Taxation law review notes

- Atty. Francis J. Sababan -

• Philex vs. CIR
COVERAGE OF TAXATION LAW REVIEW 294 SCRA 687

I. Basic Principles of II. Income Tax Law

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

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 Taxation law review notes
- Atty. Francis J. Sababan -
4. Minimum Corporate Income Tax
of 2% of the Gross Income secs.
27 (E), 28 (A) (2)
5. Improperly Accumulated
Earnings Tax of 10% of its
taxable income sec. 29 NIRC Rev.
Reg. 2-2001
• Optional Corporate Income Tax
of 15% of its gross income
sections 27 (A) 4th to 10th par.
And 28 A(1) but only up to the 4th
paragraph
-Proceed to section 42 and 23 of the
NIRC
• NDC vs. Comm 151 SCRA 472
• Comm. Vs. IAC 127 SCRA 9
-Then go to sec. 39 of NIRC
• Calazans vs. Comm. 144 SCRA
664 RR 7-2003
-Then proceed to sec. 24 (A), 25 (A)
(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),
28 (A) (6) and sec 51 (D)
-Then continue to sec 24 B 1, 25
B,C,D,E; 27 (D) (1)
-Then go to se. 24 (B) (2) sec. 73
• Comm. Vs. Manning 66 SCRA
14
• Anscor vs. Comm. 301 SCRA
152
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D)
(4); 28 (A) (7) (D); 32 B (7) (a)
- Then you go to sec. 24 C, 25A (3); 25
B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B
(5) (C) RA 7717 sec. 127 NIRC
- Then you go to sec. 24 D (1); 25 (A)
(3); 25 (B) last par. 27 (D) (5)
• China Bank vs. Court of Appeals
336 SCRA ___; RR 7-2003
-Upon reading sec. 24 (D) (2) read RR 13-
1999
-Upon reading sec. 27 (A) go to sec. 22 (B)
• Batangas vs. Collector 102 Phil. 822
• Evangelista vs. Collector 102 Phil
140
• Reyes vs. Comm. 24 SCRA 198
• Ona vs. Bautista 45 SCRA 74
• Obillos vs. Comm 139 SCRA 436
• Pascua vs. Comm. 166 SCRA 560
• Afisco vs. Comm. 302 SCRA 1
-Upon reading sec. 27 (C) of NIRC see RA
9337 then go to sec. 32 (B) (7) (b) of NIRC,
sec. 133 par (o) of LGC, sec. 154 of the
LGC.
• Pagcor vs. Basco 197 SCRA 52
• Mactan vs. Cebu 261 SCRA 667
• LRT vs. City of Manila 342 SCRA
692
-Proceed to sections 27 (D) (1), 27 (D) (2),
27 (D) (5) read RA 9337, 28 (A) (7) (b), 28
(B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28
(B) (5) (b)
• Marubeni vs. CIR 177 SCRA 500
• Proctor & Gamble vs. Comm 160
SCRA 560
• Same case Proctor and Gamble on
the Motion for Reconsideration 204
SCRA 377
• Wonder vs. Comm 160 SCRA 573
-Proceed to sec. 27(D) (5)
then sections 27 (E) and 28 (A) (2)
-Go to sec. 28 (A) (3) read RR 15-2002
-Go to sec. 28 (A) (4) see RA 9337
-Then see sec 28 (A) (5) see Marubeni vs.
Comm 177 SCRA 500
-Proceed to sec. 28(B) (5) (a) and sec 32
(B) (7) (a)
• Read Mitsubishi vs. Comm 181
SCRA 214
-Then go to sec. 29 and Rev. Reg. 2-2001
-Upon reading sec. 32 (B) 1 and 2, read
sec. 85 par (e), sec. 108A and sec. 123 of
the NIRC
-Proceed to sec. 33 read Rev. Reg. 3-98
-then go to sec. 34 (A) (1) (a) see
Aguinaldo vs. Comm. 112 SCRA 136, RR
10-2002
-Under Sec. 34 (B) read RR 13-2000
-Upon reading sec. 49 read Banas vs. CA
325 SCRA 259 and Filipina vs. Comm. 316
SCRA 480
-Upon reading sec. 60-66, read Ona vs.
Bautista 45 SCRA 74
III. Estate Tax
-Sections 84-97 see sec. 104
-Upon reading sec. 85 (B) read Vidal
de Roces vs. Posadas 58 Phil. 108
Dizon vs. Posadas 57 Phil 465
-Sec. 85 (G) compare with sec. 100
-sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos vs.
Sandiganbayan 273 SCRA 47
IV. Donors Tax Law
- Sections 98-104
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 Taxation law review notes
- Atty. Francis J. Sababan -
- G and Cumulative methods of filing
donor’s tax returns sections 99 (A), - Co-relate sec. 139 and 147 of LGC
103 (A) (1) and RR 2-2003 - Under sec. 140 of the LGC see sec. 125
- Sections 100 and 85 (9) of the Internal Revenue Code
- Under sec. 150 of the LGC read the
V. Value Added Tax following:
- Sections 105-115 • Phil. Match vs.
-Read RA 9337 Cebu 81 SCRA 99
-Read ABAKADA vs Comm. • Allied Thread vs.
GR 168056, Sept. 1, 2005 Manila 133 SCRA 338
• Sipocat vs. Shell
VI. Remedies Under the Internal 105 Phil. 1263
Revenue Code • Iloilo Bottles vs.
-Sections 202-229 Iloilo City 164 SCRA 607
-RR 12-99
• Phoenix vs Comm 14 SCRA 52 VIII. Real Property Tax
• Basilan vs. Comm. 21 SCRA 17 - Sections 197-294
• Yabut vs. Flojo 115 SCRA 278 - Sec. 235
• Union Shipping vs. Comm 185 • LRT vs. Manila
SCRA 547 342 SCRA 692
• Comm. vs. TMX 205 SCRA 184 • Cebu City vs.
• Comm. vs. Philamlife 244 SCRA Mactan 261 SCRA 667
• Comm. vs. CA & BPI 301 SCRA 435
• BPI vs. Comm. 363 SCRA 840 IX. Tariff & Customs Code
-Prescription sections 203 and 222 of - Special Customs Duty sec. 301-304 of
NIRC, sec. 194 of the LGC, sec. 270 of TCC
the LGC, sec. 1603 of Tariff and - Regukar Customs Duty sec. 104 of TCC
Customs Code - RA 7631
-Protest sec. 228 of NIRC and RR 12-99
sec. 195 of LGC, 252 LGC, sec. 2313 of
Tariff & Customs Code and RA 7651 X. Court of Tax Appeals
- RA 1125 as amended by RA 9282
VII. Local Taxation
- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read Bulacan
vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-128
-Under sec. 133 (e) read Palma vs.
Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron
198 SCRA 82
-Under 133 (i) read First Holdings Co.
vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO
322 SCRA 805
-Under 137 read sec. 193 of LGC
• Misamis vs. Cagayan de Oro
181 SCRA 38
• Reyes vs. San Pablo City 305
SCRA 353
• Meralco vs. Laguna 306 SCRA
750
• PLDT vs. Davao City 363 SCRA
522

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Taxation law review notes
- Atty. Francis J. Sababan -

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

Q: How many types? ► Liable to pay 15% from Gross Income

A: There are three (3) types, namely: received from their employer
1. NRA engaged in trade or
business (25a1); ► Income earned from all OTHER sources
2. NRA who practices a shall be subject to the pertinent income tax,
profession (Revenue Regulation 2- as the case may be.
98);
3. foreigner who comes and Aliens Employed in Multinational
stays in the Philippines for an and Offshore Banking Units
aggregate period of MORE THAN 180
days during any calendar year. Q: How are they classified?
A: If they derived income from other
Q: What is the status of a Chinese who sources aside from their employer, you may
stays here for 200 days in 2001? classify them either as RA, NRAETB, or
A: NRAETB NRANETB.

Q: Suppose he stayed here for 100 days in Aliens Employed in Petroleum

2000 and another 100 days in 2001? Service Contractors and
A: He is not a NRAETB. To be considered as Subcontractors
such, he must stay for an aggregate period
of more than 180 days during a calendar ► Status: ALWAYS NRA. If they derive
year. income from other sources, such income
shall be subject to the pertinent income tax,
Q: What is the income tax applicable to as the case may be.
said taxpayer?
A: Net Income Tax (NIT) on all its income ► Income derived or coming from their
derived form sources within the Philippines. employer shall be subject to a tax of 15% of
the gross.
Non-Resident Alien Not Engaged in
Trade or Business II. CORPORATE TAXPAYER

Q: How many kinds? 1. Domestic Corporation (DC) – created

A: Only one. or organized under Philippine laws.
2. Resident Foreign Corporation (RFC) –
The reason why the NRANETB are corporation created under foreign
included in any income tax law is because law, and engaged in trade or
they may be deriving income form sources business.
within the Philippines.
They are subject to tax based on their
3. Nonresident Foreign Corporation
(NRFC) – created under foreign law,
GROSS INCOME received form all sources
and NOT engaged in trade or
within the Philippines.
business.
Aliens Employed by Regional or
Q: What are deemed corporations under
Area Headquarters & Regional
the NIRC?
Operating Headquarters of
A: The term corporation shall include
Multinational Companies/ Aliens
partnerships, no matter how created or
Employed by Offshore Banking
organized, joint stock companies, joint
Units (Aliens Employed by MOP)
accounts, associations, or insurance
companies, but DOES NOT includes general
professional partnerships and a joint

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- Atty. Francis J. Sababan -
venture or consortium formed of the
purpose of undertaking construction
projects or operations pursuant to or
engaging in petroleum, coal, geothermal or
consortium agreement under a service
contract with the Government.
1. Partnerships and others no matter
how created
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies
CIR v. COURT OF APPEALS
The phrase no “matter how created or
organized” was interpreted.
Even if the partnership was pursuant to
law or not, whether nonstick, nonprofit, it is
still deemed a corporation.
Reason: because of the possibility of
earning profits form sources within the
Philippines.
Q: Are partnerships always considered
corporations? Is there no exception?
A: General Rule: a partnership is a
corporation.
Exception: General Professional
Partnerships (GPP)
Q: What is a GPP?
A: It is a partnership formed by persons for
the sole purpose of exercising their
profession, no part of the income of which
in derived from any trade or business. (what
if a partner has other businesses not related
to the GPP? > read section 26 quoted
hereunder)
Two (2) Kinds of GPP formed for:
1) Exercise of a profession – not a
corporation; exempt from Corporate
Income Tax (CIT)
2) Exercise of a profession and
engaged in trade or business – a
corporation; subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a
corporation
exception: GPP
exception to the exception: if the GPP
derives income from other sources, it is
considered a corporation, thus liable to pay
corporate income tax.
Rule:
1. if the income is derived from other
sources and such income is subject to NET
INCOME TAX, it is not exempt and it is
considered a corporation.
2. if the income is derived from other
sources and such income is subject to FINAL
INCOME TAX, it is still EXEMPT and it is not
deemed a corporation. ( separate return for
this. It will not reflect in the GPP’s ITR)
» This is pursuant to the fact that FIT will
not reflect in the ITR of the GPP since the
withholding agent is liable for the payment
of the FIT.
Q: What is the importance of knowing
whether the corporation is exempt or not?
A: To determine their tax liability. This is
important to determine the tax liability of
the individual partners of the GPP.
► Section 26 (1st paragraph) provides: “a
GPP as such shall not be subject to the Net
Income Tax…” however, “…persons
engaging in business as partners in a GPP
shall be liable for income tax only in their
separate and individual capacities.”
In short, each partner will be paying NIT,
and the distributive shares they will be
receiving from the net income of the GPP
will be included in the gross income of the
partner.
Q: If the GPP is deemed a corporation, will
the partners have to pay for the income
tax?
A: No. as far as the share of the GPP is
concerned, it is considered a taxable
dividend which is subject to FIT.
Q: Is a joint venture a corporation?
A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do we
have?
A: Three, namely Corporation X, Y, and
X+Y. the joint venture has a separate and
distinct personality from the two
corporations.
Q: When is a joint venture not considered a
corporation?
A: It is not deemed a corporation when it is
formed for the purpose of undertaking a
(“construction?) project or engaging in
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 Taxation law review notes
- Atty. Francis J. Sababan -
petroleum, gas, and other energy The status of the estate is determined
operations pursuant to “?” or consortium by the status of the decedent at the time of
agreement under a service contract with his death; so an estate, as an income
the government. taxpayer can be a citizen or an alien.

Domestic Corporation When a person who owns property dies,

Is one created or organized in the
Philippines or under its laws.
Taxable on all income derived from
sources within or without the Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade
or business in the Philippines.
Taxable for income derived within the
Philippines.
the following taxes are payable under the
provision of income tax law:
1) Income Tax for Individuals – to cover
the period beginning January to
the time of death.
2) Estate Income Tax – if the property
is transferred to the heirs.
3) If no partition is made, Individual or
Corporate Income Tax,
depending on whether there is or
there is no settlement of the
estate. If there is, depending on
whether the settlement is judicial
or extrajudicial.

Non-Resident Foreign Corporation Judicial Settlement

Foreign corporations not engaged in 1) During the pendency of the

trade or business in the Philippines. settlement, the estate through the
executor, administrator, or heirs is
Taxable for income derived within the liable for the payment of ESTATE
Philippines. INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the judicial
Both DC and RFC are liable for the settlement, when the decision of the
payment of the following: court shall have become final and
1) NIT – Net Income executory, the heirs still do not
Tax divide the property, the following
2) FIT – Final Income possibilities may arise:
Tax a) If the heirs contribute to the
3) 10% income tax on estate money, property or
corporations with properly industry with the intention to
accumulated earnings. divide the profits between and
4) MCIT (Minimum among themselves, an
Corporate Income Tax) of 2% of the UNREGISTERED PARTNERSHIP is
Gross Income created and the estate becomes
5) Optional Corporate liable for payment of CIT
Income Tax of 15% of the Gross (Evangelista vs. Collector (102
Income Phil 140))
b) If the heirs without
A NRFC is liable for payment of the ff: contributing money, property or
1) GIT- Gross Income Tax industry to improve the estate,
2) FIT – Final Income Tax simply divide the fruits thereof
between and among
III. TRUST AND ESTATE themselves, a CO-OWNERSHIP is
created and Individual Income
Q: How many for each? Tax (IIC) is imposed on the
A: Seven (7) kinds for each because the income derived by each of the
trust or estate will be determined by the heirs, payable in their separate
status of the trustor, grantor, or creator, or and individual capacity (Pascual
of the decedent. vs. COMM (165 scra 560) and

16
 Taxation law review notes
- Atty. Francis J. Sababan -
Obillos vs. COMM (139 SCRA
436)) Taxable Net Income – Tax Credit =
Taxable Net Income Due
Extrajudicial Settlement and if NO
Settlement Net Income means Gross Income less
deductions and
Some possibilities may arise. The Formula:
income tax liability depends on whether or GI
not the unregistered partnership or co- - deductions
ownership is created. Net Income
x Tax Rate
Trust Income Tax Due

Trusts can be created by will, by Q: What is the rate?

contract or by agreement. The status of a A: Individual: 32%
trust depends upon the status of the Corporation: 35%
grantor or trustor or creator of the trust.
Hence, a trust can also be a citizen or an NOTE: the formula allows for deduction,
alien. personal exemptions and tax credit.

Q: Where the trust earns income and such Q: What are the other terms for NIT?
income is not passive, who among the A: NIRC:
parties mentioned is liable for payment of a. taxable income
income tax thereon? b. gross income (wlang kasunod)
A: The TRUST itself, through the trustee or → only income tax from improperly
fiduciary but only if the trust is irrevocable. accumulated earnings does not use this
If it is revocable, or for the benefit of the term.
grantor, the liability for the payment of
income tax devolves upon the trustor 1. CFA: “to be included in the
himself in his capacity as individual gross income”
taxpayer. 2. Revenue Regulations and
Statutes:
a. ordinary way of paying
KINDS OF INCOME TAX income tax;
b. normal way of paying income
Q: How many kinds of income tax? tax .
A: There are Six (6), namely:
1. Net Income Tax (NIT); Characteristics:
2. Gross Income Tax (GIT);
3. Final Income Tax (FIT); Q: Who are not liable to pay NIT?
4. Minimum Corporate Income A: 1. NRANETB (liable for GIT);
Tax of 2% of the Gross Income 2. NRFC (GIT also);
(MCIT) 3. With certain modifications, AEMOP, if
5. Income Tax on Improperly they derive income from other
Accumulated Earnings subject to sources;
10% of the Taxable Income;
6. Optional Corporate Income Q: Is the taxable net income subject to
Tax of 15% on the Gross Income withholding tax?
A: It is subject to withholding tax if the law
I. NET INCOME TAX says so.

Q: what is the formula? Q: What if the law is silent?

A: Gross Income – Deductions and Personal A: If the law is silent, it is not subject to
Exemptions = Taxable Income withholding tax.

Taxable Income x Tax Rate = Net Q: What is another term for withholding
Income tax?

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

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

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

Q: To what kind of taxpayer does this Q: Under Section 23, who are liable for
apply? income within and income without?
A: To DC and RFC. A: Only
1. RC
Q: What kind of taxes are applicable or 2. DC
imposed upon the 1st five individual
taxpayers? ► The rest of the taxpayers will be liable
for income coming from sources within.

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

Q: What is the tax mentioned in section Passive Income

24? Interest, Royalties, prizes and Other
A: NIT winnings

Q: What is taxable income? Interest

A: (memorize section 31) it is the pertinent
items of gross income specified in the NIRC,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the NIRC or other
laws. It refers to NIT because it allows
deductions.
Q: What do you mean by the phrase “other
than B, C, and D”?
A: It means that if the elements of passive
income are present, the taxpayer has to
pay FIT.
Q: Bank Interest, what is the requirement?
A: The bank must be located in the Phils.
because the income must be derived from
sources w/in.
Q: Do you include this in your ITR?
A: No! because it is subject already to FIT.
The bank is the one liable for the payment
of this.
NOTE: Liability for NIT, GIT, and MCIT will
depend on the elements present.

Q: Who are the taxpayers mentioned in Q: Who are liable for bank interest?
section 24? A:
A: 1. RC }
1. RC 2. NRC} Sec. 24 B1
2. NRC 3. RA }
3. OCW 4. NRAETB
4. RA 5. NRANETB Sec. 25 (25%)
6. AEMOP
► Additionally, under Section 25, NRAETB 7. DC
8. RFC
Q: What is the tax liability of NRAETB? 9. NRFC
A: Section 25(1) NRAETB is subject to
income tax in the same manner as Q: What is the rate of interest?
those individuals mentioned in Section 24. A: FIT of 20%

Q: What about Domestic Corporations? Q: Is there a lower rate?

A: A: 7 ½ % if under EFCDS
1. Sec. 27 A,B, and C
2. Sec. 26- GPP is not subject to income Q: What if the depositor is non resident
tax. alien?
A:

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 Taxation law review notes
- Atty. Francis J. Sababan -
-W/in – FIT
- W/out- exempt
Q: What is the rule on pre- termination?
A: If it is pre terminated before 5th year a
FIT shall be imposed on the entire income
and shall be deducted and withheld by the
depositary bank from the proceeds of the
long term deposit based on the remaining
maturity thereof
a. 4 yrs to less than 5 yrs – 5%
b. 3 yrs to less than 4 yrs- 12%
c. Less than 3 yrs- 20%
Q: Does it apply to all individuals?
A: No! It does not apply to 10 NRFC and
NRA and NRAETB because they are liable to
GIT.
2. AEMPOP (NRANETB- GIT)
3. DC- NIT 27 D is silent
4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT
Q: When can we apply NIT in Prizes?
A: 1. When the taxpayer is RC, RFC and
DC
2. For DC and RC it must be derived
from income abroad RFC it must be
derived from income w/in
3. amount is more than P10,000
NOTE: If the prize is derived from sources
w/in but it is below P 10,000 it is not subject
to tax. If derived from sources abroad, most
of them are exempt except for RC and DC
who are liable w/in and w/out.

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

► Resident citizen is liable to pay tax for Winnings

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

Requirements: Not liable to FIT?

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

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 Taxation law review notes
- Atty. Francis J. Sababan -
Q: MCIT applies when? A: shares come from another shareholder
A: It is higher than the NIT Q: What are the dividends included?
A: Sec. 24 refers to cash or property
Royalties dividend
H: For stock Dividends to be exempt it
Requirement: must come from the profit of the
► The income is from w/in corporation.

