PRIMUS PRE-BAR REVIEW DIVISION

BAR STAR NOTES

TAXATION
VER. 2010.08.12
copyrighted 2010
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker,
Management Consultant, Professor of Law and Pre-Bar Reviewer)
How to use the BAR STAR NOTES. The BAR STAR NOTES in the form of questions
and answers as well as textual discussion were specially prepared by Prof. Domondon for the
exclusive use of Bar Reviewees who attended the 2010 Wrap-Up Lectures on TAXATION
conducted by Primus Information, Center, Inc., and the Bar Reviewees of various law schools
and Review Centers where he was invited to lecture on Taxation. Included in the presentation
are doctrines contained in Supreme Court decisions up to April 2010.
The purpose of the BAR STAR NOTES is to provide the Bar Reviewee with a handy
review material which serves as memory-joggers for the September 12, 2010 Bar
Examinations in Taxation. The author tries to second guess what would be included in the Bar
Exams using statistical analysis. The actual Bar questions may not be formulated in the same
manner as the BAR STAR NOTES. However, the doctrines tested in the Bar would in all
probability be included in these Notes.
If pressed for time, the author suggests that the reader should focus his attention on the
following:

Nice to know

Should know

Must know and master

It is further suggested that the reader should merely browse those without stars.
The BAR STAR NOTES in TAXATION is the 4th in the series of Bar Star Notes the
author has prepared for all the eight Bar subjects. The other Bar Star Notes may be availed of
by enrolling in the 2010 Wrap-Up lectures conducted by PRIMUS INFORMATION CENTER,
INC. Please feel free to call Baby, Tel. No. 816-07-68 or 817-84-49; Leon, Mobile No. 0917-7936169; Atty. Celia, Mobile No. 0917-790-8406, or Venny, Mobile No. 0917-337-6479.
WARNING:
These materials are copyrighted and/or based on the writers books on Taxation and
future revisions. It is prohibited to reproduce any part of these Notes in any form or any means,
electronic or mechanical, including photocopying without the written permission of the author.
These materials are authorized for the use only of PRIMUS Reviewees and others who
attended the authors lectures on Taxation. Unauthorized users shall not be prosecuted but
SHALL BE SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER PASS THE
BAR OR WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of the author.
THE BEST OF LUCK AND ADVANCE CONGRATULATIONS

TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
1.
State briefly and concisely the nature of taxation. Alternatively, define taxation.
SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature
to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising
revenues to carry out the legitimate objects of government.
2.

What is the nature of the States power to tax ? Explain briefly.

SUGGESTED ANSWER: The nature of the states power to tax is two-fold. It is both an
inherent power and a legislative power.
It is inherent in nature being an attribute
of sovereignty. This is so, because without the taxes, the states existence would be imperiled.
There is thus, no need for a constitutional grant for the state to exercise this power.
It is a legislative power because it involves the promulgation of rules. Taxation is a set of rules,
how much is the tax to be paid, who pays the tax, to whom it should be paid, and when the tax
should be paid.
3.

What is the underlying theory of taxation ? Explain briefly.

SUGGESTED ANSWER: Taxes are the lifeblood of the nation.
Without revenue
raised from taxation, the government will not survive, resulting in detriment to society. Without
taxes, the government would be paralyzed for lack of motive power to activate and operate it.
(Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17)
4.
Marshall said that, the power to tax involves the power to destroy. On the other
hand, Holmes stated that the power to tax is not the power to destroy while the court
sits.
Reconcile the statements.
In the alternative, what are the implications that flow from the above statements ?
SUGGESTED ANSWERS: Marshalls view refers to a valid tax while the Holmes view refers to
an invalid tax.
a.
The imposition of a valid tax could not be
judicially restrained merely because it would prejudice taxpayers property.
b.
An illegal tax could be judicially declared invalid and should not work to prejudice a
taxpayers property.
5.
Discuss briefly the basis/bases, or rationale of taxation.
SUGGESTED ANSWER: a.
Reciprocal duties of protection and support between the
state and its citizens and residents. Also called symbiotic relation between the state
and its citizens.
b.
Jurisdiction by the state over persons and property within its territory.
6.
Discuss briefly but comprehensively the objectives or purposes of taxation.
SUGGESTED ANSWER: The purposes or objectives of taxation are the following:
a.
The primary purpose:
1)
Revenue purpose.
b.
The secondary purposes
1)
Sumptuary or regulatory purpose.
2)
Compensatory purpose.
3)
To implement the
power of eminent domain.
7.

