the deposit for costs before the expiration of the reglementary period, the
Court of Appeals may grant an additional period of fifteen (15) days only within which to file the
petition for review. No further extension shall be granted except for the most compelling reason
and in no case to exceed fifteen (15) days. (n)

Section 2.Form and contents. The petition shall be filed in seven (7) legible copies,
with the original copy intended for the court being indicated as such by the petitioner, and shall
(a) state the full names of the parties to the case, without impleading the lower courts or judges
thereof either as petitioners or respondents; (b) indicate the specific material dates showing that it
was filed on time; (c) set forth concisely a statement of the matters involved, the issues raised, the
specification of errors of fact or law, or both, allegedly committed by the Regional Trial Court,
and the reasons or arguments relied upon for the allowance of the appeal; (d) be accompanied by
clearly legible duplicate originals or true copies of the judgments or final orders of both lower
courts, certified correct by the clerk of court of the Regional Trial Court, the requisite number of
plain copies thereof and of the pleadings and other material portions of the record as would
support the allegations of the petition.

The petitioner shall also submit together with the petition a certification under oath that
he has not theretofore commenced any other action involving the same issues in the Supreme
Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there
is such other action or proceeding, he must state the status of the same; and if he should thereafter
learn that a similar action or proceeding has been filed or is pending before the Supreme Court,
the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes
to promptly inform the aforesaid courts and other tribunal or agency thereof within five (5) days
therefrom. (n)

Section 3.Effect of failure to comply with requirements. The failure of the petitioner to
comply with any of the foregoing requirements regarding the payment of the docket and other
lawful fees, the deposit for costs, proof of service of the petition, and the contents of and the
documents which should accompany the petition shall be sufficient ground for the dismissal
thereof. (n)

Section 4.Action on the petition. The Court of Appeals may require the respondent to
file a comment on the petition, not a motion to dismiss, within ten (10) days from notice, or
dismiss the petition if it finds the same to be patently without merit, prosecuted manifestly for
delay, or that the questions raised therein are too insubstantial to require consideration. (n)

Section 5.Contents of comment. The comment of the respondent shall be filed in seven
(7) legible copies, accompanied by certified true copies of such material portions of the record
referred to therein together with other supporting papers and shall (a) state whether or not he
accepts the statement of matters involved in the petition; (b) point out such insufficiencies or
inaccuracies as he believes exist in petitioner's statement of matters involved but without

263
repetition; and (c) state the reasons why the petition should not be given due course. A copy
thereof shall be served on the petitioner. (a)

Section 6.Due course. If upon the filing of the comment or such other pleadings as the
court may allow or require, or after the expiration of the period for the filing thereof without such
comment or pleading having been submitted, the Court of Appeals finds prima facie that the
lower court has committed an error of fact or law that will warrant a reversal or modification of
the appealed decision, it may accordingly give due course to the petition. (n)

Section 7.Elevation of record. Whenever the Court of Appeals deems it necessary, it

may order the clerk of court of the Regional Trial Court to elevate the original record of the case
including the oral and documentary evidence within fifteen (15) days from notice. (n)

Section 8.Perfection of appeal; effect thereof. (a) Upon the timely filing of a petition
for review and the payment of the corresponding docket and other lawful fees, the appeal is
deemed perfected as to the petitioner.

The Regional Trial Court loses jurisdiction over the case upon the perfection of the appeals filed
in due time and the expiration of the time to appeal of the other parties.

However, before the Court of Appeals gives due course to the petition, the Regional Trial Court
may issue orders for the protection and preservation of the rights of the parties which do not
involve any matter litigated by the appeal, approve compromises, permit appeals of indigent
litigants, order execution pending appeal in accordance with section 2 of Rule 39, and allow
withdrawal of the appeal. (9a, R41)

(b) Except in civil cases decided under the Rule on Summary Procedure, the appeal shall stay the
judgment or final order unless the Court of Appeals, the law, or these Rules shall provide
otherwise. (a)

Section 9.Submission for decision. If the petition is given due course, the Court of
Appeals may set the case for oral argument or require the parties to submit memoranda within a
period of fifteen (15) days from notice. The case shall be deemed submitted for decision upon the
filing of the last pleading or memorandum required by these Rules or by the court itself. (n)

RULE 43

Appeals From the Court of Tax Appeals and Quasi-Judicial Agencies to the Court of
Appeals

Section 1.Scope. This Rule shall apply to appeals from judgments or final orders of
the Court of Tax Appeals and from awards, judgments, final orders or resolutions of or authorized
by any quasi-judicial agency in the exercise of its quasi-judicial functions. Among these agencies
are the Civil Service Commission, Central Board of Assessment Appeals, Securities and
Exchange Commission, Office of the President, Land Registration Authority, Social Security
Commission, Civil Aeronautics Board, Bureau of Patents, Trademarks and Technology Transfer,
National Electrification Administration, Energy Regulatory Board, National Telecommunications
Commission, Department of Agrarian Reform under Republic Act No. 6657, Government Service
Insurance System, Employees Compensation Commission, Agricultural Invention Board,