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

Not Liable? Q: Is there an exception when stock

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

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

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

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

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 Taxation law review notes
- Atty. Francis J. Sababan -
5. NRFC
► Shares of association and partnership is
taxable
Q: Determine the tax liability of the
following?
A:
1. DC a Stockholder of DC= Exempt
2. RFC stockholder of DC= Exempt also
3. DC stockholder of RF= Liable for NIT.
Capital Gains From Sale of Shares of
Stock Not Traded (§24C)
1. Subj to FIT
2. Determine whether there is a loss or
a gain because the tax is impose
upon the net capital gains realized
from the sale, barter, or exchange or
other disposition of the shares of
stock in a domestic corp.
3. It is uniformly imposed on all
taxpayer
4. not subj to w/holding tax.
Requirements:
1. Shares of stock of a DC
2. It must be capital asset
3. must not be traded in the stock
market
► 25 R last part: Capital Gains realized by
NRANETB in the Phils. from the sale of
shares of stock in any DC and real prop
shall be subj. to the income tax prescribed
under Sub sec (c) and (d) of Sec. 24.
► SEC. 24 B 1&2: If the elements are
present NRANETB and NRFC are liable to
pay GIT.
Except: under 24 C for NRANETB. What do
you mean by the phrase “ the provisions of
39 notwithstanding”?
► It refers to the holding period. When it
comes to capital gains from sale of shares
of stock not traded and capital gains from
the sale of real prop. The holding period
does not apply because the basis will be
those provided in 24 C & D and not under
39B (GSP or FMV)
ELEMENT #1 The share is a share in DC
Q: What if the share is from foreign corp?
A: Determine the income considered. If
income w/in read Sec. 42 (E)
► If the shares sold are that of a foreign
corp it is subj to the ff rules:
a. sold in the Phils= its income w/in
b. sold in abroad= w/out
c. Shares of stock in a Dc is always
considered an income w/in regardless
where it was sold.
Q: Shares of Foreign Corp sold in Phils.
Who’s liable? What tax?
A: Not subj to FIT because one of the
elements is not present . Shares not being
that of a DC.
Hence: a) RC, NRC, OCW, NRAETB,
AEMOP (RA, NRAETB) will pay NIT. DC and
RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign Corporation sold
abroad?
A: It will be considered an income w/out.
Thus:
most of them will be exempt
except RC and DC liable to pay NIT
ELEMENT # 2 NOT TRADED OR SOLD IN
THE STOCK MARKET
► if sold in the stock market- it is not subj
to FIT
► if sold in the stock market, it will be subj
to percentage tax, in lieu of NIT.
ELEMENT # 3 It must be a capital
asset.
Q: When is it considered an ordinary asset?
A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary
course of trade or business
2. to all other assets, it will be
considered a capital asset
NOTE: if all elements are present it will be
subj to FIT
If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT
except NRFC and NRANETB
2. Ordinary assets of foreign corporations
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 Taxation law review notes
- Atty. Francis J. Sababan -
a. Income within if sold in the Phils:
most will pay except NRANETB
and NRFC
b. Income w/out if sold abroad: most
will be exempt except RC and DC
MCIT
Q: When is a RFC subj to NIT?
A:
1. Sale of shares of stock of a
Foreign corp in the Phil.
2. sale of shares of stock of DC
which are ordinary asset
► DC and RFC are subj to MCIT which may
be imposed if the NIT is lower than the
MCIT2% MCIT will be imposed if MCIT is
higher than NIT.
Capital Gains From Sale of
Property (§24D)
► In 39 B the holding period does not
apply because the basis of income tax is
the gross selling price (GSP) or the Fair
market value (FMV) whichever is higher- 6%
FIT
Requirements:
1. The real prop must be sold w/in the
Phils and located in the Phils.
2. It must be a capital asset
3. The seller must be an individual,
estate or trust or a DC
► RFC not liable for FIT but liable to pay
NIT if all the elements are present.
► NRFC liable to pay GIT and not FIT
► NRANETB liable to pay FIT are all
elements are present.
ELEMENT # 3 The real prop must be a
capital asset
Q: When considered a capital asset?
A: Read R.R. 7- 2003
Q: Ordinary asset- shall refer to all real
property specifically excluded from the
definition of capital asset under Sec. 39
A: Other property not mentioned are
capital asset.
Q: What if all the elements are
present?
A:
most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT
Q: May a RC be liable to pay NIT even if all
the elements are present?
A: YES, disposition made to the Govt. Thus,
the taxpayer has the option of paying 32%
NIT or 6% FIT
Q: Which is more advantageous?
A: It depends determine first if there’s a
loss or a gain.
If there’s a gain choose to be taxed at
6% FIT. In this case the gain is always
presumed.
If there’s a loss choose to be taxed at
32% because losses may be considered an
allowable deduction .
Real
Other transactions are covered:
1. sale
2. barter
3. exchange
4. other disposition
NOTE: If the prop is under mortgage
contract and the mortgagee is a bank or
financial inst, the FIT does not apply
because the property is not yet transferred
because there’s a period of redemption
If after a year the mortgagor failed to
redeem the property that is the only time
that the FIT will apply because there’s now
a change of ownership. If redeemed w/in 1
yr period FIT will not apply because there’s
no change of ownership.
If the mortgagee is an individual the FIT
is imposed whether or not there is a
transfer of ownership.
Exceptions (§24(D2))
Q: What if the prop being sold was a movie
house, can he claim for the exception?
A: the prop covered by the exemption is a
residential lot
Q: Who can claim the exemption?
A: Only the taxpayer mentioned in Sec. 24
Requirements:
1. The purpose of the seller is to
acquire new residential real prop
2. the privilege must be availed of w/in
not 18 mos. From the sale
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 Taxation law review notes
- Atty. Francis J. Sababan -
3. Comm. must be informed w/in 30 derived by such educational inst or hospital
days from the date of sale with the from all sources
intention to avail of the exemption
4. the adjusted basis or historical cost Requirements:
of the residence sold shall be carried 1. It is a private school or hospital
over to the new residence. 2. it is stock corp
5. the privilege must be availed only 3. it is non profit
once every 10 yrs 4. that gross income from unrelated
6. Certification of the brgy. Capt where business, trade or activity must not
the taxpayer resides that indeed the exceed50% of its total gross income
prop sold is the principal residence derived by such educational inst or
of the tax payer (RR 13- 99) hospital from all sources
5. has permit to operate from DECS,
Q: What if the property is worth 10 M and it TESDA, or CHED
was sold only for 2M, what will happen to
the unused portion or profit? Q: What do you mean by unrelated trade
A: If the proceeds are not fully utilized, the business or activity?
portions of the gain is subj to FIT A: It means any trade, Business, or activity
which is not substantially related to the
SEC. 27A RATES OF INCOME TAX exercise or performance by such entity of
its primary purpose or performance
Q: How many income taxes are paid by a
DC? Q: May a school or hospital be exempt from
A: paying tax? What are the req?
1. NIT A:
2. MCIT 1. It must be non- stock and non- profit
3. FIT 2. the assets property and revenues
4. 10%Improperly Accumulated must be used actually, directly, and
Earnings exclusively fro the primary purpose
5. Optional corporate income tax of
15% of the gross Q: Under what law? Is it the constitution or
the NIRC which provides fro the exemption?
► DC liable for five, but the optional is not A: It is under Sec. 30 of NIRC and not
yet applicable so only 4. under Sec.4 Art. 14 of the Constitution. The
provision of the NIRC is the specific law
Q: How many can be applied which prevails over the Constitution which
simultaneously? A: ONLY 3 is the general law.
1. NIT, FIT and 10% IAE → exempt from all taxes and custom
2. MCIT, FIT, 10% IAE duties

SEC. 27 (B) PROPRIETARY Q: What about exemption from real

EDUCATIONAL INST. & HOSP. property tax?
A: Art. 6 Sec. 28 of the Constitution:
Who are the taxpayers? charitable institution churches, ….and all
1. Non- Profit Proprietary Educl. lands buildings, actually directly and
Inst and exclusively used for religious, charitable,
2. Non Profit Proprietary and educational purposes shall be exempt
Hospital from taxation.
→ Not Sec. 4 of Art. 14 of the
Q: What if the school or hospital is non Constitution.
profit only, is it exempt?
A: No, subject to 10% on their taxable Q: You donated a property to a school will
income except those covered by subsection you be liable for donor’s tax?
(D) A: not liable if it falls under Sec. 101 (3) of
PROVIDED that gross income from the NIRC
unrelated business, trade or activity must
not exceed 50% of its total gross income REQ. FOR EXEMPTION TO DONORS TAX:

29
 Taxation law review notes
- Atty. Francis J. Sababan -
1. it must be non-stock, non-profit
educational inst.
2. not more than 30% of the prop
donated shall be used by such donee for
admin purposes.
3. paying no dividends
4. governed by trustees who don’t
receive any compensation
5. devoting all its income to the
accomplishment and promotion of the
purposes stated in its Articles of
Incorporation
Q: What about exemption from VAT?
A: Sec. 109 (m) of R-VAT
Q: What about exemption fro Loc Gov
Code?
A: If its non-stock, non-profit educational
inst. It may be exempted from local
taxation.
Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the Consti.
SEC. 23: GOCC, AGENCIES, INST of the
GOVT.
GEN RULE: Subj to tax.
EXCEPTIONS:
1. GSIS
2. SSS
3. PHIC
4. PCSO
► PAGCOR no longer included.
Q: If the GOCC is not one of those
enumerated does it follow all of its income
is automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived
from any public utility or from the exercise
of essential government function accruing
to the Govt of the Phils or to any political
subd. Are therefore exempt from income
tax.
Therefore, even if the GOCC is one of
those enumerated under Sec. 27 it may still
be exempt under Sec. 32 b7b if its
performing governmental function
NOTE: Pagcor vs. Basco case
Q: What is the difference between Sec. 27
C and 32 b7b?
A:
1. Sec 27 C exempts those enumerated
without any qualification.
2. Sec. 32b7b qualification must concur
before it may be exempted.
Q: Can the government impose tax on
itself?
A: It depends on who the taxing authority
is. If the taxing authority is the National
Govt. as a rule, YES.
Exceptions
1. those entities enumerated under §27
C
2. those GOCC falling under §32b7b
If the taxing authority is the local
government units, as a rule NO. LGU’s are
expressly prohibited from levying tax
against: (Sec 133(o)
1. National Govt.
2. Its agencies and instrumentalities
3. local government units
Exception: Sec 154 of LGC says that LGU’s
may fix rate for the operation of public
utilities owned and maintained by the
within their jurisdiction.
PAL CASE July 20 2006
H: The SC used 133 (o)an exception to
pay tax, real estate tax, imposed by City
of PAranaque on NAIA. The SC said that
the airport is not an agency or GOCC but
mere instrumentality of the Govt.
This is Gross ignorance of the law
Sec. 133 (o) is for local taxation not real
property taxation which is the one
involved in the present case.
NOTE: Mactan- Cebu Airport case
SEC. 27 D(1)
Q: How many possible incomes were
mentioned?
A: Two (2): bank interest and royalties
REQ:
1. Bank interest must be received by a
Domestic Corp
2. Royalties derived from sources
within
Q: When it comes to bank interest, what is
the difference if the taxpayer is an
individual or corporation?
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 Taxation law review notes
- Atty. Francis J. Sababan -
A: If individual, they may be exempt from ► exemption of NR from EFCDS:
the payment of interest in case of long term
deposit except NRANETB Q: Who is the income earner?
If DC, they are not exempt from long A: Non Residents whether individual or
tem deposit. Corporations

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

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

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

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

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

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 Taxation law review notes
- Atty. Francis J. Sababan -
Q: What is the carry over rule?
A: Sec 27 E2 states the carry over rule.
► In order to avail: only in the year where
the MCIT is greater than the NIT.
Sec 28 A1
Q: What Kinds of taxes are paid by the
RFC?
A: NIT
MCIT
Sec. 28 B2 MCIT on RFC
► same with Sec. 27
Sec. 28 A3- INTL CARRIER
Kind:
1. Air carrier
2. ships
► An intl. carrier doing business in the
Phils. shall pay 2 ½ % on its Gross Phil
Billings (GPB)
Q: Is 28 A3 the Gen. rule or the Exception?
A: It is the general rule because it is under
28 A3
► GPB is in the nature of FIT, applies only
if all the requirements are present.
► RFC will be liable for NIT, hence a RFC
engaged in common carriage does not pay
GPB but NIT
► Income without: EXEMPT
International Carrier:
► GPB refers to the amount of revenue
derived from: carriage of persons, excess
baggage, cargo and mail originating from
the Phils in a continuous and uninterrupted
flight, irrespective of the place of sale or
issue and the place of payment of the
tickets or passage document.
REQ:
1. Originating from the Phils.
2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale or
issue and the place of the payment
of tickets or passage document.
Q: Do you consider landing rights to
determine liability? (RR 15-2002)
A:
1. If originates from the Phils
and has landing rights- ONLINE- RFC
2. No landing rights- OFFLINE-
NRFC
Q: If there are stopovers, is it still
uninterrupted?
A: YES, provided that the stopover does
not exceed 48 hrs.
Q: When will the place of sale of tickets
matter as to the taxpayers liability?
A: The place of tickets is material only if
the two other elements are not present to
be able to know if its subj to NIT or exempt.
Revalidated, exchanged or indorsed
tickets
REQ:
1. The passenger boards a plane in a
port or point in the Phils.
2. The tickets must be revalidated,
exchanged, or indorsed to another
airline.
Q: What if it’s the same airline but different
plane?
A: GPB does not apply, it must be to
another airline
Q: What if it did not originate from the
Phils.?
A: Determine if its income within or
without.
if ticket was purchased in the Phils. it is
income within hence apply NIT
if purchased outside, it is income
without, hence exempt
Transshipment
REQ:
flight originates from the Phils
transshipment of passenger takes place
at any port outside the Phils.
the passenger transferred on another
airline
Q: How do you apply GPB?
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 Taxation law review notes
- Atty. Francis J. Sababan -
A: Only the aliquot portion of the cost of If: Lender- OBU
the ticket corresponding to the leg flown Borrower- Resident Citizen
from the Phils to the point of transshipment EXCEPT:
shall from part of the GPB. 1. OBU
2. Local Commercial Banks
Q: Is it liable for the whole flight?
A: Transactions of Non Residents:
From the Phils to the point of 1. Income earner: Non- Residents
transshipment, it is income w/in 2. Lender: OBU’s
From transshipment to final destination,
its income w/out- EXEMPT NOTE: Non resident exempt from
transactions with OBU’s and EFCDS
International Shipping
SEC. 28 A5 TAX ON BRANCH PROFITS,
► GPB means gross revenue whether from REMITTANCES
passenger, cargo, mail ► profits based on the total profits applied
or earmarked fro remittance remitted by a
branch to its head office
REQ: ► Subj to 15% tax
it must originate from the Phils.
up to final destination Except: those activities which are registered
- regardless of the place of sale or with PEZA
payments of passenger or freight
documents NOTE: Interests, Dividends, Rents, Royalties
including remuneration for technical
Sec28 A(4) OFF SHORE BANKING UNITS sevices, salaries, wages, premiums,
annuities, emoluments, or casual gains,
OBU’s profits, income and capital gains
1. only acceptable foreign currencies received by a foreign corporation during
2. always a foreign corporation (subj to each taxable year from all sources
NIT) except #3 within shall not be treated as branch
3. Exempt if income is derived by the profits UNLESS the same are effectively
OBU from EFCDS connected with the conduct of its trade
4. Parties: or business.
a) local commercial banks
b) Foreign bank branch Branch Profit Remittance
c) Non Residents
d) OBU in the Phils. Two ways to receive income (FC)
1. Branch
Difference with EFCDS: 2. Subsidiaries
EFCDS
1. Acceptable foreign currency, Phil. NOTE:
Currency or both 1. When a FC establishes branch, it is
2. Can be a domestic or foreign always a FC
corporation 2. When a FC establishes DC, it is a
3. Exempt if income derived by DC or RFC
RFC from EFCDS
4. Parties: Q; It is in addition to NIT- Why?
a) local commercial banks A: NIT because it is RFC
b) Foreign bank branch
c) Non Residents Q; What kind of tax is imposed under 28
d) OBU in the Phils A5? A: 15% FIT
e) Other banks under EFCDS
Q: How do you apply the rate?
FOREIGN CURRENCY LOAN A: multiplied to the total profit applied or
earmarked for remittance w/o deductions
► 10% FIT

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

35
 Taxation law review notes
- Atty. Francis J. Sababan -
to do with the sale of copper to
Mitsubishi. Atlas and Mitsubishi had
reciprocal obligations- Mitsubishi in
order to fulfill its obligations had to
obtain a loan, in its independent
capacity with Exim bank. Laws granting
exemption from tax are construed
strictly against the taxpayer and
liberally in favor of the taxing authority.
SEC. 28 D5 b INTERCORPORATE
DIVIDENDS:
► FIT 15% imposed on the amount of cash
and or prop dividends received from a
domestic corporation.
SUBJ TO THE CONDITION: the country where
the NRFC is domiciled allows a credit
against the tax due from the NRFC taxes
deemed paid or deemed to have been paid
in the Phils.
Gen rule: 35 % FIT
Exception: 15% under the “tax deemed
paid rule/ reciprocity rule/ tax sparring rule”
JHONSONS CASE
2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for
income within and income without
2nd : countries liable only for income within.
MARUBENI Case: 2 Issues
1. Is the payment of 10% FIT correct?
- No because it was a branch and RFC but
still Marubeni was NRFC under the old law
which is liable to pay 35%, but SC said
liable only to 25% because of the tax treaty
► You cannot refund right away → 15%
BPRT and 10% Inter-corporate Dividends
tax has different basis
In P&G who are involved
- DC (P&G Phil) and NRFC (P&G US)
- DC declares dividends to NRFC
- 35% was withheld and remitted to
the BIR
What did they discover? (after paying)
- they discovered that they are liable
only for 15% so they have a refund
of 20%
Q: In the 1st case did the SC allowed the
refund?
A: NO, denial anchored on 2 grounds:
1. One claiming for refund was not the
proper party
2. There was a showing or proof as to
the existence of the “tax deemed
paid” rule
Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
1. Income tax is FIT: the
withholding agent is the proper party
because he is liable to pay said
taxes
2. actual proof of payment not
necessary, what is necessary is the
law of the domicile of the country
providing fro tax credit equal to 20%
of the tax deemed paid.
Q: What is the rate if the law is silent?
A: 35% FIT
► The rate will only be 15% if there’s a law
recognizing the same but this refers to the
case of those belonging to the first
category.
WANDER CASE
Q: Who are the parties?
A: DC(Wander) and FC (Glaxo)- they
belong to different categories
The BIR tried to collect 35% because
the law is totally silent about the tax
credit
H: The SC said that the tax should be 15%
which applies 2 instances:
1. Foreign law do not provide for tax
credit- 35%
2. law provides but the law is silent-
15%
3. law is silent because there is no law-
15%
4. law is silent because there’s no law
because the subj matter is not
taxable- 15%
SEC. 29 IAET
Q: What is the rate?
A: 10% of the gross income (taxable
income)

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

Q: Income form the sale of property, do Q: What kind of dividends?

you include this in the ITR?
A: it depends
a. if subject to FIT, not included.
Withholding agent accomplish the forms
→ subject to FIT if the following
elements are present:
1. it is a capital asset;
2. located in the Phil.: and
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR.
→ Elements are not present, like when
the real prop. is an ordinary asset or when it
is capital asset if the taxpayer is RFC.
TAKE NOTE: R-R 17-2003
► Real property sale subject to FWT, the
buyer accomplishes the ITR.
4. interest; [Sec. 32 A (4)]
A: one that does not constitute a passive
income.
TAKE NOTE:
1. DC individual taxpayer = FIT
2. DC – DC & RFC = EXEMPT
3. DC – NRFC = FWT
► only dividends issued by a FC to an
individual taxpayer (RC OR RA) is included
in the computation of the gross income.
Thus, included in the ITR.
8. Annuities. [Sec. 32 A (8)]
Q: What kind of annuities?
A: annuities which are not exempt from tax
are included in the computation of the gross
income. (included in the ITR)

Q: What interest is being referred to here?
A: interest which is included in the
computation of gross income is interest
earned from lending money and interest
from bank deposit which does not
constitute passive income.
Bank interest from sources, without or
abroad.
9. Prizes and Winnings [Sec. 32 A (9)]
Q: What kind of prizes and winnings?
A:
a. those that does not constitute
passive income; and
b. those that are not considered as an
exclusion. Thus, exempt.

Q: Bank interest from Solid Bank, is it Passive Income

included in the ITR?
A: No, because it is included or considered 1. Prizes – derived from sources within
an income within, thus subject to FIT. Thus, and over 10,000.00
not included in the ITR. 2. Winnings – derived from sources
within.
5. Rents. [Sec. 32 A (5)]
Exempt:
► subject to NIT, included in the ITR. a. winnings: PCSO and Lotto winnings.
b. prizes:
6. Royalties; [Sec. 32 A (6)]

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

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

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

Q: Are there any requirement for Rule: Gov’t workers (both officers or non-
separation pay granted by foreign gov’t or officers) granted TLP on a yearly basis →
corp? exempt from income tax.
A: None, the separation pay granted by the → there is no qualification as to vacation or
aforementioned institutions are exempt sick leave.
without further qualifications (“other similar
benefits”). ► Take Note of 3 cases.
» be reminded of EO 291, Sec. 2. 78.2
Q: is separation pay an exclusion, par. 97, RR2-98, RR16-200 (3).
therefore, exempt?
A: No. Case of Zialcita
GENERAL RULE: Separation pay not ► retired from DOJ, contention: TLP should
exempt (?) be exempt from income tax pursuant to the
Exception: old law.
1. Automatic exclusions, thus exempt if SC: on a different ground – TLP is exempt
due to: because it is similar to Retirement pay, thus
a. illness

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 Taxation law review notes
- Atty. Francis J. Sababan -
exempt but the ruling’s application is 1. foreign government
limited only to DOJ employees. 2. financing institutions owned,
controlled or enjoying re-financing
Borromeo case: from foreign gov’ts; and
► Same as the Zialcita case 3. int’l or regional financial institutions
Issues: WON the TLP is subject to income established by foreign gov’ts
tax and WON COLA and RATA are included? (established in the Philippines)
SC: RULED TLP is Exempt!
Modified: the rule applies not only to DOJ TAKE NOTE: if plain foreign corp., subject to
officers but also to CSC commissioners. FIT 20%.