Distinguish a tax from a license fee.

SUGGESTED ANSWER: The following are the distinctions:

a.
Purpose: Tax imposed for revenue while license fee for regulation. Tax for general
public
purposes
while
license
fee
for
regulatory
purposes
only.
b.
Basis: Tax imposed under power of taxation while license fee under police power.
c.
Amount: In taxation, no limit as to amount while license fee limited to cost of the
license
and
the
expenses
of
police
surveillance
and
regulation.
d.
Time of payment: Taxes normally paid after commencement of business while license
fee before.
e.
Effect of payment: Failure to pay a tax does not
make the business illegal while failure to pay license fee makes business illegal.
f.
Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for lawful
consideration while a license fee may be surrendered with or without consideration. (Cooley on
Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)
8.
How may the power to tax be utilized to carry out the social justice program of
our government ?
SUGGESTED ANSWER: The compensatory purpose
of taxation is to implement the social justice provisions of the constitution through the
progressive system of taxation, which would result to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No.
158540, August 3, 2005)
In recent years, the increasing social challenges of the times expanded the scope of the
state activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as public
welfare and similar objectives.
(Batangas Power Corporation v. Batangas City, et al., G. R.
No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of
Cabanatuan, G. R. No. 149110, April 9, 2003)
9.
Explain the sumptuary purpose of taxation.
SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general
welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise of
the power of taxation and police power where regulatory taxes are collected.
Taxation may be made the implement of the states police power. The motivation behind
many taxation measures is the implementation of police power goals. [Southern Cross Cement
Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540,
August 3, 2005) The reader should note that the August 3, 2005 Southern Cross case is the
decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision.
The so-called sin taxes on alcohol and tobacco manufacturers help dissuade the
consumers from excessive intake of these potentially harmful products. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No.
158540, August 3, 2005)
10.
Taxation distinguished from police power. Taxation is distinguishable from police
power as to the means employed to implement these public goals. Those doctrines that are
unique to taxation arose from peculiar considerations such as those especially punitive effects
(Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines,
et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy and
the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the
government, their prompt and certain availability is of the essence.
These considerations necessitated the evolution of taxation as a distinct legal concept
from police power. (Ibid.)

11.
How the power of taxation may be used to implement power of eminent domain.
Tax measures are but enforced contributions exacted on pain of penal sanctions and clearly
imposed for public purpose. In most recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and the equitable distribution of wealth.
(Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April
16, 2005)
Establishments granting the 20% senior citizens discount may claim the discounts
granted to senior citizens as tax deduction based on the net cost of the goods sold or services
rendered: Provided, That the cost of the discount shall be allowed as deduction from gross
income for the same taxable year that the discount is granted. Provided, further, That the total
amount of the claimed tax deduction net of value added tax if applicable, shall be included in
their gross sales receipts for tax purposes and shall be subject to proper documentation and to
the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation
v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act
of 2003, Sec. 4 (a)]
12. What are the three basic principles of a sound tax system? Explain each briefly.
SUGGESTED ANSWER: The canons of a sound tax system, also known as the characteristics
or, principles of a sound tax system, are used as a criteria in order to determine whether a tax
system is able to meet the purposes or objectives of taxation. They are:
a.
Fiscal adequacy.
b.
Administrative feasibility.
c.
Theoretical justice.
13. What are the elements or characteristics of a tax ?
SUGGESTED ANSWER:
a.
Enforced contribution.
b.
Generally payable in money.
c.
Proportionate in character.
d.
Levied on persons, property or exercise of a right or privilege.
e.
Levied by the state having jurisdiction.
f.
Levied by the legislature.
g.
Levied for a public purpose.
h.
Paid at regular periods or intervals.
14. State the requisites of a valid tax.
SUGGESTED ANSWER:
a.
A valid tax should be within the jurisdiction of the taxing authority.
b.
That the assessment and collection of certain kinds (The same as the inherent
limitations of the power of taxation) should be for a public purpose.
c.
The rule of taxation should be uniform.
d.
That either the person or property of taxes guarantees against injustice to
individuals, especially by way or notice and opportunity for hearing be provided.
e.
The tax must not impinge on the inherent and Constitutional limitations on the power
of taxation.
15. What are the classes or kinds of taxes according to the subject matter or object ?
SUGGESTED ANSWER:
a.
Personal, poll
or capitalization imposed on all residents, whether citizen or not. Example Community Tax.