264
Insurance Commission, Philippine Atomic Energy Commission, Board of Investments,
Construction Industry Arbitration Commission, and voluntary arbitrators authorized by law. (n)

Section 2.Cases not covered. This Rule shall not apply to judgments or final orders
issued under the Labor Code of the Philippines. (n)

Section 3.Where to appeal. An appeal under this Rule may be taken to the Court of
Appeals within the period and in the manner herein provided, whether the appeal involves
questions of fact, of law, or mixed questions of fact and law. (n)

Section 4.Period of appeal. The appeal shall be taken within fifteen (15) days from
notice of the award, judgment, final order or resolution, or from the date of its last publication, if
publication is required by law for its effectivity, or of the denial of petitioner's motion for new
trial or reconsideration duly filed in accordance with the governing law of the court or agency a
quo. Only one (1) motion for reconsideration shall be allowed. Upon proper motion and the
payment of the full amount of the docket fee before the expiration of the reglementary period, the
Court of Appeals may grant an additional period of fifteen (15) days only within which to file the
petition for review. No further extension shall be granted except for the most compelling reason
and in no case to exceed fifteen (15) days. (n)

Section 5.How appeal taken. Appeal shall be taken by filing a verified petition for
review in seven (7) legible copies with the Court of Appeals, with proof of service of a copy
thereof on the adverse party and on the court or agency a quo. The original copy of the petition
intended for the Court of Appeals shall be indicated as such by the petitioner.

Upon the filing of the petition, the petitioner shall pay to the clerk of court of the Court of
Appeals the docketing and other lawful fees and deposit the sum of P500.00 for costs. Exemption
from payment of docketing and other lawful fees and the deposit for costs may be granted by the
Court of Appeals upon a verified motion setting forth valid grounds therefor. If the Court of
Appeals denies the motion, the petitioner shall pay the docketing and other lawful fees and
deposit for costs within fifteen (15) days from notice of the denial. (n)

Section 6.Contents of the petition. The petition for review shall (a) state the full names
of the parties to the case, without impleading the court or agencies either as petitioners or
respondents; (b) contain a concise statement of the facts and issues involved and the grounds
relied upon for the review; (c) be accompanied by a clearly legible duplicate original or a certified
true copy of the award, judgment, final order or resolution appealed from, together with certified
true copies of such material portions of the record referred to therein and other supporting papers;
and (d) contain a sworn certification against forum shopping as provided in the last paragraph of
section 2, Rule 42. The petition shall state the specific material dates showing that it was filed
within the period fixed herein. (2a)

Section 7.Effect of failure to comply with requirements. The failure of the petitioner to
comply with any of the foregoing requirements regarding the payment of the docket and other
lawful fees, the deposit for costs, proof of service of the petition, and the contents of and the
documents which should accompany the petition shall be sufficient ground for the dismissal
thereof. (n)

Section 8.Action on the petition. The Court of Appeals may require the respondent to
file a comment on the petition not a motion to dismiss, within ten (10) days from notice, or

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dismiss the petition if it finds the same to be patently without merit, prosecuted manifestly for
delay, or that the questions raised therein are too unsubstantial to require consideration. (6a)

Section 9.Contents of comment. The comment shall be filed within ten (10) days from
notice in seven (7) legible copies and accompanied by clearly legible certified true copies of such
material portions of the record referred to therein together with other supporting papers. The
comment shall (a) point out insufficiencies or inaccuracies in petitioner's statement of facts and
issues; and (b) state the reasons why the petition should be denied or dismissed. A copy thereof
shall be served on the petitioner, and proof of such service shall be filed with the Court of
Appeals. (9a)

Section 10.Due course. If upon the filing of the comment or such other pleadings or
documents as may be required or allowed by the Court of Appeals or upon the expiration of the
period for the filing thereof, and on the records the Court of Appeals finds prima facie that the
court or agency concerned has committed errors of fact or law that would warrant reversal or
modification of the award, judgment, final order or resolution sought to be reviewed, it may give
due course to the petition; otherwise, it shall dismiss the same. The findings of fact of the court or
agency concerned, when supported by substantial evidence, shall be binding on the Court of
Appeals. (n)

Section 11.Transmittal of record. Within fifteen (15) days from notice that the
petition has been given due course, the Court of Appeals may require the court or agency
concerned to transmit the original or a legible certified true copy of the entire record of the
proceeding under review. The record to be transmitted may be abridged by agreement of all
parties to the proceeding. The Court of Appeals may require or permit subsequent correction of or
addition to the record. (8a)

Section 12.Effect of appeal. The appeal shall not stay the award, judgment, final order
or resolution sought to be reviewed unless the Court of Appeals shall direct otherwise upon such
.terms as it may deem just. (10a)

Section 13.Submission for decision. If the petition is given due course, the Court of
Appeals may set the case for oral argument or require the parties to submit memoranda within a
period of fifteen (15) days from notice. The case shall be deemed submitted for decision upon the
filing of the last pleading or memorandum required by these Rules or by the court of Appeals. (n)

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