COMMISSIONER v. CASTAÑEDA EXAMPLES of exclusions:

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

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

A: A:

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 Taxation law review notes
- Atty. Francis J. Sababan -
1. gov’t; and
2. Private institutions.
F. GSIS, SSS, Medicare and other
contributions (Sec. 32 B 7 f)
► must be deducted from the GI not NIT
because it is an exclusion.
-creditable withholding tax is an exclusion-
must be deducted first from the GI before
you compute the NIT. Otherwise, you are
including in the GI something that is
excluded from the same.
G. Gains from the Sale of bonds,
debentures, or other Certificate of
indebtedness. (Sec. 32 B 7 g)
Q: Why 5 years?
A: certificate of indebtedness is similar to
Bank Interest in a long term deposit.
- Sec. 32 B 7 g is similar or the same as 24
B in long term deposit.
H. Gains from redemption of shares in
mutual fund (Sec. 32 B 7 h)
1. Fiscal Year – means an accounting period
of 12 months ending on the last day of any
month other than December.
2. Calendar year – a period of 12 months
beginning on January and ending on
December.
Q: Business expense incurred in February
2006, is it possible to include it for April
2006?
A: yes, it is possible or it is possible if fiscal
year is employed, if it falls under the fiscal
year and all the elements are present.
- related to trade or business.
REASON: Capital loss has no connection to
the trade or business.
TAKE NOTE:
► for taxpayers liable for income within
and without (RC & DC)), they can claim
deduction for expenses incurred within
and without.
► for taxpayers who are liable only for
income within, they can claim a
deduction for expenses incurred within
the Philippines.
Sec. 34 A EXPENSES
1. For those business expenses not
enumerated under A. You need to prove
that it is an ordinary and necessary
expense.
2. For those enumerated under A, all you
have to prove is that it is incurred during
the taxable year.
Feb. 12, 2007 (Sec. 34 A, Expenses)
Q: Did the law define what is reasonable?
A: No. for salaries and wages all that is
required by law is for it to be reasonable.
- for other forms of compensation, there
must be services actually rendered.
AGUINLDO Case
F: involves a corporation engaged in selling
fish nets, and the corporation have a land
sold through a broker.
►there was substantial profits gained from
the sale of a land which was sold by a
broker. The profit was in turn given to the
workers as special bonus.
►the corporation claimed the bonus as a
deduction.
ISSUE: Should the deduction be allowed?
H: The SC did not allow the deduction, for
other forms of compensation, it must be
made or given for services actually
rendered.
►in this case, it was proven that the sale
was not made by the employees, no effort
or services actually rendered by them
because the sale was made through a
broker.
►
Q: Reasonable Travel Expenses, What is the
requirement?
A:
1. Travel must be in pursuit of business,
trade or profession.
2. Travel expense while away from
home.
Q: Is there a travel expense which was not
in pursuit of business?
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 Taxation law review notes
- Atty. Francis J. Sababan -
A: yes, those which are considered as
fringe benefits (FB), expenses for foreign
travel is considered a FB only if it is not in
pursuit of the trade or business.
Q: can you claim it under Sec. 34 A (1)(a)
(ii)?
A: No, you can claim it under Sec. 34 A (1)
(a)(i) last paragraph.
Q: Reasonable Allowances for rentals for
meralco bills, requirements?
A:
1. required as a condition for the
continued use or possession, for the
purpose of the trade, business or
possession of the property.
2. taxpayer has not taken any title or no
equity other than a lessor.
Q: Reasonable allowance for entertainment,
amusement and recreation expenses, what
is the requirement?
A:
1. connected with the development,
management, and operation of the
trade (DOM);
2. Does not exceed the limits or ceiling
set by the Secretary of Finance; and
3. Not contrary to law, morals, good
customs, public policy or public order.
Q: How about bribe, kickbacks, and other
similar payments
A: even without this provisions, kickbacks
will not pass the requirement of (i) ordinary
and (ii) necessary hence not deductible
EXPENSES ALLOWABLE TO PRIVATE
EDUCATIONAL INSTITUTION
Q: Why only private educational institution
is mentioned and no other taxpayers?
A: it refers to section 27 for Private
Educational Institution given to the
educational institution.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for capital outlays not
deductible as business expense
EXCEPTION: Private Educ. Institution can
claim it under Sec. 34 A (2)
BUSINESS EXPENSE vs. ALLOWANCE
FOR DEPRECIATION
BUSINESS EXPENSE
1. No carry-over
2. can be claimed for one year only.
3. if the amount of capital outlay is
substantial, it cannot accommodate all of
the expenses incurred.
ALLOWANCE FOR DEPRECIATION
1. There is carry over
2. you can claim it for a longer period
depending on the life span of the property.
3. it can accommodate all of the expenses
incurred.
• taxpayer’s allowable deduction for
interest expense shall be deducted
by an amount equal to 42% (RR 10-
2000) of the interest income subject
to FIT.
Q: Who claims this deduction?
A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
►interest on debt - when one borrows
money to finance his business interest in
connection with the taxpayer’s profession
trade or business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2
a)
►a borrower or taxpayer can claim the
interest paid in advance as itemized
deduction when he filed his income tax
return (ITR) depending on whether or not
the principal obligation has been paid.
1. if the entire amount or entire principal
obligation has been paid – the entire
amount of interest can be claimed as
itemized deduction.
2. if only ½ of the obligation had been paid,
then the entire amount of ½ of that interest
can be claimed as a deduction.
3. if no payment had been paid on the
principal obligation, the advance interest
paid cannot be claimed as a deduction on
the years that it was paid.
REQUIREMENTS FOR REDISCOUNTING OF
PAPERS:
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 Taxation law review notes
- Atty. Francis J. Sababan -
1. incurred within the taxable year.
2. individual taxpayer reporting income on a
cash basis.
• No deduction shall be allowed in
respect to the following interest:
1. if within the taxable year an individual
taxpayer reporting income on the cash
basis incurs an indebtedness on which an
interest is paid in advance or through
discount or otherwise.
2. if both taxpayer and the person to whom
the payments has been made or is to be
made are persons specified under Sec. 36
(B):
a. member of a family
b. bet. an individual and a corp., more than
50% in advance of the outstanding stock of
which is owned directly or indirectly by or
for such individual;
c. Bet. 2 corp., more than 50% in value of
the outstanding stock of each of which is
owned, directly or indirectly, by or for the
same individual.
d. bet. the grantor and a fiduciary of any
trust;
e. bet. the fiduciary of a trust and the
fiduciary of another trust if the same person
is a grantor with respect to each trust; or
f. bet. a fiduciary of trust and a beneficiary
of such trust.
Q: Who are not allowed to claim interest
under sec 36 B?
A: interest incurred between related
parties.
Q: What if half-brother?
A: not allowed to claim deduction for
interest.
TAKE NOTE: interest incurred from the
exploration of petroleum refers not just in
interest incurred on loan of money but also
interest incurred for installment payments.
Q: Who are related parties?
A: individuals and corporations.
OPTIONAL TREATMENT OF INTEREST
EXPENSE:
1. interest incurred to acquire property
used in trade, business or exercise of
profession can be claimed a an itemize
deduction…
a. on interest; or
b. depreciation (as capital
expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in a
bank so that it will warn interest. (RR13-
2000)
ILLUSTRATION:
1. loan of 1M from a bank with an interest
of 20%
2. 20% of 1M is Php200,000 but you cannot
claim this whole amount as a deduction.
3. when you deposited the 1M in the bank,
it earned a bank interest subject to FIT
worth Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
5. Php200K-4,200= Php195,800/ this is the
amount you can claim as a deduction.
34 C TAXES:
REQUISITES:
1. taxes must paid or incurred within the
taxable year
2. it must be incurred in connection with
trade or business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7
Q: Where should it be deducted?
A:
1. if claimed as a deduction, it should be
deducted from the gross income;
2. if claimed as a tax credit, it should be
deducted from the Net Income Tax due
(bottom of the formula)
MERCURY DRUG CASE
- Discount of senior citizens
SC: discount claimed by senior citizens shall
create a tax credit and must be deducted at
the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
►tax deduction is allowed if the taxes were
paid or incurred within the taxable year and
it must be connected to the trade, business
or profession of the tax payer.
Q: Who are entitled to claim it?
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- Atty. Francis J. Sababan -
A: those liable to pay NIT. (Tax credit only
for NIT)
Q: What is a tax credit?
A: refers to the taxpayer’s right to deduct
from the income tax due the amount of
tax the taxpayer paid to foreign country,
subject to limitations.
Q: What is the tax credit being referred to
under 34 C (3)?
A: credit against taxes for taxes of foreign
country.
Q: What are the other tax credit under the
code?
A:
1. RA 6452 – selling goods and commodities
to senior citizens, the discount claimed is
treated as a tax credit.
2. income tax paid to foreign country.
3. Input tax on Vat
4. Creditable w/holding tax system under
NIT
5. Tax credit certificate.
Q: Who are allowed to claim it?
A: RC and DC only.
Q: Suppose you are a RC, you pay NIT to
US, will you be able to claim it as a tax
deduction?
A: 1. generally, you can claim it as tax
credit.
2. you can claim under Sec. 34 C (1) b
►if the taxpayer did not signify in his return
his intention to avail himself of the benefit
of tax credit for taxes paid to foreign
country.
►taxes incurred not related to the trade or
business, you have the option to:
a. claim it as tax credit; or
b. claim it as a deduction
►law gives you this privilege.
Q: When is taxes not allowed as a
deduction?
A: Sec. 34 C (1)
1. Income tax;
2. Income tax imposed by authority of
any foreign country;
3. Estate and Donor’ tax; and
4. taxes assessed against local benefits
of a kind tending to increase the value of
the property.

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

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

STEP 2 Q: Which would you choose? Tax credit or

deduction?
Quotient x RATE = amount w/c can be A: tax credit because it is deducted from
claimed as a deduction the taxable income while deductions are
deducted from the GI.
A: you cannot claim the whole 100K, you
can only claim the product of the quotient FORMULA: GI-DEDUCTION = NET INCOME x
times the rate RATE = TAXABLE NET INCOME – TAX
CREDIT)
TAKE NOTE: deduct at the bottom of the
formula ( sa computation ng GI) 34 D LOSSES

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Q: Is always a requirement that it is Q: Why is there a need for a carry over
incurred in pursuit of trade, bus. or under Sec. 34 D # when you can claim the
profession? loss from both capital and ordinary loss?
A: No. Sec. 34 D(1) provides for 2 kinds of A: if the loss exceeds the income for the
losses: taxable year, you cannot deduct the entire
a. incurred in pursuit of trade, bus. or amount of loss from your income for that
profession; year so the excess may be deducted for the
b. property connected with t,b,p, if the taxable year following the loss.
loss arises from fire, storms, shipwrecks
or other casualties or from robbery, B. CAPITAL LOSS – NET CAPITAL LOSS
theft or embezzlement (arising from CARRY OVER ( # 2 above)
natural calamity).

NET CAPITAL NET OPERATING

Q: What is the requirement? LOSS CARRY- LOSS CARRY-
A: OVER OVER
1. Loss actually sustained during the
taxable year 1. taxpayers is an 1. taxpayer may be
2. Not compensated for by insurance or individual only not an individual or
other forms of indemnity. corporation. corp;
3. Not claimed as a deduction for estate
tax purposes. 2. involves net 2. losses incurred
capital loss or connected with
Q: This is your itemized deduction which T or B;
can be claimed as a deduction from?
A: Gross income 3. carry-over as loss 3. Business losses
from sale of capital not previously off-
TAKE NOTE: asset in the next set as a deduction
► The itemized deduction of losses, succeeding year from the GI carried
however, is not confined to section 34B. it is over as such for
also found under section 86A (1) (e) which the next 3
also pertains to deductions available under consecutive years;
the estate tax law. 4. can only be 4. can be deducted
►Losses within six (6) months after the deducted from from capital gains
death of the decedent can be claimed as capital gains. and/or ordinary
itemized deduction of losses under Section gains.
34B. However, may be claimed as
deduction under estate tax return provided
that the same are not claimed as itemized
deduction of losses under Section 34B. NET OPERATING LOSS CARRY
REQUIREMENTS:
Q: How many carry-overs do we have under 1.Net operating loss of the business or
the Code? enterprise incurred w/in the taxable year
A: 3. Namely: 2. not previously off-set as a deduction from
1. Section 27 E (32) Carry forward of the GI
excess minimum Tax 3. carried over as a deduction from the GI
2. Section 39 D Net Capital Loss Carry- for the next 3 consecutive taxable years
over immediately following the year of such loss.
3. Section 39 D 3 Net Operating Loss
Carry-Over. Q: Can the period be extended?
A: yes, for mines other than oil and gas
KINDS OF LOSSES AND THEIR CARRY- well.
OVERS: 1. net operating loss w/out the benefit
incentives provided by law;
A. ORDINARY LOSS – NOLCO ( #3 above) 2. incurred in any of the first 10 years of
operation.

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3. carried over as a deduction from the
GI for the next 5 years following such loss.
4. no substantial change in the
ownership of the business or enterprise.
Q: What is the limit?
A: 75% of the nominal value of outstanding
shares is held by or on behalf of the same
persons/ corporation
► individual no problem, problem lies with
corporations or enterprises.
ABANDONMENT LOSSES
1. contract area where petroleum
operations are undertaken is partially or
wholly abandoned;
► all (1) accumulated exploration and (2)
development expenditures pertaining
thereto shall be allowed as a deduction.
2. a producing well is subsequently
abandoned:
►unamortized cost and undepreciated cost
of equipment directly used therein shall be
allowed as a deduction in the years it was
abandoned.
TAKE NOTE:
1. if abandoned well is reentered and
production is resumed; or
2. if equipment or facilities are restored into
service in the year of resumption or
restoration and shall amortized
depreciated.
Q: What is the Tax benefit rule?
A: Last Par. of Sec. 34 E (1): recovery of
bad debts previously allowed as deduction
in the preceding year shall be included as
part of the gross income in the year of
recovery to the extent of the income tax
benefits of said deduction.
Q: What is a Bad Debt?
A: Bad debts shall refer to those debts
resulting from the worthlessness or
incollectibility in whole or in part of
amounts due the taxpayer by others,
arising from money lent or from
uncollectible amounts of income from goods
sold and services rendered.
CHINA BANK VS. CA
► bad debts can only be claimed if
pursuant to a contract of loan
- no bad debts for loss of instruments.
Q: Who claims it?
A: a. creditor
b.money lender
Q: What year can it be claimed?
A: can be claimed in the year it was
actually sit ascertained to be worthless and
charged off, meaning cancelled in the books
of account.
Q: Do you need to file an action before you
can claim?
A: No, all you have to do is prove that you
did exert effort to claim or recover the
same.
Q: What cannot be deducted as bad debts?
A:
1. debts not incurred in connection
with the trade, business and profession
of taxpayer.
2. transactions, mered into between
parties mentioned under Section 36 (B)
namely.
a) between members of the family
b) between an individual who owns
more than 30% of outstanding
capital stock of a corporation
and that corporation
c) between two (2) corporations more
that 50% of the outstanding capital
or stock of which is owned by or for the
same individual
d) between a grantor and fiduciary of
any trust
e) between two (2) fiduciaries of two
(2) trusts who has the same
grantor
f) between a fiduciary of a trust and
above fiduciary of such trust
SECURITIES BECOMING WORTHLESS
1. ascertained to be worthless and
charged off within the taxable year
2. capital asset
3. taxpayer, other than a Bank or trust
company incorporated under Phil. Laws
4. substantial part of business is the
receipt of deposit
5. considered as a loss from the sale of
capital assets on the last day of such
taxable year
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34 F DEPRECIATION
ALLOWANCE FOR DEPRECIATION:
Q: What is depreciation? 1.all properties used in mining operations
A: It is the gradual dimension in the service other than petroleum operations shall be
or useful value of tangible property due computed as follows:
from exhaustion, wear and tear and normal a. if the expected life is ten (10) years or
obsolescence. less – normal rate of depreciation

Q: What kind of property is involved? b. if the expected life is more than ten (10)
A: 1. Real property except parcel of land years – depreciated over any number of
2. Personal Property years between five (5) years and the
expected life.
REQUISITES:
1. depreciation deduction must be REQUIREMENTS:
reasonable 1. depreciation is allowed as a deduction
2. for the exhaustion, wear and tear, from 61; and
including reasonable allowance for 2. contractor notifies the Commissioner at
obsolescence the beginning of the depreciation period
3. property used in the trade of which depreciation rate shall be used.
business
DEPRECIATION DEDUCTIBLE BY NRAETB OR
Q: What do you mean by “reasonable RFC
allowance”? ► reasonable allowance for the
A: it shall include, but not limited to, an deterioration of property
allowance computed in accordance with
rules and regulations prescribed by the 1. arising out of its use or
Secretary of Finance, upon employment
recommendation of the Commissioner, 2. or non-use in the business,
under any of the following methods: trade or profession
1.Straight-line method 3. property is located in the
2.Declining balance method Philippines
3.Sum-of-the-year-digital method; and
4.any other method which may be 34 G DEPLETION OF OIL and GAS
prescribed by the Secretary of Finance WELLS and MINES
upon recommendation of the ► only deduction which is a not self
Commissioner executing deduction

DEPRECIATION OF PROPERTIES USED Q: What is depletion?

IN PETROLEUM OPERATIONS A: the exhaustion wear and tear of natural
resources as in mines, oil, and gas wells
1. properties directly related to production ►the natural resources called “wasting
of petroleum assets”
2. allowed under (1) straight line or (2)
declining balance method DEPRECIATION vs DEPLETION
3. useful life of properties used or related
to production of petroleum shall be ten 1.involves 1. involves natural
(10) years or such shorter life as property resources
may be permitted by the 2. ordinary wear 2. ordinary wear
Commissioner. and tear of and tear of natural
4. for property not used directly in the equipments resources
production of petroleum (1) depreciated
under the straight line method, and TAKE NOTE:
useful life is only five (5) years ►Equipment used in mining operation is
deductible in depreciation
DEPRECIATION OF PROPERTIES USED
IN MINING OPERATIONS Q: Method for computing depletion?

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- Atty. Francis J. Sababan -
A: cost depletion method
Q: What if the Donee is not one of those
Q: to whom allowed? mentioned under the law, can he claim a
A: only mining entities owning economic deduction?
interest in mineral deposits A: No.
►Economic interest: capital investments in
mineral deposits TAKE NOTE: Donee is never an individual.

34H CHARITABLE & OTHER Q: If the Donor is a pure compensation

CONTRIBUTIONS income earner and he donates P100,000 to
the church, can he claim it as a deduction?
TAKE NOTE: A: No. pure compensation income earner
1.unique because deducted from the can only claim a deduction under Sec 34 M
taxable net income and not from the gross
income Q: If Donee is the Philippine Government,
►second step of the formula deduction what is the requirement?
A: it must be made exclusively for public
Q: Who is claiming the deduction? purposes
A: the donor
Q: What if the Donee is a province?
Q: Who are the Donees? A: there must be a qualification that it is for
A: 1.Government of the Philippines or any public purpose
of its agencies or any political subdivision
thereof exclusively for public purpose Q: If the Donee is a Domestic Corporation,
2. Accredited Domestic corporation or what is the requirement?
association organized and operated A: no part of its income inures to the
exclusively for religions, lion, charitable, benefit of any private shareholder or
scientific, youth and sports individual
development, cultural or educational
purposes or for the rehabilitation of Q: What are those contributions which can
veterans, or to social welfare institution, be deductible in full?
or to non government organization and A: 1.Donations to the Government – no
no part of its net income inures to the conflict with partial (different
benefit of any private stock holder or requirement)
individual ►Partial donated for exclusively public
purposes
Q: How many kinds of deduction? ►Full, used in undertaking priority
A: Two (2) kinds: activities of NEDA
1.partial deduction
►10% of taxable income in case of 2.Donations to certain Foreign
an individual Institutions or International
►5% of taxable income in case of Organizations
corporations ►in compliance with agreement, treaties
2. full /total deduction or commitment entered into by the
Philippine Government and such donees
Q: Which of the two kinds is the General
Rule? 3.Donations to Accredited Non
A: General Rule: Partial deduction government organizations Non
Exception: Total /Full deduction government organization, non profit
domestic corporation
Q: Suppose Mr. A made a cash donation of
P1M. How much can he claim as a REQUIREMENTS:
deduction? 1. organized and operated exclusively for
A: First determine the taxable income of Mr scientific, research, educational, character
A since he is an individual, he can only building and youth and sport development,
deduct 10% of his taxable income.