b.
Property Imposed on property.
Example Real property tax.
c.
Excise imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in an occupation. Example income tax, estate tax.
16. What are the kinds of taxes classified as to who bears the burden? Explain each
briefly.
SUGGESTED ANSWER: Based on the possibility of shifting the
incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified
into:
a.
Direct taxes. Those that are extracted from the very person who, it is intended or
desired, should pay them (Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, G. R. No. 140230, December 15, 2005); they are impositions for which a
taxpayer is directly liable on the transaction or business he is engaged in, (Commissioner of
Internal Revenue v. Philippine Long Distance Telephone Company, supra)
which liability
cannot be shifted or transferred to another. Example income tax, estate tax, donors tax, etc.
b.
Indirect taxes are those that are demanded in the first instance, from, or are paid
by, one person in the expectation and intention that he can shift the burden to (Commissioner of
Internal Revenue v. Philippine Long Distance Telephone Company, supra) to someone else not
as a tax but as part of the purchase price. (Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various
cases and authorities) Example value added tax (VAT), documentary stamp tax, excise tax,
percentage tax, etc.
17.
Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from
Petron Corporation, which it uses for its operations. It now claims for refund or tax credit for the
excise taxes it paid claiming that it is exempt from the payment of excise taxes under the
provisions of Sec. 135 of the NIRC of 1997 which provides that petroleum products are exempt
from excise taxes when sold to
Exempt entities or agencies covered by tax treaties,
conventions, and other international agreements for their use and consumption: Provided,
however, That the country of said foreign international carrier or exempt entities or agencies
exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies
Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between
the Government of the Republic of the Philippines and the Government of the Republic of
Singapore (Air Transport Agreement between RP and Singapore) which reads: Fuel, lubricants,
spare parts, regular equipment and aircraft stores introduced into, or taken on board aircraft in
the territory of one Contracting party by, or on behalf of, a designated airline of the other
Contracting Party and intended solely for use in the operation of the agreed services shall, with
the exception of charges corresponding to the service performed, be exempt from the same
customs duties, inspection fees and other duties or taxes imposed in the territories of the first
Contracting Party , even when these supplies are to be used on the parts of the journey
performed over the territory of the Contracting Party in which they are introduced into or taken
on board. The materials referred to above may be required to be kept under customs
supervision and control.
Silkair likewise argues that it is exempt from indirect taxes because the Air Transport
Agreement between RP and Singapore grants exemption from the same customs duties,
inspection fees and other duties or taxes imposed in the territory of the first Contracting Party. It
invokes Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld
the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that
the NPC is exempt even from the payment of indirect taxes.
Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following
reasons:

a.
The excise tax on aviation fuel is an indirect tax. The proper party to question, or
seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the burden thereof to another.
(Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028, July 29,
2005, 465 SCRA 308, 317-318)
The NIRC provides that the excise tax should be paid by the
manufacturer or producer before removal of domestic products from place of production. Thus,
Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based
on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP
and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount
billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a
purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127 Phil. 461,
470 (1967)]
b.
Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31,
1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power
Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect
taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R.
No. 140230, December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling in
Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held that
an exemption from all taxes granted to the National Power Corporation (NPC) under its charter
includes both direct and indirect taxes.
An exemption from all taxes excludes indirect taxes, unless the exempting statute, like NPCs
charter, is so couched as to include indirect tax from the exemption. The amendment under
Republic Act No. 6395 enumerated the details covered by NPCs exemption. Subsequently,
P.D. 380, made even more specific the details of the exemption of NPC to cover, among others,
both direct and indirect taxes on all petroleum products used in its operation. Presidential
Decree No. 938 [NPCs amended charter] amended the tax exemption by simplifying the same
law in general terms. It succinctly exempts NPC from all forms of taxes, duties, fees The
use of the phrase all forms of taxes demonstrates the intention of the law to give NPC all the
tax exemptions it has been enjoying before.
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore cannot, without a clear showing of legislative
intent, be construed as including indirect taxes. Statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority,
and if an exemption is found to exist, it must not be enlarged by construction. (Silkair
(Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594, February 6,
2008)
18. What
are
the
different
kinds
of
taxes
classified
as
to
purpose
?
SUGGESTED ANSWER:
a.
General,
fiscal or revenue imposed for the purpose of raising public funds for the service of the
government.
b.
Special or regulatory imposed primarily for the
regulation of useful or non-useful occupation or enterprises and secondarily only for the raising
of public funds.
LIMITATIONS OR RESTRICTIONS ON THE POWER
1.
Purpose for the limitations on the power of taxation.
The inherent and constitutional limitations to the power of taxation are safeguards which would
prevent abuse in the exercise of this otherwise unlimited and plenary power.