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health, social welfare, cultural or charitable
purposes or a combination thereof
2. no part of the net income of which inures
to the benefit of any private individual
3. uses the contributions directly for the
active conduct of the activities constituting
the purpose or function for which it is
organized and operated
4. annual administrative expense does not
exceed 30% of the total expenses and
5. in case of dissolution, the assets of which
would be distributed to:
a) another non profit domestic
corporation organized for similar
purpose or purposes
b) to the state for public purpose
c) distributed by the court to another
organization to be used in such a
manner which would accomplish the
general purpose for within the dissolve
organization was organized
34I RESEARCH AND DEVELOPMENT
►In the old law, this is not allowed as a
deduction. To remedy this, they felt that
those should be a separate deduction for
research and development.
REQUISITES:
►tax payer may treat research and
development expenditures as ordinary and
necessary expenses provided:
1. it is paid or incurred during the taxable
year
2. incurred in connection with trade,
business or profession; and
3. not chargeable to capital account.
Q: Treated as such when?
A: during the taxable year it is paid or
incurred
AMORTIZATION OF CERTAIN RESEARCH
AND DEVELOPMENT EXPENDITURES
►at the election of the taxpayer, the
following shall or may be treated as
deferred expenses:
a. paid or incurred by the taxpayer in
connection with his trade, business or
profession;
b. not treated as expenses under par 1
and
c. chargeable to capital account but not
chargeable to property of a character
which is subject to depreciation or
depletion
Q: How to compute taxable income:
A: deferred expenses shall be allowed as
deduction ratably distributed over a period
of not less than 10 months as may be
elected by the taxpayer (beginning with the
month the
taxpayer first realizes benefits from
expenditures.)
►the election or option may be exercised
for any taxable year after the effectivity of
the code but not later than the time
prescribed by law for filing the return for
such taxable year.
LIMITATION ON DEDUCTION
Q: When not deductible?
A: 1.Any expenditure for the
(1) acquisition or improvement of land
or (2) for the improvement of property to
be used in connection with research and
development of a character which is
subject to depreciation and depletion
and office site
2. Any expenditure paid or incurred for
the purpose of undermining the
existence, location, extent or quality of
any deposit of one or other mineral
including oil or gas.
► not for mineral exploration
34 J PENSION TRUST
Q: Claimed by Whom?
A: the employer
Q; What is a Pension Trust contribution?
A: a deduction applicable only to employer
on account of its contribution to a private
pension plan for the benefit of its employee
deduction is purely business in character.
Q: Requisites?
A:
1.the employer must have established a
pension or retirement plan to provide for
the payment or reasonable pension of his
employees
2. pension plan must be reasonable and
actually sound;
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- Atty. Francis J. Sababan -
3. it must be funded by the employer
4. the amount contributed must no longer REQUIREMENTS:
be subject to his control or disposition 1. amount of premiums, paid by taxpayer
5. the amount has not yet been allowed as for himself and members of his family,
a deduction and 2. amount of premiums should not exceed
6. the amount has or is apportioned in (1) P2,400 per family or (2) P200 a
equal parts over a period of 10 consecutive month
years beginning with the year in which the 3. gross income of the family for the
transfer or payment is made. taxable year is not more than P250,000

34 K ADDITIONAL REQUIREMENTS FOR

DEDUCTIBILITY OF CERTAIN PAYMENTS
►allowed as a deduction only if shown that
the tax required to be deducted and
withheld there from has been paid to the
BIR in accordance with Section 58 and
Section 81
34 L OPTIONAL STANDARD DEDUCTION
Q: Who can avail of this deduction?
A: 1.individual taxpayer earning purely
compensation income during the year;
2. individual taxpayer availing itemized
or optional standard deduction; and
3. individual taxpayer earning both
compensation income and income from
business

KINDS OF DEDUCTIONS: SECTION 35 ALLOWANCE FOR

1.Itemized deduction PERSONAL EXEMPTION FOR
2.Optional Standard Deduction INDIVIDUAL TAXPAYER
3.Personal /Additional Deduction
Q: When do we apply this?
OPTIONAL STANDARD DEDUCTION: A: apply if individual taxpayer is paying by
►can be availed of by an individual who way of NIT
may elect a standard deduction in an
amount not exceeding 10% of his gross Q; Who are taxpayer?
income A: those mentioned under Section 24 (A)
► may apply in lieu of the other 1. RC
deductions under Section 34 2. NRC
►the taxpayer must signify in his return his 3. OCW
intention to elect the optional standard 4. RA
deduction, otherwise, he shall be ►all can claim both personal and
considered as having availed of the additional exemption
itemized deduction.
Q: Why not include NRAETB? Can the latter
Q: Who can claim this deduction? claim any exemption?
A: all individual taxpayers except non A: NRAETB is not included because Section
resident alien not engaged in trade or 35 A refers to Section 24 A
business (NRANETB) ►NRAETB can claim personal deductions
Reason: he is not liable to pay by way of the but not additional exemptions pursuant to
NIT, thus, follows he cannot claim this Sec 35 D
deduction because he is liable to pay by
way of GIT. REQUIREMENTS:
1.NRAETB should file a true and accurate
TAKE NOTE: return
►can co-exist with personal and / or 2. the amount to be claimed as personal
additional exemption exemptions should not exceed the
amount provided for under Philippine
34 M PREMIUM PAYMENTS ON HEALTH Laws
AND /OR HOSPITALIZATION INSURANCE
OF AN INDIVIDUAL TAXPAYER TAKE NOTE:
► for (1) Health and /insurance AEMOP: can be a RA or NRAETB
(2) Hospitalization

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BASIC PERSONAL EXEMPTIONS: Section 35 A – but can claim under sec
35B
1. Single individual; or ►widower, married or used to be married
individual judicially
decreed as legally MARRIED INDIVIDUALS
separated with no ►each legally married individuals can claim
qualified dependents. the personal exemption. Husband and wife
► 20, 000 = P64,000

2. For head of the family – Q: Who are allowed to claim?

can be single or legally A: Normally , it is the husband who claims
separated with qualified unless he executes a waiver that the
dependents. wife will claim the same (RR2-98)
► 25, 000
Additional Exemptions: (35B)
3. For each married
individual – if only one of -additional exemption of P8,000 for each
the spouse, earns or dependent not execeeding four (4)
derives gross income,
only such spouse can Q: Who can claim the same?
claim the personal A: 1.Married couples: only one of the
exemption. spouses can claim it;
►32, 000 2.legally separated individuals: can be
claimed by the spouse who has custody
Q: Who is the “head of the family”? of the child or children
A: 1.unmarried or legally separated man or ►the additional exemption claimed by
woman both shall not exceed the maximum
2. With (1) one or both parties or additional exemption herein allowed.
(2) With one or more brothers and
sisters Q: Define “dependents”
(3) with one or more legitimate, A: legitimate, illegitimate or legally adopted
recognized, natural or legally adopted child chiefly dependent upon and living
children with the taxpayer if such dependent is (1)
3. living with and dependents upon him not more than 21 years of age, (2)
for their chief support unmarried, and (3) not gainfully employed
4. whose such brother or sisters or or (4) if such dependent, regardless of
children are age is incapable of self support because
(1) not more than 11 years old and of mental or physical defect.
(2) not gainfully employed,
(3) unmarried Q: What if widower has illegitimate
5. OR, regardless of age, the same are children, can claim additional
incapable of self support because of exemption?
mental or physical defect. A: can claim, can be considered as head of
the family w/ dependent
Q: Why do we have to determine who the
head of the family is? Q: What if the children are temporarily
A: only legally separated individuals can away from the parents?
claim additional exemptions if they have A: still considered living with parents, can
qualified dependents. claim exemption

TAKE NOTE: CHANGE OF STATUS: (SEC 35 C)

►R.A. 7432 and RR 2-98: a senior citizen Q: Reckoning Period?
can also be a dependent. A: end of the year or close of such year
when such change of status
Q: Can a widower claim exemptions? occurred.
A: exemptions must be strictly construed,
widower not included in the list under TAKE NOTE:

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 Taxation law review notes
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►always choose the higher amount of 2. Any amount expanded in restoring
exemption if you are filing a return covering property or in making good the
the period within which the change of exhaustion thereof for which an allowance
status occurred is or has been made.
Exceptions:
1. if the taxpayer should (1) marry or (2) 1. Option granted to Private
have additional dependents during the Educational Institution to deduct the
taxable year, he may claim the same as capital outlays.
corresponding exemption in full for the TAKE NOTE:
year. ►Amount paid for new buildings, can be
deducted if it involves intangible drilling
Illustration: and development cost incurred in
1.Single Jan 1, 2005 petroleum operations (Sec 34 6 (A)
2.Married June 1, 2005 – on April 15, 2006 –
status: legally married can claim P 32,000 PREMIUMS PAID ON LIFE INSURANCE
POLICY :
2. if the taxpayer should die during the
taxable year, estate can claim personal 1. covering the life of any officer or
exemption. employee or any person financially
invested in any trade of business
Illustration carried on by the taxpayer.
1.Jan. 25, 2005 taxpayer married w/ one 2. taxpayer is directly or indirectly the
child beneficiary under such policy.
can claim on April 15, 2006
P32,000+
P8,000 } P40,000 LOSSES FROM SALES OR EXCHANGES
OF PROPERTY (between related parties)

► In this case, as if the change of status 1) between family members

occurred at the close of taxable year. If
taxpayer’s spouse or child dies within the Q: Who is considered the “family of the
taxable year or the dependent’s became (1) taxpayer?”
gainfully employed (2) got married or (3) A: a. brothers and sister (whole is ½
became 21 as if the change as status blood)
occurred at the close of taxable year. b. spouses
Illustration: c. ancestors
1. Taxpayer’s tragic story wife died Jan. 25, d. lineal descendants
2005 and child died the next day then Q: are uncles or nieces included?
another child eloped and get married. A: no
2. Taxpayer despite the tragedy can claim
ton of money on April 15, 2006.
P 32,000
P 16,000 (8,000 per child) IN DONOR’S TAX
48,000 ►Relatives includes relatives by
consanguinity within the 4th civil code.
Section 36. Items not Deductible Nephew is a stranger and relative ang
nephew.
36 A. General Rule: In computing net
income, no deduction shall be allowed: 2) individual and corporations
(1) Personal, living or family expenses – not Gen. Rule: NO DEDUCTION
related to trade or business Except: distribution in liquidation or
(2) Section 36 A (2) and Section 36 A (3) less than 50% of the outstanding
General Rule: No deductions allowed for capital stock
1. Any amount paid out for new buildings
or for permanent improvements, or 3) Two corporations
betterments, made to increase the value 4) Grantor or Fiduciary
of any property or estate 5) Two fiduciaries of two trust
6) Fiduciary and beneficiary of trust

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Sec. 37 Special provisions regarding
deductions of insurance companies.
Codal Provisions
Section 38: Losses From Wash Sales of
Stock or Securities
Q: What is a wash sale?
A: It is a sales or other disposition of stock
securities where substantially identical
securities are purchased within 61 days,
beginning 30 days before the sale and
ending 30 days after the sale.
Q: What period?
A: 61 day period beginning 30 days before
and ending 30 days after the sale
Q: Jan 20 you purchased share of stock, and
disposed of the same on Feb 5, 2005. Is
this a wash sale?
A: No
Q: If it is a loss in wash sale, happens?
A: General Rule: (Sec 131 RR No. 2)
gains from wash sale are taxable but
losses are non-deductible
Exception:
►unless claim is made by a dealer in stock
or securities and with respect to a
transaction made in the ordinary course of
the business of such dealer
Q: Reason why losses in wash sale cannot
be deducted?
A: 1. to avoid too much speculation
in the market
2. taxpayer not telling the truth,
because he may say he incurred
a loss instead of a gain
Section 40. Determination of Amount
and Recognition of Gain or Loss
GENERAL RULE: This is totally
irrelevant if the income is subject to fit.
In fit gain is presumed.
EXCEPT: sale of shares of stock where
you have to determine actual gain or
loss
Q: When is there a gain?
A: excess of the amount realized over the
basis or adjusted basis for determining
gain. (amount realized from the sale or
other disposition of property)
Q: When is there a loss?
A: the amount realized is not in excess of B
or AB
Illustration: 1987 Bar (Juan dela Cruz
sold jewelry for 300,000 ) contract of
sale
►amount realized is 300,000
Q: What will be the basis of the gain?
A: Sec. 40 B (1), property was acquired
by purchase
►Cost: purchase price + expenses
Q: If there is a gain, is the whole gain
subject to income tax?
A: it depends
►if ordinary asset = 100% is subject to
income tax
►if capital assets
a. short term(less than 12 months) :
100% taxable
b. long term (more than 12 months):
50% taxable
Q: suppose property sold is a parcel of land
will the rule be the same?
A: No, and it depends
►ordinary asset: apply the cost
►capital asset: 6% FMV or selling price
which ever is higher
Q: Do we apply the holding period?
A: No, holding period does not apply to the
sale of real property. This is an absolute
rule:
►If realty is ordinary – holding period
does not apply.
►If realty is capital asset – 6% FMV or
selling price applies.
►Holding period applies only to sale of
personal property which is a capital asset
except sale of shares of stocks.
►Holding period also do not apply to
corporations.
Q: If the property is acquired through
inheritance, what is the basis?
A: Sec 40 B (2) fair market value or price
as of the date of acquisition.
Q: Suppose it was a sale of personal
property, do we apply the same
principles?
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 Taxation law review notes
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A: No.
Q: What if it involves a sale of real
property?
A: Apply the same principles
Suppose it was a result of swindling,
theft, robbery or estafa, do we apply
the same principles?
A: Law is silent, take note of the old CIA
ruling on this one
Q: Feb 14, 2006, your GG gave you a
jewelry in Sept your GG breaks up with
you. GG request the jewelry be returned
but you already sold it for P200,000.
Will the entire P200,000 be included in
gross income?
A: Basis: (1) same as if it would be in the
hands of the Donor (FMV as of date of
acquisition); or (2) last owner who did
not acquire the same by gift (cost)
Q: If it involves a parcel of land?
A: apply the same rules Section 40 B (4)
what is the basis?
1. Property was acquired for
less than an adequate
consideration in money or
moneys worth: the basis would
be the amount paid by the
transferee for the property.
Q: Section 40 B (5) what is the basis? A: 40
C (5)
► if the property was acquired in a
transaction where gain or loss is not
recognized (pursuant to a merger or
consolidation plan)
a. corporation, party to a merger or
consolidation, exchanges property solely for
stocks in another corporation, also a party
to the merger or consolidation
b. is a party to the merger or
consolidation, solely for the stocks of
another corporation also a party to the
merger or consolidation, or
c. Security holder of a corporation,
party to a merger or consolidation,
exchanges his securities solely for
stock or security in another
corporation, also a party to the
merger or consolidation. – person
transfers property to corporation to
gain control
40 C EXCHANGE OF PROPERTY
GENERAL RULE: In sale or exchange of
property, the control amount of gain or loss
shall be recognized.
1. gain is taxable
2. losses are deductible
Exception: If permanent to a merger or
consolidation plan, no gain or loss shall
be recognized
1. gain is exempt
2. losses are not deductible
REQUISITES:
1. the transaction involves a contract
of exchange
2. the parties are members of the
merger or consolidation
3. the subject matter is only limited or
confined with the one provided for
by law
►Merger and Consolidation in corporation
code and tax code are not the same.
►Sec 40 (2) (a)
►a corporation which is a party to a
merger or consolidation, exchanges
property solely for stock in a corporation
which is a party to the merger or
consolidation
Illustration:
Transferor gives 1M
Transferee gives 700,000 = not
taxble gain P300,000
►If other property received by transferee
(40 C (3) (a) TRANSFEREE
►if the party receives not just the
subject matter permitted to be received:
lie if the party receives money and /or
property, the gain, if any, but not the
loss, shall be recognized (meaning
taxable) but in an amount not in excess
of the sum of the money and the FMV of
such other property received.
(40 C (3) (b) TRANSFEROR
1.Transferor corporation receives money
and / or property, distributes it pursuant to
the merger or consolidation plan
►no gain to the corporation shall be
recognized
2. Transferor corporation receives money
and / or property, does not distribute it
pursuant to the merger or consolidation
plan
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- Atty. Francis J. Sababan -
►the gain shall be recognized but in an
amount not in excess of the sum of such
money and the FMV of such other property
so received.
Q: What is the rule?
A: 40 C (3) (a)
1. gain taxable
2. loss not deductible
►40 C (3) (b)
It depends on how distributed:
1. pursuant to the merger
consolidation plan:
►gain exempt
►loss not deductible
2. not pursuant to merger
consolidation plan:
►gain taxable
►loss not deductible.
Sec 40 C (1) (b)
►a shareholder exchanges stock in a
corporation which is a party to a merger
or consolidation, solely for the stock of
another corporation which is a party to
the merger or consolidation
Sec 40 C (2) (c)
► a security holder of a corporation
which is a party to the merger or
consolidation, exchanges his securities
in such corporation, solely for stock
securities in another corporation.
►The rule is similar in 40 C (3), (a), (b) and
(c) although different property are involve,
that is why the last paragraph of 40 C is a
separate paragraph.
►Therefore, Sec 40 C (3) (a,b,c) the rule is
1. gain exempt
2. loss not deductible
40c last paragraph
► the transferee becomes a stockholder,
parties are not members of the merger
►the individual wants to be a
shareholder but does not want to
purchase shares but willing to give up
property as a result of the exchange ,
the person gains control of the
corporation
►The rule is:
a. gain is exempt
b. loss not deductible
Requisites:
1. There is A contract of
exchange where property was
transferred by the person in
exchange of stock or unit of
participation in a corporation.
2. As a result, the person alone
or together with others (not
exceeding of 4 persons) gains
control of the corporation.
or
Q: What is control?
A: ownership of stocks in a corporation
possessing at least 51% of total voting
or power.
Sec 40 B (5)
►non applicability of income tax is only
temporary
Reason : Basis will be 40 C (5)
1. 40 C (5) (a) Transferor
►basis of stock or securities received by
the transferor: same as the basis of the
property, stock or securities
exchanged:
►decreased by the (1) money and (2)
FMV of the property received; and
►increased by (a) amount treated as
dividend and (b) amount of gain
recognized
2. 40 C (5) (b) Transferee
►as it would be in the hands of
transferor increased by the amount of
gain recognized.
Sec 40 (c) (4) Assumption of
Liability
1. Taxpayer, in connection with the
exchanges described – receives
securities or stocks permitted (no
gains recognized) – it is sole
consideration of the same – the
other party assumes liability of the
same – the acquisition of liability not
treated as money and / or other
property – the exchange still falls
within the exceptions.
2. If amount of liabilities assumed +
amount of liabilities to which
property is subjected to exceeds -
adjusted basis of the property
transferred – the excess shall be
considered a gain from the sale of a
capital asset or of property which is
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- Atty. Francis J. Sababan -
not a capital asset, as the case may
be.
SECTION 41 INVENTORIES
Purpose: Change of inventory to determine
clearly the income of any taxpayer/ to
reflect the true income.
Limitation:
1. once every 3 years
2. approval of the secretary of finance
Section 43 Accounting Periods
1. Fiscal year
2. use of calendar year
a. no annual accounting
b. does not keep books of account
c. individuals
►Use of method as in the opinion of the
commissioner clearly reflects the income:
1. no accounting method has been
employed
2. the method does not clearly reflect
the income
Sec 44 Period in which items of Gross
Income included and Sec 45 Period for
which Deductions and Credit Taken
►Under Sec 44 amount of all items of
gross income shall be included in the
gross income for the taxable year in
which they are received by the taxpayer
►Under Sec 45 deductions shall be
taken for the taxable year in which
“paid or accrued” or “paid or incurred.”
►Sec 44 and Sec 45 are mentioned in the
code because of the death of the person.
Illustration:
Facts: taxpayer dies in the middle of the
year
January 1, 2006 – June 15, 2006
►June 26, 2006 to Dec 31, 2006 the
estate is the taxpayer
►So the income and deductions from Jan
1 to June 25,, included in the
computation
Section 46 Change of Accounting
Period
Q: Who is the taxpayer?
A: corporation (taxpayer other than
individual)
Q: What kinds of accounting period?
A: 1.fiscal year
2. calendar year
Q: Changes contemplated?
A: 1. fiscal to calendar
2. calendar to fiscal
3. fiscal to another fiscal
►with the approval of the
Commissioner, net income shall be
computed on the basis of the new
accounting period.
Q: Calendar to calendar, correct?
A: not correct statement
Section 47 (A)
Taxpayer: Corporation
1. Fiscal to calendar
► separate final or adjusted return shall
be made for the period between the so
close of the last fiscal year for which the
return was made and (2) the following
Dec 31.
2. Calendar to Fiscal
►separate final or adjusted return shall
be made for the period between the
close of the last calendar year and the
date designated as the close of the
fiscal year.
3. Fiscal to fiscal
►separate final or adjusted return shall
be made for the period between the
close of the former fiscal year and the
date designated as the close of the new
fiscal year.
►File return indicating the change in
accounting method
Section 48 Accounting for Long Term
Contracts
Q: Who are the professionals involved?
A: applies to architects and engineers
Q: What is a long term contract?
A: it means building, installation or
construction contracts covering a period in
excess of one (1) year.
Q: Basis of income?
A: a. persons whose gross income is
derived in whole or in part from such
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- Atty. Francis J. Sababan -
contract shall report such income upon H: Initial payment exceeds 25% installment
the basis of percentage of consumption. basis is not applicable

b. the return shall be accompanied by a RR 2; Section 175: In payment by way of

certificate of architects or engineers
showing the percentage of completion
c. deduction of expenditures made
during the taxable year, on account of
the contract is allowed
Section 49 Installment Basis
►contemplates a seller of the property
Q: Is it important to know if the property is
personal or real?
A: Yes
installment promissory note, bills of
exchange and checks will not be considered
in computing the 25% initial downpayment.
Section 50 Allocation of Income and
Deductions
►tremendous power of the
Commissioner to allocate the income
and deduction of several corporations
having the same interest.
Q: Same interest?
A: stockholders substantially the same

Q: Sale of Real Property is it important to Q: Limitations?

know if it is a casual sale or regular A: None
sale? ►That is why it is a great source of
A: No corruption

Requirement: The initial payments do not Section 51 Individual Returns

exceed 25% of the selling price. Who are required to file? (ITR)
1. RC
Q: If the initial payment exceeds 25% what 2. NRC
do you call it? 3. RA
A: called deferred sale 4. NRAETB – sources within

Q: Consequence? Q: Who is not mentioned in Sec 51 but

A: you must pay the whole amount of the liable to pay by way of NIT?
tax A: OCW/ seaman

Q: Sale of Personal Property, is it important Exception:

to know if it is a casual or regular sale?
A: Yes
Casual Sale has Requirements:
1. selling price exceeds P1,000
2. initial payment not exceeding
25% selling price
RC OR ALIENS: engaged in trade or practice
of profession in Phil. Shall file ITR regardless
of the amount of gross income.
Q: If OFW is exempt from filing a return,
what is he required to file?
A: Information Return

►Regular sale no requirements Q: who are not required to file a return?

Case of Bañas A:
1. subject matter a. an individual whose gross income
2. sold by way does not exceed his total personal
3. agreement and additional exemptions for
4. cash deposit dependents
5. post dated promissory notes b. worker (compensation income
(installments) earners) regardless of the amount of
3. 1st installment promissory note was compensation shall not required to
disconnected file ITR because the management
4. 2nd installment exchanged with cash files it. (RR 3-2002)
- these two exceeds the selling price c. individuals whose sole income is
5. you only compute cash subject to FIT

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

INCOME OF MINORS 3.Secure a tax clearance from the BIR and

Q: Minor below 18: Will it be included in the file it with the SEC
Minor’s ITR?
A: it depends
1. income from property received from 4.Thereafter, SEC issued a Certificate of
parents ► included in parent’s ITR Dissolution or Reorganization.
Except:
a.Donor’s tax paid D. Sale of Stocks – ITR
b.Property exempt from donor’s tax look at the previous notes about it

2. income from minor’s own industry Section 53 Extension of Time to File

►Minor’s ITR accomplished by guardian Returns
or parents
Q: To whom granted?
Q: if the individual is exempt from income A: Corporations
tax, can be required to file a return? Grounds: Meritorious case
A: General Rule: No ►subject to the provisions of Sec 56
Exceptions: Time Extension
1.engaged in trade or business; or
2.exercise of profession – Sec 51 A (2) Section 54 Returns or Receivers,
Trustees in Bankruptcy or Assignees
SEC 52 CORPORATION RETURNS ►the aforementioned persons shall
A.Requirements make returns of net income as and for
Taxpayer: DC or RFC (except NRFC) such corporation in the same manner
ITR Filed: 1. TRUE AND ACCURATE and form as such organization is
a. quarterly income tax return required to make.
b. final or adjusted income tax return
Section 55 Returns of General
Filed by: Professional Partnership
1.President; ► file a return of its income setting forth
2.Vice President 1. items of gross income and of
3. Other principal officer deductions allowed by this title (Title
►ITR must be sworn by such officer and the II – Tax on Income)
treasurer or assistant treasurer 2. Names of partners
3. Taxpayer identification number (TIN)
B. Taxable Year 4. address of partners
1. fiscal; or 2. calendar 5. shares of each partners
► corporation cannot change accounting
method employed without the approval or ►GPP is exempt from corporate income tax
prior approval of the commissioner (Sec 47)
Q: Why is the GPP obliged to file a return?
C. Return of Corporation Contemplatory A: to determine the shares of each partners
Dissolution or Recognition
1.Within 30 days after: Section 56 Payment and Assessment of
a. the adoption by the corporation of a Income Tax for Individuals and
resolution or plan for its dissolution; or Corporations
b. liquidation of the whole or any part of
its capital stock, including a corporation A. Payment of Tax
which has been notified of possible
involuntary dissolution by the SEC; or Q: Who pays the tax of tramp vessels?
c. for its reorganization

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A: 1.the shipping agents and or the ►No registration of document
husbanding agent transferring real property
2.in their absence, the captains thereof 1. without a certification from
►those people are required to file a return commissioner or his duly authorize
and pay the tax due before departure representative that
a. transfer has been reported
Q: What is the effect of failure to file the b. tax has been paid
return and pay the tax due?
A: 1.Bureau of Customs may hold the B. Assessment and Payment of Deficiency
vessel and prevent its departure until: Tax
a. proof of payment of tax is ► Return is filed, the commissioner
presented; or examiner and assess the correct amount of
b. a sufficient bond is filed to answer tax
for the tax due. ►tax deficiency discovered shall be paid
upon notice and demand from the
Installment Payments commissioner.
Tax due: more than P2,000
Taxpayer: individuals only (other than 3 INSTANCES CONTEMPLATED
corporation) 1. file the return and pay the tax
Elect to pay the tax in two (2) equal 2. file the return but not pay the tax
installments 3. not file the return and not pay the tax

a. 1st installment: paid at the time the Section 57 Withholding of Tax at

return is filed
b. 2nd installment on or before July 15
following the close of the calendar
year
Q: What is the effect of non payment on the
date fixed?
A: The whole amount of tax unpaid
becomes due and demandable together
with the delinquency penalties.
Payment of capital gains tax :
Q: Paid when?
A: on the date the return is filed
Avail exemption for capital gains:
a. no payments shall be required;
b. if you fail to qualify for exemption –
tax due shall immediately become
due and payable and subject to
penalties
c. seller pays tax – submit intention or
proof of intent within six (6) months
from the registration of document
transferring
Q: when is the real property entitled to
refund?
A: upon verification of compliance with
the requirements for exemption.
►Report gains on installments under Sec
49 – tax due from each installment
payment shall be paid within 30 days
from the receipt of such payments.
Source
A. Withholding of Taxes
►subject to the Rules and Regulations the
Section of Finance may promulgate, upon
recommendation of commissioner:
Require the filing up of certain income tax
return by certain income payees.
Q: Enumeration is all about what?
A; Enumer ation about Final Income Tax
Except: Gross Income Tax
1. 25 B (NRANETB)
2. 28 B (NRFC)
B. Withholding of Creditable Tax at Source
►The Sec. of Finance, upon
recommendation of the commissioner
require the withholding of a tax on the
items of income payable to natural or
juridical persons, residing in the Phil,
by payor-corporation/ person… the
same shall be credited against the
income tax liability of the taxpayer for
the taxable year. At the rate of not
less than 1% but not more than 32%
thereof.
Q: What is the maximum?
A: Maximum: now 35% pursuant to RA
9337
Q: When will you allow withholding beyond
15%?
A:

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For NIT 15% is the maximum
1. FIT – the amount of withholding is
totally
2. GIT - equal to the amount of tax
Tax Free Covenant Bond
►the bonds, mortgages, deeds of trust or
other similar obligations of
DC or RFC
►contains a contract or provision where the
obligor (debtor) agrees to pay the tax
imposed herein
►normally between the creditor and debtor
Q: Who pays the tax?
A: Creditor pays the tax by virtue of an
agreement the debtor assumes the liability
and the creditor is now free from payment
of tax before it can transfer the property to
the buyer.
Section 58 Returns and Payment of
Taxes Withheld at Source
A. Quarterly Returns and Payment of Taxes
Withheld at Source
1. covered by a return and paid to:
a. authorized agent bank
b. revenue district officer
c. collection agent
d. duly authorized treasurer of city or
municipality where withholding agent
has:
1. his legal residence; or
2. principal place of business; or
3. if corporation , where
principal office is located
2.Tax deducted and withheld
►held as a special fund in trust for the
government until paid to the collecting
officers.
3.Return for final withholding tax
►filed and paid within 25 days from the
close of each calendar quarter
4.Return for Creditable withholding taxes
►filed and paid not later than last day of the
month following the close of the quarter
during which withholding was made
5. Commissioner, with approval of Sec
Finance
► require withholding agents to pay or
deposit taxes at more frequent intervals
where necessary to protect the interest of
the government
B. Statement of Income Payments Made
and Taxes Withheld
►Withholding agent shall furnish payee
a written statement showing:
1. income or other payments made by
WHA during such quarter or year and
2. amount of tax deducted and
withheld
► statement given simultaneously upon
payment at the request of the payee.
Creditable withholding taxes
1. corporate payee – not later than the
20th day following the close of the
quarter
2. individuals payee – not later than
March 1 of the following year
Final Withholding taxes
►the statement should be given to the
payee on or before January 31 of the
succeeding year.
C. Annual Information Return
►Withholding agent shall submit to the
commissioner an annual information return
containing :
1. the list of payees and income
required
2. amount of taxes withheld from each
payees
3. other pertinent information required
Final Withholding Tax: AIR
►filed on or before January 31 of the
succeeding year
Creditable withholding tax: AIR
►not later than March 1 of the year
following the year for which the annual
report is being submitted
►Commissioner may grant WHA reasonable
extension of time to furnish and submit the
return required herein.
D. Income of Recipient
1. Income upon which any creditable
tax is required to be withheld at
source shall be included in the
return of its recipient.
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2. the excess of the amount of tax so
withheld over the tax due on his
return shall be refunded
3. income tax collected at source is
less than the tax due on his return –
difference shall be paid
4. all taxes withheld
1. considered trust fund
2. maintained in separate account
3. not commingled with other funds
of WHA
E. Registration with Register of Deeds
►No registration of any document
transferring real property shall be
effected by the Register of Deeds unless
the commissioner or his duly authorize
representative has certified that the
transfer (1) has been reported and (2)
tax due has been paid
►Register of Deeds requires payment of
tax before transfer of property
Section 59 Tax on Profits Collectible
from Owner of other Persons
►Tax imposed under this title upon gains,
profits and income not falling under the
foregoing and not returned and paid by
virtue of the foregoing
shall be assessed by personal return
Intent and Purpose of this Title
1. All gains, profits and income of a
taxable class shall be charged and
assessed with the corresponding tax.
2. Said tax be paid by the owner of the
gains, profit or income or the person
having the receipt, custody, control
or disposal of the same
Determination of Ownership:
►determined as of the year for which a
return is required to be filed
CHAPTER X: ESTATES AND TRUSTS
Section 60: Imposition of Tax
1. Estate ► property of the decedent
created by an agreement, trust or
by last will and testament
2. Trust ►agreement, contract or last
will and testament
Status:
1. Estate: same status as decedent
2. Trust: same status as the grantor
Income taxpayer is the Estate:
►income of the estate pending partition
or no partition at all:
Three kinds of partition:
1. judicial
2. extra judicial partition
3. or no partition at all
During partition Estate earns income:
1. individual – income tax
2. corporation – corporate income
tax
3. estate (Taxpayer = TP)
a.Impose Income as if TP is individual
b.Impose income as if TP is
corporation
c.Impose income as if estate itself
►depends whether there is a (1) judicial
(2)extra judicial partition or (3) no partition
at all
When there is a judicial settlement which is
final and executory but no partition:
Two possibilities:
1.Creation of unregistered partnership
►Income of the Estate: corporate income
tax
2.Creation of Co-ownership
►Income of the Estate: Income tax on
individual
-co-owner liable in their individual company
Ponce Case:
H: After finality heirs did not divide the
property, the applicable income tax is
corporate income tax because they
contributed money to engage in real estate.
SECTION 61 TAXABLE INCOME
(Important)
“Taxable income of the estate or trust shall
be computed in the same manner and on
the same basis as ill the use of an
individual.”
Section 62: Applies during Pendency of
Extra Judicial Settlement
Personal Exemption (P20,000)
Individual ► it will depend whether
he/she is classified as single, head of
the family or married
Estate ►regardless
Special deductions:Income distributed to
the heirs
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►if you distribute nothing you cannot ►transfer tax impose on the Net Estate
claim this special deductions for the transfer of property to the heirs
►if there is a distribution, the heir shall or beneficiary whether real, personal,
be liable to pay whether individual tangible or intangible
capacity
►if there is no distribution, heirs are not 3 KINDS OF TRANSFER TAX:
liable to pay anything 1.Estate Tax
2. Donor’s Tax
►Special deduction not apply if individual 3. Sec 135 of LGU Transfer of Real
tax is paid by the Estate itself. Property

Payment: made by executor, administrator, Q: We don’t have inheritance tax and

to creditor to preserve the estate donees tax, why?
A: 1973 Marcos issued P.D. 69
Sec. 61 and Sec 62 Explain: Sec 84, rate is max of 20% of net
►does not apply if estate is subject to before the rate is 60% plus additional
income or corporate income tax amount.
►it applies if the estate pays itself ►resulted to many gimiks through tax
during the pendency of the judicial avoidance scheme, like creating a family
settlement corporation (only taxable is the
stockholders which is exempt)
Basis: Sec 60 C ►Congress enacted RA 7449 decreased
“during the period of administration or 60% to 35% and then RA 8424 – 35% to
settlement of the estate.” 20%
Q: Now is it safe to create a family
Taxpayer is a Trust: corporation?
Q; When liable to pay income tax? A: No more.
A: If the trust is revocable (if revocable, Sec
61 and 62 also apply) Q: Now: Iba na ang scheme – which is
better sale or donation?
Parties: A:
1.Grantor /creator /trustor 1.Sale of RP considered capital assets
2.fiduciary / trustee ►6% to 1.5% doc. Tax 7.5 % better
3.beneficiary / Les Qui trust 2.Sale of RP considered ordinary asset
►5% to 52% as per use may be
Q: Who is liable to pay tax: 3.Donation if given to all compulsory heir
A: If trust revocable: ► relative lower than 20% which is 15%
► obligation of the trustee ► stranger: 30% so go with 20%
►liability of trust itself and not personal
Q: Who are the taxpayers?
Liability of trustee: A: Sec 104 Estate and Donors
If trust irrevocable 1.Estate
►obligation of the grantor a. RC
►personal liability of the grantor as an b.NRC
individual c. RA
d. NRA
TWO WAYS OF REPORTING INCOME: 2. Donor’s Tax
PURSUANT TO RR2 – (1949) a. RC
1. report only once b.NRC
(building paid once) c. RA
2. after the span of 25 years d. NRA
(payment of building divided per year) e. DC
f. FC
ESTATE TAX:
1.Sec 60 ►A corporation cannot die of a natural
2.Real Estate Tax death.
3. Estate Tax

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Q: What is the reason for classifying the
taxpayers?
A:
1. NRA and Estate
2. NRA and FC Donors = property
outside Phil exempt
3. all, other than these 3 – taxable w in
and w/out
Q: Is Section 104 relevant to all taxpayers?
A: No, material only to NRA and FC
Section 104 speaks of intangible personal
property located in the Philippines.
1.Franchise which must be exercised in
the Philippines;
2.S.O.B. issued by a Domestic
corporation;
3.S.O.B. issued by foreign corporation at
least 85% of the business of which is
located in the Philippines. – do not
confuse with 42 (2nd par)
4.S.O.B. of foreign corporation which
acquired a business situs in Phil
5.S.R. in business, partnership or
industry established in the Phils
Q: NRA, German donates SOS of FG to
Filipina gf, is it subject to donor’s tax?
A: it depends (you must qualify)
1.Subject to donor’s tax if:
1.S.O.B. FG at least 85% of business
located in the Phil
2.S.O.B. FG which acquired a business
situs in Phil
2.Exempt
1.personal property outside of Phil; or
2.intangible personal property net taxable
if following requisites concern:
A decedent at the time of his death or the
donor at the time of donation was a citizen
and resident.
1.of a foreign country which at the time of
his death or donation did not impose a
transfer tax of any manner, in respect of
intangible personal property of citizens of
Philippines not residing in that foreign
country; or
2. the laws of the foreign country allows
a similar exemption from transfer or
death taxes of every character or
description in respect of intangible
personal property owned by citizens of
the Philippines not residing in that
foreign country.
Q: What if citizen of one country and
resident of another country will the
exemption apply?
A: No, law requires that he must be a
citizen and resident of the foreign
country.
Campos Rueda Case:
F: NRA died – married to Moroccan man, so
she was a Moroccan resident.
Donated SS in DC – administrator claims
exemption, ground: In Morocco,
intangible personal property of Filipinos
not residing therein is exempt from
transfer tax.
BIR contends: Morocco is not a country
but a colony of Spain.
H: claim granted – even if it is not a full
pledged state, or it’s a mere colony,
what matter is that the foreign law
provides for an exception.
SECTION 84 RATES OF ESTATE TAX
Q: What is the formula for Estate tax?
A: Gross Estate (Sec 85)
- Deductions (Sec 86)
--------------
Net Estate
x Rate
-------------
Taxable net income
- Tax credit
---------------------
Tax due
Gross estate (define) – Sec 104
►gross estate include real and personal
property, whether tangible or intangible,
or mixed, wherever situated
NRA: Decedent / Donor – property
situated outside of Philippines not
included on the gross estate
Section 85 Gross Estate (inclusion)
A.Decedent’s interest
►includes property (1) owned at the time of
death and (2) property not owned at the
time of death
Classic example: Usufruct
Q: if terminated by the death of
usufructuary, is it subject to estate tax?
A: Not subject to estate tax
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Reason: Exempt Transmission under
Sec 87 (a)
►merger of the usufruct in the owner of
the naked title
Q: is there a conflict between Sec 88 a and
Sec 87 a? How do you reconcile?
A: No conflict
1.Section 87 a contemplates a situation
where the usufruct is terminated.
2.Section 88a contemplates a usufruct
for a fixed period. Ex contract of lease
Q: How do you determine the value of
usufruct?
A: Sec. 88 a provides to determine the
value of the right of usufruct, take into
account the probable life of the
beneficiary.
Q: Why definition of gross estate is longer
than definition of gross gift?
A: transfer occurring after death. estate
tax absolute
Transfer during the life time
►Normally Donor’s tax
However there are exceptions:
1.transfer in contemplation of death
(85B)
2.revocable transfer (85 C)
3.transfer for insufficient consideration
B. Transfer in contemplation of death
Roces case:
F: during lifetime, the following document
were instituted or executed
simultaneously
1.will and 2. donation
The heirs insisted to pay Donor’s tax,
Posados the collector tried to collect
inheritance tax.
unique thing: Donees were also the heirs
in the last will and testament
Donees wanted to pay donor’s tax
because it is always lower than the estate
tax except when the donee is a stranger
H: this is a transfer in contemplation of
death
Dizon Case:
F: Deed of Donation was executed
Dizon died several days thereafter
son claims Donor’s tax
H:Transfers in contemplation of death
Q: What are transfers deemed in
contemplation of death?
A: 1.Property was transferred during the
lifetime but the decedent:
a. retains possession or receive
income or fruits of property; or
b.retains the right to designate
persons who will possess the property
or the right to receive fruits or income
c.Revocable Transfers
1.revocable transfers are included in the
gross estate
Reason: the decedent retains
tremendous power and control over the
property
2.Irrevocable transfers are not included
in the gross estate: exempt
Reason: the decedent losses control
over the property
Notice Not Required because the person
has the control over the property
D. Property passing under general power of
appointment
► same with fidel commissary substitution
3 parties:
1.testator / decedent
2.1st heir
3.2nd heir
TAKE NOTE: To determine whether included
in Estate or not, know who has the choice to
designate the 2nd heir:
►if decedent instructs the 1st heir that he
can transfer the property to whomever he
wants included in gross estate
►1st heir choice – included in gross estate
E. Proceed of Life Insurance
1.Beneficiary is the estate
►included in gross estate whether
designation is revocable or not
2.Beneficiary is 3rd person
► revocable included
►irrevocable not included
F. Prior Interest
►important only due to the codification of
the tax code B,C,E, included whether
before or after the effectivity of the code
G. Transfer for insufficient consideration
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Q: Similar provision in Sec 100 (Donor’s
tax) can you apply the two (2) Q: Who are the taxpayers under 86 A?
provisions simultaneously? A: 1.RC
A: No, alternative application, one or the 2.NRC
other but not both. 3.RA
The application will depend on the time
of transfer or motive: Q: Who is the taxpayer under 86 B?
1.If transferred because of impending A: NRA
death
► estate tax Q: Why do we need to know this?
2.If transfer because of generosity A: NRA cannot avail of the following
►Donor’s tax deductions:
1.family income
Q: Parcel of land was sold for less than 2.standard deduction
adequate consideration (adequate) to 3.hospitalization
relative for P600,000 when FMV is 1 4.retirement pay under RA 4917
million pesos. Is this subject to transfer
tax? Is it subject to Donor’s tax? A. Deductions Allowed to the Estate of
A: No, Sec 100 provides the property a Citizen or Resident
should be other than real property
referred to in Section 24 (D) 1.ELIT (expenses, losses, indebtedness
►Not subject to Donor’s tax, the and taxes)
applicable tax is 6% FIT a) 1.Actual Funeral Expenses; or
2.amount equal to 5% of gross estate
Q: Will your answer be the same if SOS ►apply whichever is lower
are sold? Limitation:
A: No, answer not the same, SOS not a)amount equal to 5% of gross estate
property contemplated in Sec 24 D (1) should not exceed P200,000 (basis is
►in this case, the amount by which the the gross value)
FMV of prop exceeds the value of the b) Judicial Expenses
consideration shall be deemed a gift and ►no limitation
included in the computation of the gross
gift: subject to Donor’s Tax

Q: What is the subject matter in 85 G? Pajonar vs Commissioner

A: paragraphs 85 B, 85 C, 85 D
Sale in good faith as a defense:
1.under Section 100 is not a defense
2. under Section 85 G, it is a defense
H. Capital of Surviving Spouse
►correlate with Sec 86 C
►both speak of legally married individual
►pertains to the separate property of
spouse who survived
►capital used in its generic sense
►surviving spouse may be man or woman
Section 86 (c)
►to determine the limitations of
1. Funeral Expense
2. Whether written notice is required
3. to determine whether gross value
is at least P200,000 (Sec 90)
4.to determine if gross value is at
least 42 M
I: Whether or not extra-judicial expenses
may be allowed as a deduction
H: This law has been copied from U.S. In
US, expenses to be claimed as a
deduction both judicial and extra judicial
expenses.
Claims against the estate
►Estate is the debtor
Requirements:
1.at the time the indebtedness was
incurred the debt instrument was duly
notarized;
2.loan contracted within 3 days before
death;
3.the administrator or executor shall
submit a statement showing the
disposition of the proceeds of the loan
Claims of the deceased against insolvent
person

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►Estate is the creditor 5. 1 year -100%

Requirement: Q: Suppose the person died within 1 year

►the only requirement is that the (only) and it was inherited by son, suppose the
amount of loan is included in the gross son also died within 1 year or may be 2
estate years, should we apply the vanishing
►notarization and certification not deductions?
required A: No more (last par Sec 86 A2)

Unpaid Mortgage, taxes and losses Transfer for Public Use

Q: In unpaid mortgage who is the
mortgagor?
►decedent mortgagor
1. Unpaid mortgage
1.value of the decedent’s interest in the
property is undiminished by such
mortgage;
2.included in the value of the gross
estate;
Illustration:
1 million FMV but mortgage is only
600,000 you include 1 million
2.Estate tax
3.Losses
Requirements:
1.losses incurred during the settlement
of the estate;
2.arising from fire, storms, shipwreck or
other casualties, or from robbery, theft
or unbezzlement
3.losses not compensated by insurance
4.losses not been claimed as a
deduction for income as purpose
5. losses incurred not better than the
last day for the payment of the estate
tax
Property Previously Taxed
►Vanishing Deduction Return
Requirement:
1.person acquires the property by virtue
of donation or inheritance
Q: What if acquired through purchase?
A: Not apply, the property must be acquired
by inheritance or donation
2.Estate tax or Donor’s tax already paid
by the Estate of the Decedent (1st par)
3.Any person who died within five (5)
years prior to the death of the decedent
Q: What are the amounts?
A: Prior Decedent died within:
1.5years – 20%
2.4years – 40%
3.3 years -60%
4. 2years – 80%
►amount of all bequest, legacies, devises
or transfers
Recipient:government or any political
subdivision
►exclusively for public purpose
Take Note: 30% of which not used for
administrative purpose is not a
requirement
FAMILY HOME
►amount equivalent to the current FMV
of the Family Home of decedent.
Limit: FMV should not exceeds 1 million
otherwise the excess will be subject to
estate tax.
Requirements: (RR 2-2003)
1.Person is legally married
GR: if single not allowed to claim
Except: if head of the family
2.Family Home actual residence of the
decedent
3.Certification of Barangay Captain of
locality
STANDARD DEDUCTIONS
►automatic: RR 2-2003 no requirement
provided the decedent is the one in 86 (A)
(RC, NRC, RA)
MEDICAL EXPENSES
Requirements:
1.amount not exceeding P500,000
2.medical expenses incurred by the
decedent within one (1) year prior to his
death.
►must be duly substantiated with receipt
RETIREMENT PAY UNDER RA 4917
(RETIREMENT PAY WITH PRIVATE PLAN)
Requirements:
1.plan duly approved by the BIR
2.person at least 50 years old
3. 10 years in service
4. avail only once

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TAKE NOTE: This is a deduction in the
nature of exemption, all other retirement
plan is excluded
B. Deductions Allowed to Non resident
Estates
1.ELIT
2.Property Previously taxed
3.Transfers for public use
C. Shares in the Conjugal Property
D. Miscellaneous Provisions
For NRA: No deduction allowed unless
include in the return the value at the time
of his death that part of his gross estate
not situated in the Philippines. For proper
deduction must include E. below
E. Tax Credit for Estate Tax Paid to
Foreign Country
SECTION 87 EXEMPTION OF CERTAIN
ACQUISITION AND TRANSMISSIONS
1. Merger of usufruct in the owner of the
naked title;
2. transmission or delivery of the
inheritance or legacy by the fiduciary
heir or legatee to the fideicommissary;
3. transmission from the first heir, legatee
or legacy donee in favor of another
beneficiary, in accordance with the
desire of the predecessor;
4. All bequest, devises, legacies or
transfers to (1) social welfare (2)
cultural and (3) charitable institution
Requirements:
1.no part of the net income insures to the
benefit of any individual;
2.not more than 30% of donation (BDL)
shall be used by such institutions for
administration purposes.
SECTION 88 DETERMINATION OF THE
VALUE OF THE ESTATE
A.Usufruct
1.Determine value of right of usufruct:
►consider the probable life of the
beneficiary based on the latest Basic
Standard Mortality Table
B.Properties
►fair market value of the Estate at the time
of death
1.FMV determined by Commissioner
2.FMV schedule of values fixed by the
Provincial or City Assessors
SECTION 89 NOTICE OF DEATH TO BE
FILED
Q: What is the Basis?
A: the gross estate of the person
Q:When is the notice required to be filed?
A: 1.all cases of transfer subject to tax
2.although exempt, when gross values
of the estate exceeds P200,000
Q: When filed?
A: within two (2) months
1. after decedent’s death
2.same period after qualifying as executor
or administrator
►give a written notice
Q: If the Net Estate is at least P16,000 will
you in form the commissioner?
A: yes, the gross is at least 3-4 million
SECTION 90 ESTATES TAX RETURNS
Q: When required to file return?
A: 1.all cases of transfer subject to tax
2.even though exempt, gross value
of the estate exceeds P200,000
3.regardless of gross value of the
estate, when the same consists of
registered or registrable prop such as:
a.real property
b.motor vehicle
c. shares of stocks
d. other similar property where
clearance from BIR necessary for
transfer of ownership in the name of
the transferee
►return must set forth the following:
1.value of the gross estate at time of
death
2.deductions allowed
3.information necessary to establish
correct taxes
Q: What if Estate is exempt, is it required
to file a return?
A: General Rule: No
Exception:
a. gross value exceeds P200,000
b.estate contains registrable property
Q: if the estate or gross estate exceeds 2
million, what is the requirement?
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- Atty. Francis J. Sababan -
A: return must be duly certified by a CPA city hall). Is the order of Mayor Binay
legally tenable?
A: NO. There should always be a tax
B. Time of Filing ordinance after conducting a public hearing.
(§186)
►filed within 6 months from decedent’s
death tax ordinance
►within 30 days for filing the return
►within 30 days after promulgation of such Q: Can BIR collect the tax even in the
order absence of a revenue regulation?
1.certified copy of the schedule of A: YES.
partition and
2.order of court approving the same Q: Can a province, city, municipality or
barangay collect the tax if there is no tax
C. Extension of Time ordinance?
Time: 30 days A: NO.
Grounds: meritorious cases
Who grants: Commissioner Q: Why is it that there should be a tax
ordinance as required by §186?
D. Place of filing: A: The rationale is not mentioned in §186,
►return shall be filed with: but if you read the other provisions of the
1.authorized agent bank LGC, you will come to set of conclusions of
2.revenue district officer the reason why there must be a tax
3. collection officer ordinance.
4. duly authorized treasurer
►city or municipality in which decedent » In most of these provisions, it always
was domiciled at the time of his death say: one-half if the town or municipality
Q: What if non resident? shall collect a tax of not exceeding 1% of
A: NR with no legal residence here, with the the gross receipt.
office of the commissioner. TAKE NOTE: There is no exact amount;
hence, it is the tax ordinance which will fix
Q: Let us say there are 3 compulsory heirs, the exact amount.
namely A, B, and C. A renounces his
inheritance coming from the parents, but A
renounces his inheritance in favor of his 2
siblings, brother and sister B and C. Is this
subject to donor’s tax? public hearing
A: NO. It is exempt.
In Congress, the requirement is not
Q: But if in the given example, A said “I am absolute (by discretion only). Under local
renouncing my inheritance, but I am giving taxation (last phrase of §186), the
it to my sister B”, is this subject to donor’s requirement is ABSOLUTE.
tax?
A: YES. Renunciation is to the REYES vs. SECRETARY (320 SCRA 486)
disadvantage of the brother. F: In the municipality of San Juan (just
beside Mandaluyong) there was a tax
TAXATION UNDER THE LOCAL ordinance passed. Reyes, a resident,
GOVERNMENT CODE: claims that there was no public hearing
1. Local Tax conducted, he maintains that under
2. Real Property Tax §186 last phrase, there should always
be a public hearing.
LOCAL TAXATION (§186, 187, then go to H: The SC said: “yes, that requirement is
§151, 128 down) an absolute one, but since the petitioner
failed to produce evidence to support
Q: Mayor Binay of Makati ordered the his allegation, if there is no proof
collection of elevator tax (for elevator in the presented other than his own
statement, we hereby rule that the

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ordinance was passed in accordance to » Go to §151:
the procedure mandated by law”. While The city could impose the tax already
it is true that a public hearing is an imposed by the province of by the
absolute requirement, he who alleges, municipality.
must prove the same.
Q: What are the numerous taxes imposable
Q: If you don’t agree with the validity or by the province which a city now allowed to
the constitutionality of the tax ordinance, impose?
what will be your remedy? A: Those enumerated in §135 to §141 of
A: Within 30 days from the effectivity of the LGC
the ordinance, the taxpayer should file an
appeal with the office of the Secretary of Reasons why a municipality wanted to be
the DOJ (§187) converted into a city:
1. §151
REYES vs. SECRETARY (320 SCRA 486) 2. §233 (real estate tax)
F: Reyes asserted the validity and » In addition, the law says that the city
constitutionality of the tax ordinance could increase the rate of the tax by not
only after the lapse of thirty (30) days more than 50% of the maximum EXCEPT
(perhaps his lawyer was thinking that an those enumerated in §139:
ordinary statute may be contested a) professional tax
anytime with the RTC, CA or SC). b) amusement tax
H: With regard to a tax ordinance, w have
a specific rule, failure to assail the A. General Principles (§128-130)
validity with the specific period of time,
is fatal to the taxpayer. Since it was ► reiteration of the constitutional tax
filed beyond the 30day period, we do provisions
not disturb the validity of the ordinance.
► notice that the constitutional limitations
Q: Within what period should the Sec. of on taxation do not only apply to the
Justice decide? national government but also to local
A: Within 60 days from the time the appeal government units.
was filed. Failure to decide within this time,
the taxpayer has the remedy to file an B. Definitions (§132)
action with the regular courts.

» If the decision was made within the 60 Local Taxing Authority (§132)
day period, and receives the decision, his  for a province, it is the provincial
remedy is to file an appeal within 30days board or the provincial council
form the receipt of the decision to court of (sangguniang panlalawigan)
competent jurisdiction → RTC.  for a city, we have the city council
(sangguniang panlusod)
» Beginning April 23, 2004, from the
 for the municipality, we have the
ruling of the RTC, pursuant to RA 9282 (the
municipal council (sangguniang
law uplifting the standards of the CTA), the
pangbayan)
ruling of RTC on local tax cases, is
 for the barangay or barrio, we have
appealable to the CTA en banc.
the barangay council.
TWO APPEALS DECIDED BY THE CTA EN
C. Common limitations on the taxing
BANC:
power of the LGU’s (§133)
1. decisions of RTC involving local tax
cases
» Under the old law this was §5 of the
2. decision of the Central Board of
Local Tax Code.
Assessment Appeals.
Q: Why common?
» From CTA en banc, the appeal must be
A: Because the limitations or prohibitions
file with the SC within 15days.
apply to all LGUs, the provinces, cities,
municipalities and barangays.

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Two Common Crimes (under §133)
1. absolute prohibition
2. relative prohibition
It shall be unlawful for the LGUs to collect:
I. Income Tax EXCEPT when levied on
banks and other financing institutions
(§133(A))
» the term “other financing institution
shall include money changer, lending
investor, pawnshop (§131(E))
» rate of tax: does not mention rate
of tax, so long as it is “fair, just and
reasonable”
» It cannot be “prohibited taxation,
because the element of “imposed by the
same taxing power” is not present. One
is imposed by the national government
and the other is by the LGU.
II. Documentary Stamp Tax (§133(B))
» absolute prohibition
III. Estate tax, inheritance, donations inter
vivos, donations mortis causa EXCEPT in
§135 (§133(C))
» transfer tax on the transfer of realty
to be imposed by provinces and cities
(§135)
NOTE: this is not a real estate tax,
this is a local tax.
IV. Custom duties, charges or fees for the
registration of vessels or ships, wharfages
fees and wharage dues EXCEPT if the wharf
had been established, maintained and
operated by the locality (§133(D))
» wharfage due – is a custom fee
imposed on the weight of the cargoes.
» wharf – a pier
» special levy on public works (§240)
» allows provinces cities and
municipalities to impose a special real
estate tax known as “special levy or
public works”
» let us say the municipality
established a pier for a minimal value of
P10M; out of P10M, under §240, 60% of
this may be recovered; the other 40%
may be recovered by warfage due.
v. Tax, fee or charge for goods or
commodities coming out or passing through
the territorial jurisdiction even if in the
guise of a toll or a fee (§133(E))
» an absolute prohibition
» commodities marketed in a public
market, let’s say in the city of Pasig,
where the commodities came from
Laguna then to Tanay, Cainta, Taytay;
just imagine if each of the towns will
impse 1peso for every head of a chicken
or 50cents for every bundle of
vegetable.
PALMA DEV’T CORP v. MALANGAS
ZAMBOANGA DEL SUR (113 SCRA 572)
F: Municipal council passed a tax
ordinance entitled “police surveillance
fee” which provide that ALL motor
vehicle passing through a particular
street in the town proper of Malangas
which will lead to the pier or wharf will
pay a certain sum of money whether it
is camote, copra, palay,or rice. One of
the owners of the motor vehicle is Palma
Dev’t Corp. carrying copra, banana and
coconut to be loaded in a ship docked at
pier of Malangas. The lawyer of
petitioner assailed the validity of the
ordinance stating that it is a clear
violation of §133(E).
H: It is not the title of the ordinance which
is controlling but it is the essence of the
substance of the tax ordinance. The tax
ordinance clearly violated §133(E),
therefore, the SC had no option but to
declare the tax ordinance null and void
for being in violation of the law.
VI. Taxes, fees or charges on agricultural
and aquatic products when sold by
marginal farmers or fishermen (§133(F))
Q: Don Antonio Florendo, a person
coming from Pampanga who settled in
Davao City, employed thousands of
workers in the different banana
plantation. Can the LGU impose tax on
the agricultural product which is a
banana?
A: YES. The LGU can impose because
Don Antonio is not a marginal farmer. It
is only prohibited if it is sold by a
marginal farmer.
» Marginal Farmer – a farmer or a
fisherman for subsistence only, whose
immediate members are the immediate
members of the family (§131(P))
VII. Tax, fee or charge on pioneer and non-
pioneer enterprise duly registered with the
board of investments for a period of 6yrs
and 4yrs respectively (133(G))
» relative prohibition because after the
period, the LGU concerned may now
impose the tax.
VIII. Excise tax on articles and tax, fees
and charges on petroleum products
(§133(G))
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» relative prohibition since under
§143(H), it says there that taxes which
are prohibited such as excise tax,
percentage tax and value added tax
nonetheless, the LGU may impose a tax
not exceeding 2% of the gross receipt
(for cities 3%).
» My former student an assistant in
the city legal attorney in a city in Metro
Manila, received a summon from the
RTC (on complaint of a supermarket in
Metro Manila) questioning the validity of
the tax ordinance under §143(H) since
the rate imposed was 3%
I said, “ineng, una file kayo ng
motion to dismiss. Nak ng puta, absent
ka na naman ata eh, you invoke §151
stating that a city can impose a tax
higher than the rate provided for by law
not more than 50% of the maximum
(50% of the maximum of 2% is 1,
therefore, 2+1 is 3%)”
BULACAN v. CA (299 SCRA 442)
*first case decide by the SC which
interpreted both the LGC and the NIRC.
F: The then governor, Obet Panganiban
together with his provincial council
passed an ordinance imposing tax on
quarrying under the provision of §138 of
the LGC. The problem is that the
ordinance applies to ALL entities
quarrying in the province. One of the
taxpayers, Republic Cement obliged to
pay the tax, argued that under §138 of
the LGC, the tax on quarrying on which
the province may be allowed shall only
be with regard to quarrying private land,
and not only that but under §133(H),
there is a prohibition to impose excise
tax and tax on quarrying under the IRC
is an excise tax.
H: The tax on quarrying allowed to
provincial governments shall only be
with regard to lands which are public
lands, and since this is a private tax on
quarrying refers to a lot without any
distinction. Hence, if the LGC made a
qualification as to the kind of land
(where it says it should be public land),
by implication, it should refer to private
land under §151 (although the law did
not distinguish); and since it is a tax by
the national government, it should be
collected by the BIR (not the LGU), and
also the SC agreed that it is an excise
tax where LGU’s are prohibited from
collecting; thus, the SC declared the tax
ordinance null and void for being
contrary to law.
» Sir, why is it a problem when the law
is clear that under §138, it shall only
apply to public land?
Perhaps the provincial council
thought that the subject matter of the
tax ordinance may be a subject matter
provided in any book including the IRC,
or worse, that it may impose a tax on a
subject matter not mentioned in any
book.
Moral lesson: although a tax
ordinance may be passed even if the
subject matter is not provided for in any
law, it has to comply with the
limitations.
PETRON v. PENILLA (198 SCRA 86)
* The facts here arose under the old law
under §5 (now §133) of the local tax code
(PD 231)
F: Petron has a factory/plant in Penilla
where the raw materials petroleum
products are being converted into
refined petroleum products. The
municipal council of Penilla imposed a
tax by way of a tax ordinance saying
that they are invoking the old §19 (now
§143(A)) stating that municipalities are
authorized to impose tax of the
manufacture of any commodity, hence,
since it is manufacture of a petroleum
product, the LGU must e authorized.
However, Petron objected since under
§5 (now §133(H)), the prohibition
includes the prohibition to impose
excise tax and not only that, under this
par., the tax on petroleum products is
an excise tax. Under this par., the law is
clear it does not only prohibit the
imposition of tax, fee or charge over
petroleum products.
H: The controlling provision here the old
§19 (now §143(A)) that LGUs are
authorized to impose the business tax
for the manufacturing over any kind of
commodity by and petroleum product is
“any kind of commodity”.
Q: What do you think?
A: I don’t agree with this ruling because
between §133(H) and §143(A), it is the
former which is more specific.
IX. Value added tax and percentage
(§133(I) EXCEPT §143(H)
» Relative prohibition.
X. Tax, fee or charge on common carriers
whether by land, water or air (§133(J))
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FIRST HOLDING CO. v.BATANGAS CITY (300
SCRA 661)
* 2nd SC ruling discussing both the IRC and
LGC.
F: This revealed to the public the existence
of 2 very big oil pipelines coming form
Batangas City with a distance of more
than 100km, one going to Pandacan Oil
Depot and the other one is going to
Brgy. Bicutan, Taguig. The Batangas
City council deemed it necessary to
impose a tax on the gross receipt of the
1st holding company for the operation of
the oil pipeline, but the operator argued
that the oil pipeline is not a common
carrier.
H: The SC reasoned out like in the case of
Pajunar v. Comm (328SCRA666), saying
that “we have copied the code of carrier
law form the US where the definition of
a common carrier is one habitually
carrying not only individuals or
passengers but also goods or
commodities, and since the oil pipelines
is habitually carrying petroleum
products which is a commodity, we rule
this as a common carrier which is under
§133(J), LGU is prohibited from imposing
tax on common carriers, and not only
that but under §170 of the LGC, the law
is very explicit, that ALL LGUs are
prohibited to impose percentage tax on
common carriers”. With that, the tax
ordinance passed was declared null and
void for being contrary to law.
XI. Premiums on re-insurance (§133(K))
» absolute prohibition.
XII. Tax, fee or charge on registration of
motor vehicles and for the issuance of
license and permit for driving thereof
EXCEPT tricycles. (§133(L))
BATUAN CITY v. LTO (322 SCRA 805)
I: Which function was delegated to the
LGU? The LTO registering motor vehicles
“or” the LTFRB granting franchise and
regulation of common carriers?
H: Under §133(L), the function of the LTO is
prohibited, an therefore what may be
delegated to the LGU is the function of
LTFRB.
XIII. Tax, fee or charge on exportation of
products and is actually exported EXCEPT
under §143(C) where the LGU is authorized
to impose business tax on exportation
(§133(M))
XIV. Tax, fee or charge on cooperatives
duly registered under the cooperative cod
(RA 6938) and Business Kalakalan (RA
6810) (§133(N))
» A cooperative is exempt from local
tax, provided it is duly registered with
the cooperative code and the
cooperative development authority “or”
Business Kalakalan (not kalkalan)
XV. Tax, fee or charge over the national
government, political subdivisions and
agencies and instrumentalities of the
government (§133(O))
» Relative prohibition since it admits of
an exception under §154 of the LGC
where it says that a LGU may be
authorized to impose a fee or charge for
the operation of a public utility provided
it is owned, maintained and operated by
such LGU.
NAIA v. PARANAQUE (JULY 2006)
H: SC ruled in favor of the airport.
Paranaque being a LGU can’t impose tax
on a government instrumentality.
Airport owned by the government is not
an agency, it being an instrumentality.
Q: May the government tax itself it the
taxing power is the local government?
A: NO. The local government cannot
impose tax on the national government,
and with more reason that it cannot
impose a tax with equal LGU.
D. Taxes that can either be imposed
by Provinces or Cities
I. tax on transfer of realty (§135)
► Note that this is not a real estate tax,
this is a local tax for the simple reason that
it is not provide for under the topic of real
estate tax (§198-280)
► Law says “it should not exceed ½ of 1%
of the consideration” (NOTE: do not use
zonal value since this is used only under the
IRC, not the LGC.
Q: Since all the provinces and cities must
follow the limitation of the rate (not
exceeding ½ of 1%), is it violative of the
equal protection clause?
A: NO, because the sangguninan had to
determine the actual rate considering the
status of the province.
Q: Why is that Makati fix the rate of 75% or
3/4 of 1%?
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A: Because cities are authorized to
increase the rate of 50% of the maximum,
that is 50% of ½ is 25% (50+25 is 75%).
NOTE: Do not apply transfer of realty
pursuant to RA 6657 (CARP) → this is the
Comprehensive Agrarian Reform Program →
this is exempt.
II. tax on printing an publication (§136)
► Normally, a province cannot impose this
because the tax on business can only be
imposed by a city or municipality EXCEPT
this one, on printing and publication of
magazines and periodicals.
III. franchise tax (§137)
► The old national franchise tax under the
old tax code was already abolished.
► We still have franchise tax other than
this one, known as national franchise tax →
provided for in the republic act granting
franchise.
Two kinds of Franchise Tax:
1. local franchise tax (under LGC §137)
2. national franchise tax (provided for
in the statute or republic act
authorizing the franchise)
Q: May LGUs impose local franchise tax?
A: We have to consider here many
supreme court decisions and also §193 of
the LGC.
Under §193, it says there “unless
especially provided for in this code,
exemptions granted to natural juridical
persons are hereby withdrawn (abolished)
EXCEPT:
1. local water districts
2. cooperatives registered under the
cooperative code (RA 6938)
3. non-profit and non-stock educational
institution.
BASCO v. PAGCOR (197 SCRA 52)
F: The city council passed a tax ordinance
imposing tax on PAGCOR, an agency of
the government. PAGCOR objected
saying that the local city is prohibited
under the old local authority act to
impose tax on an agency of the
government.
H: The SC declared null and void the tax
ordinance saying Manila cannot do that.
CEBU v. MACTAN (261 SCRA 667)
F: Cebu government was trying to collect
real estate tax from the Mactan airport
(note: real property tax is a territorial
tax, meaning it should only be collected
within its territorial jurisdiction). Lawyers
of Mactan airport argued that under
§13(O), Cebu, a LGU, cannot impose tax
on an agency of the government, and
they also invoked the ruling in BASCO.
H: The lawyer of Mactan airport is devoid of
any merit at all, it is 100% erroneous
since the real estate tax is not a local
tax, hence, why invoke a SC ruling and
codal provision which can only be
applied to local tax. Therefore, Mactan
airport should pay Real Property Tax.
► Before the codification in 1991 (to take
effect January 1, 1992), local taxation was
embodied in a separate book known as
Local Tax Code (PD 231) while real property
tax was provided for in a separate book
known as Real Property Tax Code (PD 464)
LRT v. CITY OF MANILA (342 SCRA 692)
F: The Manila city government tried to
collect real property tax but the
management of the LRT said “no you
cannot do that to us since it is
exclusively for public use”.
H: NO, you are not exclusively for public
use since every time a person wants to
use the LRT he has to pay.
Q: Why not use the defense that it is
owned by the government?
A: Because in real estate tax, the defense
that it is owned by the government is not a
defense.
The LGC in §199(B) and in §217, both
provisions says that the basis for the
imposition of real estate tax is the ACTUAL
USE of anybody who is using that (maybe in
the concept of usufructuary or in the
concept of a lessee, or in the concept of an
owner); the basis is not ownership.
► in §134, the taxes here must not only be
imposed by provinces, it may also be
imposed by cities in line with §151 → those
enumerated in §135 to 141.
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CAGAYAN DE ORO ELECTRIC CO. v. tax → under §151 of the LGC, the increase is
MISAMIS OCCIDENTAL (181 SCRA 38) not allowed.
* This was the prevailing rule for more than
10years from 1988 ► both §139 and §147 are taxes imposed
H: In the franchise or the republic act, on persons exercising professional calling.
there are only two (2) kinds of franchise,
one is a franchise which provide for a Section 139 Section 147
condition that this tax (referring to the are to be imposed are to be imposed
franchise tax) shall be in lieu of all other by provinces and by municipalities
taxes, and the other franchise is the one cities and cities
which do not provide for such provision; are applicable to are applicable to
the province or the city can impose local workers who must persons who are
franchise tax if the franchise belong to pass a working but are
the second example. government not required to
examination (e.g. take government
REYES v. SAN PABLO CITY (305 SCRA 353) engineers, examinations
* Here the SC uniformly ruled physicians, etc)
H: A provision on exemption under §193 there is a It does not
don’t only refer to exemptions provided maximum (P300) provide for any
for by different statutes, but it includes NOTE: it is not amount, the only
those which claim exemptions by virtue always 300, since requirement is
of the case of Cagayan de Oro (because the exact amt that it must be
SC decisions are also laws). must be fixed by reasonable
the ordinance.
PLDT v. DAVAO (363 SCRA 750)
F: The franchise holders of Smart and VI. amusement tax (§140)
Globe are claiming exemptions from the
local franchise tax because they are ► under the IRC, there is also amusement
saying that they are holding a franchise tax under §125.
which says that it is a franchise enacted
by the house of Congress in 1995 which PBA v. QUEZON CITY (137 SCRA 358)
carries with it an exemption form local F: The city government enacted a tax
franchise tax. ordinance trying to collect amusement
H: By the very explicit provision of §193, tax including amusement tax on the PBA
the removal of exemptions granted by (in Araneta, Cubao); but PBA and “no,
different statutes and also by SC we are already paying amusement tax
decisions applies only to statutes and to the national government through the
decided by the SC on or before Jan. 1, BIR because of §125 of the IRC”
1992, because §193 says “upon H: QC government can no longer collect on
effectivity of this law”. For exemptions the ground that it is already being
covered by §193 therefore, Smart and collected by the national government
Globe are authorized to claim and secondly, in the enumerations of
exemptions because the statue (RA amusement under §140, you will never
7082) was enacted on 1995. see professional basketball. Most of all,
it is the intention of the author that it is
IV. tax on sand, gravel and other quarry only the national government.
resources (§138) *nak ng putang katangahan yan.. the local
tax code PD 231 was enacted in 1974 when
► We are through with that in the case of we don’t have any professional basketball..
Bulacan since professional basketball was born May
1975.
V. professional tax (§139) * ano ba dapt tama diyan? → both the
► this must be correlated with the tax national government and the QC
under §147. government can collect. There is no
violation of the prohibited double taxation,
► NOTE that this is an exemption to the because the taxing powers are different,
rule that a city may increase the rate of the and not only that §140 speaks of

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amusement tax on admission fee but under
§125, it is abut gross receipts.
VII. delivery van (§141)
Q: What if not a delivery van, but “sako”
lang?
A: The applicable tax is under §143(G)
(peddler’s tax, one imposed by
municipalities and cities.
If may dalang sasakyan, yari siya ng
province sa tax.
NOTE: §135-141, these are taxes that can
be imposed by PROVINCES and CITIES.
§143-150 are taxes to be imposed by
MUNICIPALITIES, which can also be imposed
by CITIES.
E. Taxes that can either be imposed
by Municipalities or Cities
I. Business Tax (§143(A-H))
a. manufacturing, repacking,
processing, including the
manufacturer of permitted liquor
and also its dealer
b. wholesaling
c. exportation
d. retailing
e. contractor’s tax
f. tax on banking institution and
financing institution
g. peddler’s tax
h. the exemption under §133(i)
Q: If you have two branches, how many
business taxes do you have to pay?
A: You pay only one business tax (§146)
ILO-ILO BOTTLERS v. ILO-ILO CITY (164
SCRA 607)
F: Ilo-ilo Bottlers was already paying a
business tax on manufacturing under
§143(A) to the city government by virtue
of a tax ordinance. Later on, they are
obliged to pay by virtue of another tax
ordinance imposing business tax on
wholesaling. Naturally, Ilo-ilo Bottlers
argued, “how could it be, if you
manufacture, it necessary follows that
you sell the commodity so, with the
payment of the business tax on
manufacturing, it carries with it the
business of wholesaling”.
H: NO, you have to determine the
marketing system of the company. If
wholesaling is also being done in the
place of manufacture, the business tax
on wholesaling should no longer be paid
it should only be the business tax on
manufacturing. But if the marketing
system of the company provides that
wholesaling shall be done in a separate
place (maybe several kilometers away),
the manufacturer must still pay the
business tax on wholesale because now
it could be argued that they have the
separate business of wholesaling.
Q: On the business of retailing, should the
business tax of retailing be imposed by the
city or by the municipality “OR” by the
barangay in the city or the barrio in the
municipality?
A: §143(D) must be correlated with §152,
the tax to be imposed by the barangay.
It depends:
a. city
» if the gross receipt of the retailer
exceeds P50T in a minimum of
one year, it is the right and
privilege of a city to impose the
business tax on retailing.
b. barangay
» if the gross receipt of the retailer
did not exceed P50T, it is the
barangay council where the
business of retailing is located.
c. municipality
» if the gross receipt of the retailer
did not exceed P30T within a
period of one year.
d. barrio
» if the gross receipt of the retailer
did not exceed P30T within a
period of one year.
NOTE: These distinctions do not apply in
wholesaling. These are only for retailing.
► Paragraph H: for the imposition of
excise tax, percentage tax and value added
tax, the municipality may impose a tax not
exceeding 2% of the gross receipt (with
regard to a city, it may go as far as 3%)
II. Municipalities in Metro Manila who can
increase their rate (§144)
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► Right now there are only two
municipalities:
1. San Juan
2. Pateros
III. Professional Tax (§147)
► we are through with that
IV. Fees for sealing and licensing of weights
and measures (§148)
V. Fishery rentals, fees and charges (§149)
F. Situs of Tax (§150)
► The tax referred to in here is the
business tax on wholesaling and retailing.
Q: RFM is manufacturing commodities, one
of them is Swift hotdogs, this is being sold
not only in Mandaluyong, Metro Manila, but
also to the inter country from Batanes to
Tawi-tawi. Where should the business tax of
wholesaling or the business tax of retailing
be paid? Should it be in the principal office
(Mandaluyong) “or” the place where the
commodities are sold?
A: It will be paid in the place where it had
been sold PROVIDED there is a branch office
or a sales outlet (§150(A)).
► If it so happens that the company has a
factory different from the place where the
principal office is located → 30% should be
pain in the principal office and 70% in the
municipality or city where the branch is
located.
PHIL MATCHES v. CEBU (81 SCRA 99)
F: Phil Matches were produced in
Nagtahan, Manila. In Cebu city, there
was a warehouse where the matches
were stored. Many of the customers, by
way of wholesale in the warehouse in
Cebu City, they came from different
towns of the Visayan Region. May the
business tax ordinance of Cebu be
imposed on those transactions even if
the buyers did not come from the
territorial jurisdiction of Cebu?
H: Since in this case the contract booked
and paid, meaning, it was negotiated
perfected and consummated in the
warehouse where it was located in Cebu
City, the Cebu City government has the
right to collect business tax.
Q: What if there is an agreement that
commodities would be delivered and that
the buyer would be waiting in some other
town, is the answer still the same?
A: YES, the answer is still the same
because delivery to the carrier is delivery to
the buyer where delivery has been termed
within the territorial jurisdiction of Cebu.
SHELL v. CEBUCOT, CAMARINES SUR (105
PHIL 1063)
F: The petroleum products were purchased
at the motor vehicle traversing the
neighboring towns of Cebucot like
Bason, Dimalaon, all towns in Camarines
Norte. The contract of sale was
negotiated and perfected in different
municipalities where the motor vehicle
of Shell was traveling.
H: Although the oil depot was located in
Cebucot, the said municipality cannot
impose tax on that because the contract
of sale was negotiated and perfected in
the different nearby towns of
Camarines.
Q: Is there a conflict with the case of Shell
and Phil Matches?
A: NONE. As a matter of fact, these two
decisions complement each other.
G. Taxing Powers of the Barangay
(§152)
► Only a minimal sum (fair and
reasonable)
Power to impose tax:
1. On commercial breeding of fighting
cocks, cockfights and cockpits
» must be for commercial purposes
2. On places of recreation which charge
administration fee
3. On billboards, signboards, neon signs
and outdoor advertisements
» especially for the barrios and
barangays along the highway
4. For barangay clearance
» if you want to engage in the
business of retailing or wholesaling
→ if barangay captain will not
approve that → within 7days go to
the municipal hall or city hall for
approval
5. For the use of barangay property
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» for instance the barangay has a
plaza.
H. Common Revenue Raising Powers
(§153-155)
Q: Why common?
A: All the LGU could impose the same. But
it does not follow that all the provinces,
cities, municipalities could impose the
same. Only the LGU which operate,
establish, maintain the entity
If established by the province, it should
only be the province.
These are:
1. service fee and charges
» for services rendered
2. public utility charges
» provided owned, operate and
maintained by them
3. toll fees and charges
» tax or toll for the use of a bridge or a
street
► Padua filed a civil action in the
MakatI RTC trying to stop the government
form collecting a toll free in the South
Express including the North expressway
alleging that he is affected as a taxpayer
because he is from Paranaque. He argued
that if you use the property of the
government like a street or a public plaza,
you do not pay. He made the analogy, that
if you go to Luneta, you do not pay the city
government of Manila.
The Makati RTC, the CA and SC had
a uniform ruling that the operator should be
prohibited from collecting further toll fess
because if the operator had already
recovered his investment and earned an
income already, he should be stopped. As
argue by the SC, it copied the argument of
the lawyer (re: Luneta).
» NOTE: that Res Judicata do not apply
here.
When the ruling became final an
executory in 1993, the North and South
Express were totally dismantled and totally
destroyed by the DPWH to give way to the
final and executory ruling of the Court, that
It should no longer be collected.
After several months, the
government announced in the radio that
the party in the case of Padua, mutually
agreed that the collection shall be resumed
in order to have money for the maintenance
and repair of the highway.
Exceptions to §155 (collection of toll fees)
1. members of AFP
2. members of the PMP
3. post office personnel delivering mail
4. physically handicapped
5. disabled citizens 65 years and older.
I. Community Tax (§156)
► In the old days, known as “residence tax
certificate.
Q: If the Filipino is a resident of a foreign
country (NRC), is he liable to pay the
community tax certificate?
A: NO, because the basis of imposition of
this tax is whether or not you are an
inhabitant of the Philippines. Meaning you
are a resident of the Philippines.
Q: What about a foreigner residing in the
Philippines (RA)?
A: YES. You have to pay unless the
foreigner is a trans-investor for not more
than 3months.
► This is applied to both natural and
juridical persons.
Requirements:
1. for a natural person → at least 18
years of age
2. for corporations → upon registration
with the SEC
Q: What if you become 18 in the month of
January or November or December?
A: For those who celebrated their birthday
before July 1 (that is up to June 30), they
are liable to pay the tax, for this year.
For those who celebrated their birthday
on or after July 1, they are not yet liable to
pay this year, but have to wait until next
year.
Q: Is there a difference for those who
reached 18 in the months of Jan-Feb-March
and those who reached 18 in the months of
April-May-June?
A: YES. For those who celebrated birthdays
in the months of Jan-Feb-March, they have a
grace period of 20days within which to pay.
Those who celebrated their 18th birthday in
the month of April-May-June, they do not
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have any grace period at all, they have to
pay the tax immediately.
Q: If you have a community tax certificate
for this year (2006), can it be used only
until December 31, 2006?
A: NO. It shall be valid up to April 15, 2007.
(§163(C))
J. Accrual of the Tax (§166)
► January 1
Q: What if the tax was only approved in the
month of May 2006, do you have to wait
until January 2007?
A: NO. You have the right to collect that in
July 1, because the law is saying that “it
should be collected in the next succeeding
quarter” (§167)
► Mayor Binay had a tax ordinance in May,
sabi ng mga bata niya: “bosing, collect na
tayo ng June”.
Binay: “hindi nga pupwede, maghintay
pa tayo ng July 1”.
Q: What if the tax ordinance had been
existing for several years already?
A: The time of accrual will always be
January 1.
REMEDIES UNDER THE INTERNAL
REVENUE CODE
1. Remedies of the Government
2. Remedies of the Taxpayer
Remedies of the government:
1. Assessment
2. Collection
Under the NIRC, assessment and collection
have 2 kinds:
1. Normal/Ordinary assessment and
collection – Sec. 203, NIRC
2. Abnormal/Extraordinary assessment
and collection – Sec. 222, NIRC
I. Normal/Ordinary assessment and
collection
► There was a return filed and
it is not fraudulent and not false
II. Abnormal/Extraordinary assessment
and collection
► There was:
1. an omission or failure to file
the return;
2. if there was a return filed, it
was fraudulent, or;
3. the return was false
Q: Is a false and fraudulent return
presumed?
A: NO, false and fraudulent return is not
presumed. The burden of proof to prove
that the return was false and fraudulent lies
against the government through the BIR.
The mere fact that the return is
erroneous will not make the return
fraudulent, it must be proven by the BIR.
Q: Why is it important to know whether the
assessment is under normal or abnormal
condition?
A: It is important to know because the
prescriptive period between normal and
abnormal assessment differ.
Prescriptive Period for Assessment
1. Normal/Ordinary Assessment – 3
years from the time the return has been
filed (not the payment of the tax) (Sec.
203, NIRC)
► 3 Ways of filing the return under Sec.
203, NIRC:
1. filed before the deadline (for
any tax under NIRC)
2. filed on the date of deadline
3. filed after the deadline
► 2 Ways of counting the 3 year period of
Assessment:
1. if return is filed before or on
the day of the deadline, the
prescriptive period starts on
the date of the deadline;
2. if return is filed after the
deadline, the prescriptive
period starts on the date the
return has been filed.
» For the calendar year of 2004, a return
must be filed and paid for Net Income Tax
on or before April 15, 2005. Since he was
not able to meet the deadline, the taxpayer
is now being assessed for tax due for 2004.
To minimize interest and surcharges, it has
been suggested by the BIR that the
taxpayer file a late return. Supposed he
filed his return covering 2004 on April 1,
2006. In this example, the reckoning point
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is the deadline of April 15, 2005. The
starting point of the counting the 3 yr.
period is on the date the return is filed
which is April 1, 2006.
» Suppose it is not a late filing of return,
the counting of the period is on the date of
the deadline which is April 15.
2. Abnormal/Extraordinary Assessment
► the government has 2 options:
a. Assess and Collect
» the prescriptive period for
“assessment” shall be 10 years from
the discovery of none filing or false
or fraudulent return (Sec. 222, par.
o, NIRC)
» the prescriptive period for
“collection” shall be 5 years from the
date of final assessment (Sec. 222,
par c, NIRC)
b. Collect Without Assessment
through Judicial Action
» since there is “no assessment”
there is no prescriptive period for
assessment
» prescriptive period for
“collection” shall be 10 years from
the date of discovery of none filing
of return or false or fraudulent
return.
► These options are available only if
the Assessment is under the
Abnormal/Extraordinary Conditions.
These are not available under
Normal/Ordinary Assessment
Prescriptive Period for Collection
1. Normal/Ordinary Collection – Sec.
203 did not provide for the prescriptive
period for the collection
- Intention of the author: 5 years
from the date of final assessment
Reasons: (Sababan agrees with the 5 year
prescriptive period)
Prescriptive period of collection
under 1st option on Abnormal
Assessment is 5 years from final
assessment (Sec. 222, par c, NIRC)
1. under the old code of 1939,
1977, and 1985, if the
prescriptive period for collection
under abnormal is 3 years, then
the prescriptive period for
collection under normal is also 3
years. If now a days, it is 5 years
in abnormal, the prescriptive
period for normal should also be
5 years.
2. to say that there is a prescriptive
period for collection under
Abnormal and there is none
under Normal is too abnormal. It
should be the other way around.
2. Abnormal/Extraordinary Collection
a. assess and collect – 5 years from
the final assessment
b. collect without assessment
through judicial action – 10 years
from date of discovery of none
filing, or false, or fraudulent
return.
Q: How to apply these periods?
A: Annual net income tax return filed by
individual using a calendar year. The return
should be filed on or before April 15, 2000.
It was filed on April 15, 2000.
Q Without stating the date of final
assessment, can it be collected in 2007?
A: Under normal condition, first determine
the date of final assessment. If the BIR
finally assessed the tax in November 2001,
then 2007 is way beyond the 5year period
to collect. Count the prescriptive period for
collection from the date of final assessment.
Q: (same facts) Supposed it was finally
assed on March 2003, can it be collected in
2007?
A: Yes, because it is within the prescriptive
period of 5years.
BASILAN v. COMMISSIONER (21 SCRA 17)
F: Supposed the notice of assessment was
given within the period but it was
received by the taxpayer outside the
period.
I: Whether or not the assessment is within
the period of 3 years.
H: Yes. It is within the period. If the notice
is sent through registered mail, the
running of the prescriptive period is
“stopped”. What matters is the sending
of the notice is made within the period
of prescription.
► It is the sending of the notice and not
the receipt that tolls the prescriptive period.
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Q: What if the return has been amended,
how would you compute the period of
assessment?
A: NIRC is silent.
PHOENIX v. COMMISIONER (14 SCRA 52)
If the amendment of the return is
substantial as distinguished from
superficial, the counting of the prescriptive
period is also amended. The prescriptive
period shall be reckoned on the date the
substantial amendment was made. If the
amendment is superficial, the counting of
the prescriptive period is still the original
period.
Procedure for Assessment (Sec. 228,
NIRC; RR 12-99)
Steps of assessment
1. Sec. 228, NIRC (2 steps)
2. RR 12-99 (3 steps)
2 Steps under Sec. 228, NIRC
1. Pre-assessment notice
2. Final assessment notice
3 Steps under RR 12-99
1. Notice of Informal Conference
2. Preliminary Assessment Notice
3. Formal Letter of Demand and Notice
to Pay the Tax
PROCEDURE (Sec. 228, NIRC; RR 12-99)
1. Upon receipt of the notice of
informal conference, file a reply
within 15 days from receipt of
notice;
2. Failure to file a reply, 2 things may
happen:
a. BIR will send again the Notice of
Informal Conference or
b. BIR will send a Preliminary Notice
of Assessment
3. Upon receipt of Preliminary
Assessment Notice (PAN), file a reply
within 15 days from receipt
4. Failure to file a reply will result in
either:
a. BIR will repeat PAN
b. Declare the taxpayer in default,
and send you a Final Assessment
Notice (FAN)
5. Upon receipt of FAN, taxpayer may
file a protest within 30 days.
Q: Is FAN the one appealable to the Court
of Tax Appeals (CTA)?
A: NO. This is because §228, NIRC and RR
12-99 requires the exhaustion of
administrative remedy of protest. After the
receipt of FAN or formal demand within
30days must file a protest before the office
of the commissioner of internal revenue.
FORMS OF PROTEST
1. Local Tax (Sec. 125, Local
Government Code (LGC))
2. Real Property Tax (Sec. 252, LGC)
3. Tariff and Customs Code (Sec. 2313,
RA 7651)
► In all protest under the different codes,
payment under protest is only necessary
under the “Real Estate Tax”.
RR 12-99
► If the taxpayer receives 2 final
assessments, one under the Net Income
Tax (NIT) and the other in VAT. If the
taxpayer don’t want to file protest under
VAT but want to file a protest under NIT.
The taxpayer in order to be allowed to file a
protest under the NIT must first pay the VAT
where he does not intend to file a protest.
► This is not “payment under protest”
because, payment under protest is the one
mentioned in Real Property Tax under Sec.
252, LGC.
Under NIRC, Protest is referred to as:
1. disputing of final assessment or
2. file a motion for reconsideration or
reinvestigation
Q: What should be done after filing a
protest?
A: Count 60days is the period to file the
necessary documents and receipts in
support of the protest.
Q: What is the effect of failure to file the
supporting documents?
A: Failure to file the necessary and
supporting documents within the 60day
period, to be counted on the day the protest
is filed, the final assessment shall become
final and executory.
► On the 51st day you filed the necessary
document, you have to count another
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period, which is 180 days from the day you
filed the necessary documents.
Relevance of the 180 Days: 180 days is
the time given to the BIR to decide the case
Q: Supposed it did not decide the case
within 180days?
A: Do not invoke the Lascano case because
it was rejected by RA 9282
In the Lascano case, before you file an
appeal although the 180 days have lapsed,
you have to wait for the BIR to take positive
action.
The case was ruled only by the CTA,
hence it is not a law. The jurisdiction of the
CTA has been amended by RA 9282.
RA 9282 provides that in case of
inaction of the commissioner after the lapse
of 180days, remedy is to file an appeal.
RR 12-99 says that after lapse of
180days but within 30days after 180days,
that is the time to file an appeal.
Q: Supposed the BIR rule within 180?
A: Within 30days from receipt of the
decision file an appeal to the CTA sitting in
division.
Q: Supposed the CTA decided not in your
favor?
A: File a motion for reconsideration within
15days to the same division deciding the
case.
Q: Supposed the CTA, in division decided
not in you favor?
A: File an appeal to the CTA sitting en
banc.
Q: Supposed the CTA en banc decided not
in your favor?
A: File an appeal within 15days from
receipt of decision to Supreme Court.
Q: During the pendency of the protest in
the office of the Commissioner, supposed
you receive a notice of collection, levy and/
or distraint, what is your remedy?
A:
1. YABES v. COMMISSIONER (150 SCRA
278)
2. UNION SHIPPING LINES v.
COMMISSIONER (185 SCRA 547)
YABES v. COMMISSIONER (150 SCRA 278)
F: The taxpayer receives a notice of
collection while waiting for the decision
of his protest. He then filed an “appeal”
with the CTA contending his protest has
been denied because he did not receive
a decision but receive a notice of
collection. Simultaneously, the BIR filed
before the CFI an “ordinary civil action”
for the collection of sum of money.
When the judge of the CFI, was about to
conduct the hearing of the case, the
taxpayer filed an injunction with the SC
to prohibit the judge of the CFI
contending that a single cause of action
is pending in two courts, one in the CTA
and another in CFI.
H: Injunction was granted prohibiting the
Judge of the CFI and requiring the Judge
to transfer the records to the CTA saying
that the remedy made by the taxpayer
was the correct remedy.
Q: Was the appeal made on time?
A: Yes, when the BIR filed an ordinary
action, the protest is deemed denied. Hence
an appeal is a proper remedy.
UNION SHIPPING LINES v. COMMISSIONER
F: The taxpayer was waiting for the
decision of his protest. But instead, he
received a notice of collection.
Immediately, he filed a Motion for
Reconsideration and Clarification asking
whether his protest has been denied.
The BIR did not reply or answer but
instead filed an Ordinary Civil Action
before the CFI. When the taxpayer
received summons, he did not answer
but instead filed an Appeal before the
CTA.
I: Whether or not the remedy of Appeal was
the correct remedy and Whether or not
it was filed on time.
H: Yes. The remedy of appeal is the
correct remedy and the appeal was filed
on time. The reckoning period within
which to file an appeal is the time the
taxpayer received the summons.
While an Appeal is pending before the CTA,
the CTA will determine:
1. If the decision was made within 180
days, whether the appeal was made
within 30 days from the receipt of
the said decision, or
2. if there was no decision after the
lapse of 180 days, whether the
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appeal was made within 30 days
upon the expiration or the lapse of
the 180-day period.
Q: Pending appeal with the CTA, can the
BIR amend the final assessment?
A: 2 SCHOOLS OF THOUGHT:
1. GUERRERO v. COMMISSIONER
(19 SCRA 25)
2. BATANGAS v. COLLECTOR (102
PHIL 822)
GUERRERO v. COMMISSIONER (19 SCRA 25)
H: No. Because it is no longer the disputed
assessment.
BATANGAS v. COLLECTOR (102 PHIL 822)
H: Yes. In order to avoid multiplicity of
suits
► ACCORDING TO JUSTICE VITUG:
BATANGAS v. COLLECTOR (102 PHIL 822) is
the better ruling
PROTEST UNDER LOCAL TAX (Sec. 195,
LGC)
► Under NIRC, protest is filed in the Office
of the Commissioner
► Under LGC, protest is filed with the
same City or Provincial or Municipal
Treasurer who issued the assessment
Period to file Protest
• 60 days from receipt of assessment
Q: If the treasurer did not decide within a
60day period, remedy?
A: Go to the court of competent jurisdiction
(RTC)
Q: If the RTC decided not in you favor?
A: File an appeal with CTA en banc
(beginning April 23, 2004)
Q: If the CTA decided not in your favor?
A: Appeal to the SC.
NOTE:
Pursuant to RA 9282, direct appeal to CTA
en banc can be made from:
1. Decision of the RTC involving local
taxation exercising appellate
jurisdiction
2. Decision of the Central Board of
Assessment Appeal exercising
appellate jurisdiction.
PROTEST UNDER REAL PROPERTY TAX
(Secs. 226, 230, and 252)
• Remedy shall be the same
Sec. 252, LGC
• If the taxpayer receives a Notice of
Assessment from municipal, city, or
provincial treasurer, the remedy is to
file a protest but there must be first
Payment Under Protest.
- This is the only instance where
payment under protest is
necessary
Q: How is payment under protest made?
A: At the back of the receipt there will be
an annotation that there was a payment
under protest within 60days from receipt of
the notice of assessment within the same
treasurer who issued the assessment.
Q: If the treasurer rules against the
taxpayer, remedy?
A: The remedy is to file an appeal to the
Local Board of Assessment within 30days
from the receipt of the decision.
Q: From the decision of the Local Board of
Assessment?
A: Appeal should be made to the Central
Board of Assessment Appeal.
► Beginning April 23, 2004, the ruling of
the Central Board of Assessment Appeal is
no longer final. It can now be appealed to
the CTA, sitting en banc.
PROTEST UNDER THE TARIFF AND
CUSTOMS CODE (TCC) (Sec. 2313, as
amended by RA 7651)
► Formerly, the automatic appeal under
the TCC applied only to protest; but now a
days, the automatic appeal applies to both
protest and forfeiture.
For Forfeiture Under the Tariff and Customs
Code
► Refers to the Order of the Collector
confiscating the imported goods or
commodities
Doctrine of Primary Jurisdiction
If the Collector ordered the forfeiture of
the imported commodities the order of the
Collector shall be to the exclusion of all
government offices and authority.
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Importer of Chemical, under the TCC,
the custom duties is only P27 but the
collector says it should be P52. The
importer will then file a protest with the
Office of the Collector.
In the old days, there is an automatic
appeal from the decision of the collector
under protest. But under RA 7651, the
remedy of automatic appeal is applicable to
both protest and forfeiture.
I. In both cases of protest and forfeiture, if
the importer lose the case and the
government wins, the remedy is to file an
appeal within 15 days before the Office of
the Commissioner.
• From the ruling of the Commissioner,
the importer should file an appeal
within 30 days before the CTA,
sitting in division.
• From the ruling of the CTA in
division, the importer should file an
MR within 15 days before the same
division hearing the case.
• From the ruling of the CTA in
division, deciding on the MR, the
importer should file an appeal within
15 days before the CTA sitting en
banc.
• From the CTA en banc, appeal to SC
within 15 days.
II. If the importer-taxpayer wins the case,
the government lose the case, Sec. 2313 of
TCC as amended by RA 7651, there shall be
an automatic review within 15 days.
Q: Where should the automatic review be
made?
A: It depends. Publish the value of the
commodity.
1. IF P5 MILLION OR MORE –
AUTOMATIC REVIEW SHALL BE
BEFORE THE SECRETARY OF THE
DEPT. OF FINANCE.
2. IF LESS THAN P5 MILLION –
AUTOMATIC REVIEW SHALL BE
BEFORE THE OFFICE OF THE
COMMISSIONER
Q: Suppose the commissioner decide or did
not decide within 30days, what happens?
A: If the commissioner reverses the ruling
of the collector, the ruling is final and
executory.
If the commissioner affirms or did not
decide within 30days, there shall be an
automatic appeal before the sec. of finance.
Q: Between the two which will be appealed
to the CTA?
A: The decision of the secretary which
passes through the office of the
commissioner (RA 9282)
But not all the decision of the secretary
which passes the office of the commissioner
affirms or did not decide within 30days and
appealed before the secretary of finance
will appeal to the CTA be allowed.
There are 3 instances when the Secretary of
Finance renders a decision appealable to
the CTA:
1. decision of the Secretary by virtue of
automatic review passing through
the Commissioner
2. cases of anti-dumping duty, where
the anti-dumping duty was ordered
by the Secretary
3. decision of the Secretary of Finance
on countervening duty.
COMPROMISE (Sec. 204, NIRC)
3 Questions asked in 2004 BAR:
1. May the Government compromise
criminal cases and civil cases?
2. Supposed the corporation is already
dissolved, can the stockholder be
obliged to pay?
3. Suppose the civil case filed by the
BIR is final and executor, can it be
subject to compromise?
CAN THERE BE COMPROMISE IN:
1. CIVIL CASES?
- YES, IN ANY STAGE OF THE
PROCEEDING
- EXCEPT WHEN THE CIVIL CASE IS
ALREADY FINAL AND EXECUTORY
BECAUSE IT WILL BE VIOLATIVE
OF THE SEPARATION OF POWERS
2. CRIMINAL CASES?
- YES, EXCEPT:
a. IF ALREADY FILED IN COURT
(RTC) OR;
b. IF IT INVOLVES FRAUD
3. IF THE CORPORATION IS ALREADY
DISSOLVED, CAN THE STOCKHOLDER BE
HELD LIABLE TO PAY TAX?
- GENERAL RULE: NO
- EXCEPT:
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a. IF IT IS PROVEN THAT THE
ASSETS OF THE COPORATION
IS TAKEN BY ONE
STOCKHOLDER OR;
b. IF THE STOCKHOLDER DID
NOT PAY HIS UNPAID
SUBSCRIPTION
Minimum Amount to be Compromised (Sec.
204)
1. If the ground is financial incapacity
of the taxpayer, the minimum shall
not be less than 10% of the original
assessment.
2. If based on other grounds, the
minimum amount shall not be lower
than 40% of the original assessment.
Q: Can it be lower than that prescribed by
law?
A: As a rule, no. EXCEPT, if allowed by the
evaluation board consisting of the:
a) commissioner; and
b) deputy commissioner.
Instances when the Final Assessment
becomes final and executor:
1. If the taxpayer did not file the
protest on time
2. Failure to submit the supporting
documents within the 60-day period
3. After the lapse of the 180-day
period, you did not file an appeal
within the 30-day period to the CTA
4. An appeal was filed but made
beyond the reglementary period to
appeal
METHODS OF COLLECTION (SEC. 205)
1. Judicial Action
a. Civil
b. Criminal
2. Administrative Action
a. Distraint
b. Levy
c. Tax lien
Q: Why is it important to know whether the
final assessment is under normal or
abnormal conditions?
A: It is important because of the
requirement under §222. If the final
assessment becomes final and executory,
the government (BIR) can exercise the
remedies under §205 in any order or
simultaneously (§207). But it is not always
the case, because the right of the
government to collect is limited in case of
abnormal assessment/collection under
§222. Under the second option, the right of
the government is limited to judicial action
either civil or criminal. Administrative
remedies such as distraint, levy, or tax lien
is not available under such condition.
Q: In distraint, levy or tax lien, is the 10
year period of collection applicable?
A: No, only the 5year period should apply.
Distraint
Kinds:
1. Constructive (Sec. 206)
2. Distraint of Intangible (Sec. 208)
3. Actual (Sec. 207, par. a, and Sec.
209)
1. Constructive Distraint
► The distraining officer shall make a list
of the personal property of the property to
be distraint in the presence of the owner of
the property or the person in possession of
the property.
► The owner shall be requested to sign
the receipt.
Q: What if the owner refuses to sign the
receipt?
A: Sec. 206: The distraining officer shall
require 2 individuals within the
neighborhood with the warning that they
should not allow the taxpayer to dispose,
transfer, or sell the property subject of
distraint.
Grounds for Constructive Distraint (Sec.
206):
1. The taxpayer intends to leave the
Philippines
2. The taxpayer leaves the Philippines
3. The taxpayer ceases or retires from
business
4. The taxpayer obstructs the collection
of the tax.
► THESE GROUNDS ALSO ANSWER THE
QUESTION: WHAT ARE THE TAXABLE
PERIOD LESSER THAN 12 MONTHS?
2. Distraint of Intangible Property
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Limited to 3 Intangible Properties:
1. Shares of stocks
2. Bank accounts
3. Credits and debits
Share of stocks
► Warrant of distraint furnished to the
taxpayer or the officer of the
corporation with the warning that the
property is subject of distraint and it
should not dispose of it.
Bank Accounts
► Warrant of distraint furnished to the
taxpayer or the officer of the bank with
the warning that the taxpayer should
not be allowed to withdraw.
Debits and Credits
► Warrant of distraint furnished to the
debtor and creditor
3. Actual Distraint
► Personal property shall be physically
taken by the distraining officer.
► Within 10 days from the receipt of
the warrant, a report of the distraint
shall be submitted to the BIR (Sec. 207,
par a last par.)
► The property subject of distraint
shall be sold at a public auction EXCEPT
bank accounts and debits and credits.
» Notice of sale shall be by posting
in 2 conspicuous place, stating the
date and the place of the sale (No
publication requirement)
► Sec. 211: after the sale and within 2
days, a report shall be made to the BIR
Q: If the property sold is a personal
property, is there a right of redemption?
A: NO. The rule is absolute.
Q: If the property is a personal property, is
there a right of preemption?
A: SEC. 210: Before the scheduled sale,
the taxpayer is allowed to recover the
property by paying all the property by
paying all the proper charges as well as the
interest, cost and penalties.
During the Scheduled Auction Sale, 2
Things may happen:
1. There is bidder and the bid is
enough
2. There is no bidder or there is a
bidder but the bid is not enough
Q: What is the relevance of knowing the
difference?
A: 1. If there is a bidder and the bid is
enough
» In case of insufficiency, there shall
be further distraint to cover the liability.
(§217)
» In case of excess, the excess shall
be returned to the taxpayer.
2. If there is no bidder or the bid is not
enough.
» It will be purchase by the
government and the later sold in a
public auction again (§212)
» In case of insufficiency, no further
distraint, §217 applies only if there was
a bidder.
» In case of excess, the excess shall
not be returned to the taxpayer but
shall be remitted to the national
treasury.
Levy
► Other than the delinquent taxpayer,
warrant of levy is served to the register
of deeds having jurisdiction over the
real property (Sec. 213)
► Within 10 days from the receipt of
the warrant, a report of the levy shall be
submitted to the BIR (Sec. 207 (b) last
par)
Notice of Sale in Public Auction:
1. Posting in 2 conspicuous places
2. Publication in newspaper of general
circulation once a week for 3
consecutive weeks.
Q: Is there a right of pre emption?
A: Yes, §213.
Q: Is there a right of redemption?
A: Yes.
2 Things may happen in a Public Auction:
1. There is a bidder and the bid is
enough
2. There is no bidder or the bid is not
enough
Q: What if there is no bidder or the bid is
not enough?
A: Forfeiture shall be made (§215)
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3 Definitions of Forfeiture under the Internal
Revenue Code
1. Violation of Excise Tax Law (Sec.
224)
2. If there is no bidder or the bid is not
enough (Sec. 215)
3. The order of the Collector to
confiscate imported commodities
(Sec. 2313, TCC)
Relevance of the Choice of Words:
► Under sec. 212, the law says
“purchase”
► Under sec. 215, the law says
“forfeiture”
» under 215: the real property
shall be automatically registered in
the name of the Government
(forfeiture)
» under 212: the real property is
not automatically registered in the
name of the Government (purchase)
Q: If sold at a private sale, what is the
requirement?
A: There must be an approval of the
Secretary of Finance (§216)
Q: After sale, if there was deficiency?
A: There shall be no further levy, because
§215 says that it shall be to the total
satisfaction of the taxpayer.
Q: After sale, if there was an excess?
A: It shall not be returned to the taxpayer
but shall be remitted to the national
treasury.
Sec. 217: this is only true if there was no
bidder or the bid was not enough because
of the provisions of the Secs. 212, 215, and
216
Sec. 218: no court shall issue an
injunction to restrain the collection of tax
under this code
Determine what kind of injunction is
referred to here:
1. Prohibitory – referred in Sec. 218
because it restrains the collection of
tax.
2. Mandatory
Q: Is the provision limited to “tax under
this code”?
A: Limited to internal revenue taxes.
EXCEPT: CTA (Regular Court) → RA 1125
and 9282: CTA is authorized to issue
injunction to restrain the collection of taxes
or fees collected under other code.
Q: Is the rule of distraint or levy the same
under local taxation?
A: Yes, local tax.
» §175 for DISTRAINT
» §176 for LEVY
Q: How about real property tax?
A: No, distraint is not authorized (§256,
LGC), because the remedy is only Judicial
Action and Levy.
Tax Lien
► Non payment of tax, the government
has the right to claim a lien over the
property of the taxpayer
1. NIRC – Sec. 219, NIRC
2. Local Tax – Sec. 173, NIRC
3. Real Property Tax – Sec. 257,
NIRC
Q: Supposed a parcel of land is about to be
levied by the government, but the same is
being foreclosed by the mortgagee, which
of the 2 obligee, the government or the
mortgagee shall be preferred?
A: §219, last portion: The government is
the preferred one if the lien is annotated
and recorded in the registry of deed. In the
absence of annotation in the registry of
deeds, the mortgagee is preferred.
Q: Do we have the same rule under Local
Tax and Real Property Tax?
A: NO. Both §173 and §257, the
government is always the preferred one.
The lien can only be removed by payment
of tax, interest and penalty.
Sec. 220: approving of filing an ordinary
civil action for violation of the internal
revenue code
► The approval must be made by the
Commissioner of Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574)
F: An ordinary civil action for violation of
the tax code was filed in the city of San
Fernando. But the filing was only
approved by the Revenue Regional
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- Atty. Francis J. Sababan -
Director of Central Luzon. The plaintiff
opposed the filing in the court on the
ground that it should be approved by
the Commissioner and the Revenue RD.
H: Sec. 220 should be read with Sec. 7 of
the NIRC
» General Rule: powers and
functions of the Commissioner may
be delegated but not to a position
lower than a Division Chief
» Under Sec. 7, there are powers
which can not be delegated
a) Power to recommend to the
Secretary of Finance to issue
rules and regulation
b) Power to decide a case of fist
impression
c) Power to enter into a
compromise agreement
d) Power to assign BIR officer in
the place of production
subject to income tax
» Since the case does not fall
under the prohibited delegation, the
filing of the case is legal and
tenable.
► Decision of the Commissioner of Internal
Revenue (CIR) is appealable to CTA.
Q: When is a decision of the cir appealable
to the Secretary of Finance?
A: §4, on matters of interpretation of tax
laws.
SEC. 223: SUSPENSION OF THE
RUNNING OF PRESCRIPTIVE PERIOD
Q: A Filipino taxpayer went to Canada,
after 15years he went back, he is being
assessed by the BIR under normal
assessment. Has the right of the
government to asses the tax already
prescribed?
A: NO. When he went to Canada, the
running of the prescribed period is
suspended.
Q: What if the change of address is within
the Philippines, say only from manila to
Pasay City, is the running of the prescriptive
period suspended?
A: In order that the running of the
prescriptive period will not be suspended,
especially if the change is district office,
§223 provides that the taxpayer must send
a written notice of change of address to the
BIR.
In the absence of the written notice, the
period will be suspended.
Q: Change of address is from Philippines to
abroad?
A: The period will be suspended.
Other Grounds for Suspension:
1. During collection if there is no
property found, the period is
suspended
2. If the BIR is prohibited from making
assessment such when the subject
property is under litigation
3. In distraint of levy, the BIR officer
can’t locate the property
CLAIM FOR REFUND (SEC 229)
Written claim for refund:
1. Sec. 229, NIRC
2. Sec. 112, VAT
3. Sec. 136, Local Tax
4. Sec. 253, Real Property Tax
5. None except sec. 1603, Tariff and
Custom
Written claim for refund under the
input tax (Sec. 112)
► Period is also 2 years from the close of
the taxable quarter when the transaction
was made
Q: Can we apply §229 to VAT?
A: Yes, because there is no conflict. §112 is
refund under input tax system.
§229 is refund for:
1. errors in payment or;
2. collected without authority; or
3. assessment without authority.
► The period to claim refund is 2years.
Doctrine of Equitable Recoupment
► If a taxpayer is entitled to a written
claim for refund but the prescriptive period
to claim has lapsed, the taxpayer is allowed
to credit his written claim for refund which
he failed to recover to his existing tax
liability.
Computed from;
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a. Individual – counted on the day the
tax has been paid
1. paying by way of withholding tax
system, the reckoning point is
the end of the taxable year.
2. paying by way of installment,
reckoning point is the date the
last installment is paid.
3. if sold to public auction through
distraint or levy, the date the
proceeds is applied to the
satisfaction of the tax liability.
b. Corporation
1. Existing
- 1992, *** v. Commissioner (205
SCRA 184)
- 1995, Commissioner v. Philam
life (244 SCRA 446)
- 1998, Commissioner v. CTA (301
SCRA 435)
2. Non-existing
- 2001, BPI v. Commissioner (363
SCRA 840)
1. Existing – the counting of the
prescriptive period is 2 years on the
day the annual adjusted return is
filed, because it is at that day that
the tax liability is known.
2. Non-existing – the counting of the
prescriptive period should also be
reckoned on the day the annual
return is filed. But the corporation is
no longer required to wait till the
taxable period is over to file the
return. Upon receipt of a notice
from the SEC to dissolve the
corporation, within 30 days
thereafter, a return should be filed.
A: Appeal within 30days from the decision,
provided it is still within the 2 year period.
Q: Suppose there is only 21days remaining
after receiving the decision, when to file an
appeal?
A: Within 21days before the end of the 2
year period.
► A written claim for refund should be filed
within 2 years
► Sec 204 (c) last phrase: in case of over
payment a written claim is not necessary
because a return constitutes a written claim
for refund.
Q: May the commissioner of internal
revenue open the bank account of a
taxpayer?
A: General Rule: NO. EXCEPT:
1. To determine the gross value of the
estate; and
2. To enter into a compromise
agreement. (under §204(A))
► The written claim for refund to
determine the gross value of the estate
because the taxpayer is already dead
In case of compromise, there must be
consent.

Q: Suppose there is a supervening event,

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

Q: Suppose the 2 year period is about to

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

Q: Suppose the BIR decided within 2 years

against the refund?

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