The limitations also serve as a standard to measure the validity of a tax law or the act of a
taxing authority. A violation of the limitations serves to invalidate a tax law or act in the exercise
of the power to tax.
INHERENT LIMITATIONS
1. What are the inherent limitations on the power of taxation ?
SUGGESTED ANSWERS:
a.
Public purpose. The revenues collected from taxation should be devoted to a
public purpose.
b.
No improper delegation of legislative authority to tax. Only the legislature can
exercise the power of taxes unless the same is delegated to some other governmental body by
the constitution or through a law which does not violate any provision of the constitution.
c.
Territoriality. The taxing power should be exercised only within territorial
boundaries of the taxing authority.
d.
Recognition of government exemptions; and
e.
Observance of the principle of comity. Comity is the respect accorded by
nations to each other because they are equals. On the other hand taxation is an act of
sovereign. Thus, the power should be imposed upon equals out of respect.
Some authorities include no double taxation.
2.
What are the principles to consider in the determination of whether tax revenues
are devoted for a public purpose ?
SUGGESTED ANSWER:
a.
The tax revenues are for a public purpose if utilized for the benefit of the
community in general. An alternative meaning is that tax proceeds should be utilized only to
attain the objectives of government.
b.
Inequalities resulting from the singling out of one particular class for taxation or
exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax that the legislature is free to select the
subjects of taxation.
BASIS: The lifeblood theory.
c.
An individual taxpayer need not derive direct benefits from the tax.
REASON: The paramount consideration is the welfare of the greater portion of the
population.
d.
A tax may be imposed, not so much for revenue purposes, but under
police power for the general welfare of the community. This would still be for a public purpose.
e.
Public purpose continually expanding. Areas formerly left to private
initiative now lose their boundaries and may be undertaken by the government if it is to meet the
increasing social challenges of the times.
f.
Tax revenue must not be used for purely private purposes or for the
exclusive benefit of private persons.
g.
Private persons may be benefited but such benefit should be merely incidental
as its main object is the benefit of the community in general.
h.
Determined at the time of enactment of tax law and not at the time of
implementation.
i.
There is a presumption of public purpose even if the tax law does not specifically
provide for its purpose. (Santos & Co., v. Municipality of Meycauayan, et al., 94 Phil. 1047)
j. Public use is no longer confined to the traditional notion of use by the public but held
synonymous with public interest, public benefit, public welfare, and public convenience.

(Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April
16, 2005)
3. A law was enacted imposing a tax on manufacturers of coconut oil, the proceeds of
which are to be used exclusively for the protection and promotion of the coconut industry,
namely, to improve the working conditions in coconut mills and to conduct research on the use
of coconut oil for motor fuel. Some of the manufacturers of coconut oil challenge the validity of
the law, contending that the tax is to be used for a private purpose, and therefore, the law
violates the rule that public revenues shall not be appropriated for anything but a public
purpose. Decide with reason.
SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied that the
coconut industry is one of the major industries supporting the national economy. It is, therefore,
the states concern to make it a strong and secure source not only of the livelihood of the
significant segment of the population, but also of export earnings, the sustained growth of
which is one of the imperatives of economic growth. (Philippine Coconut Producers
Federation, Inc. (Cocofed v. Presidential Commission on Good Government, 178 SCRA 236,
252)
4.
Requisites for taxpayers, concerned citizens, voters or legislators to have locus
standi to sue.
a.
In general, the case should involve constitutional issues. (David, et al., v.
President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)
b.
For taxpayers, there must be a showing:
1)
That tax money is being extracted and spent in violation of specific
constitutional protections against abuses of
legislative power. (Flast v. Cohen, 392 U.S.
83)
2)
That public money is being deflected to any
improper
purpose (Pascual v. Secretary of Public Works, 110
Phil. 33) or a
claim of illegal
disbursement of public funds
or that the tax measure is unconstitutional. (David, supra)
3)
A taxpayer is allowed to sue where there is a
claim
that public
funds are illegally disbursed, or that public
money is being deflected to any improper
purpose, or that
there is a wastage of
public funds through the enforcement of
an
invalid or
unconstitutional law. (Abaya v. Ebdane, G. R.
No. 167919, February
14,
2007; Garcia v. Enriquez, Jr. G.R.
No. 112655 December 9,
1993, Minute
Resolution)
A taxpayers suit is properly brought only when there
is
an exercise of
the spending or taxing power of
Congress.
(Automotive Industry Workers Alliance
(AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No.
157509,
January 18, 2005
citing Gonzales v. Narvasa, G.
R. No. 140835, August 14, 2000, 337 SCRA
733, 741)
c.
For voters, there must be a showing of obvious interest in the validity of the
election law in question.
d.
For concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early.
e.
For legislators, there must be a claim that the official action complained of
infringes upon their prerogatives as legislators. (David, et al., v. President Gloria MacapagalArroyo, etc., et al., G. R. No. 171396, May 3, 2006)
5.
Only those directly affected have locus standi to impugn the alleged
encroachment by the executive department into the legislative domain of Congress.

a.
Only those who shall be directly affected by such executive encroachment, such
as for example employees who would find themselves subject to disciplinary powers that may
be imposed under the questioned Executive Order as they have a direct and specific interest in
raising the substantive issue therein (Automotive Industry Workers Alliance (AIWA),etc., et al., v.
Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005) or employees who are going to be
demoted, transferred or otherwise affected by any personnel action subject o the rule on
exhaustion of administrative remedies.
b. Moreover, and if at all, only Congress, can claim any injury from the alleged
executive encroachment of the legislative function to amend, modify and/or repeal laws.
(Automotive Industry Workers Alliance (AIWA),etc., et al., supra, citing Gonzales v. Narvasa, G.
R. No. 140835, August 14,2000, 337 SCRA 733, 741)
6.
Locus standi being merely a matter of procedure, have been waived in certain
instances where a party who is not personally injured may be allowed to bring suit. The
following are examples of instances where suits have been brought by parties who have not
have been personally injured by the operation of a law or any other government act but by
concerned citizens, taxpayers or voters who actually sue in the public interest:
a.
Taxpayers suits to question contracts entered into by the national government
or government-owned or controlled corporations allegedly in contravention of the law.
b.
A taxpayer is allowed to sue where there is a claim that public funds are illegally
disbursed, or that public money is being deflected to any improper purpose, or that there is a
wastage of public funds through the enforcement of an invalid or unconstitutional law. (Abaya v.
Ebdane, G. R. No. 167919, February 14, 2007)
7. The VAT law provides that, the President, upon the recommendation of the Secretary
of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%) after any of the following conditions have been satisfied. (i) value-added tax collection
as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and fourfifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1 %).
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of legislative power but
only of the discretion as to the execution of the law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority. In the above
case the Secretary of Finance becomes merely the agent of the legislative department, to
determine and declare the even upon which its expressed will takes place. The President
cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting
as the execute alter ego or subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al.,
G. R. No. 168056, September 1, 2005 and companion cases citing various cases]]
8. Instances of proper delegation: When taxing power could be delegated: Exceptions
to the rule on non-delegation:
a. Delegation of tariff powers by Congress to the President under the flexible tariff
clause, Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to the President under Section 23 (2) of Article VI
of the Constitution.
c. The delegation to the President of the Philippines to enter into executive
agreements, and to ratify treaties which may contain tax exemption provisions subject to the
concurrence by the Senate in the ratification made by the President.
d. Delegation to the people at large.

e. Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS),

etc., v, Ermita, et al., G. R. No.168056, September 1, 2005], which is referred to as subordinate
legislation.
In this instance, there is a requirement that the law is complete in all aspects so what is
delegated is merely the implementation of the law or there exists sufficiently determinate
standards to guide the delegate and prevent a total transference of the taxing power.
9.
Paradigm shift from exclusive Congressional power to direct grant of taxing
power to local legislative bodies. The power to tax is no longer vested exclusively on Congress;
local legislative bodies are now given direct authority to levy taxes, fees and other charges
pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v.
Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National
Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
Local government legislation, is not regarded as a transfer of general legislative power, but
rather as the grant of authority to prescribe local regulations, according to immemorial practice,
subject, of course, to the interposition of the superior in cases of necessity. (People v. Vera, 65
Phil. 56)
10.
Taxing power of the local government is limited. The taxing power of local
governments is limited in the sense that Congress can enact legislation granting tax
exemptions.
While the system of local government taxation has changed with the onset of the 1987
Constitution, the power of local government units to tax is still limited.
While the power to tax by local governments may be exercised by local legislative bodies,
no longer merely by virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains
essentially the same, the power to tax is [still] primarily vested in the Congress. (Quezon City,
et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March
6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v.
Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)
11.
Further amplification by Bernas of the local governments power to tax. What is
the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not
change the doctrine that municipal corporations do not possess inherent powers of taxation.
What it does is to confer municipal corporations a general power to levy taxes and otherwise
create sources of revenue. They no longer have to wait for a statutory grant of these powers.
The power of the legislative authority relative to the fiscal powers of local governments has been
reduced to the authority to impose limitations on municipal powers. Moreover, these limitations
must be consistent with the basic policy of local autonomy. The important legal effect of
Section 5 is thus to reverse the principle that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts
will be resolved in favor of municipal corporations. It is understood, however, that taxes
imposed by local government must be for a public purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the local unit to pass. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government
of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484
SCRA 169)
12.
Reconciliation of the local governments authority to tax and the Congressional
general taxing power. Congress has the inherent power to tax, which includes the power to

grant tax exemptions. On the other hand, the power of local governments, such as provinces
and cities for example Quezon City, to tax is prescribed by Section 151 in relation to Section
137 of the LGC which expressly provides that notwithstanding any exemption granted by any
law or other special law, the City or a province may impose a franchise tax. It must be noted
that Section 137 of the LGC does not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of Congress to grant
tax exemptions over and above the power of the local governments delegated power to tax.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No.
162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local government units under the Constitution and
the LGC does not affect the power of Congress to grant exemptions to certain persons,
pursuant to a declared national policy. The legal effect of the constitutional grant to local
governments simply means that in interpreting statutory provisions on municipal taxing powers,
doubts must be resolved in favor of municipal corporations. [Ibid., referring to Philippine Long
Distance Telephone Company, Inc. (PLDT) vs. City of Davao]
13. General principles of income taxation in the Philippines or the source rule of
income taxation as provided in the NIRC of 1997.
a. A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
b.
A nonresident citizen is taxable only on income derived from sources within the
Philippines;
c. An individual citizen of the Philippines who is working and deriving income abroad as an
overseas contract worker is taxable only on income from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker;
d.
An alien individual, whether a resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines;
e. A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines. (Sec. 23, NIRC of 1997,
emphasis supplied)
14.
Juliane a non-resident alien appointed as a commission agent by a domestic
corporation with a sales commission of 10% all sales actually concluded and collected through
her efforts. The local company withheld the amount of P107,000 from her sales commission
and remitted the same to the BIR.
She filed a claim for refund alleging that her sales commission is not taxable because the
same was a compensation for her services rendered in Germany and therefore considered as
income from sources outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor which determines the source of
income of personal services is not the residence of the payor, or the place where the contract
for service is entered into, or the place of payment, but the place where the services were
actually performed.
Since the activity of securing the sales were in Germany, then the income did not
originate from sources from within the Philippines. (Commissioner of Internal Revenue v. BaierNickel, G. R. No. 153793, August 29, 2006)

 15. Ensite, Ltd.. is a Canadian corporation not doing business in the Philippines. It
holds 40% of the shares of Philippine Stamping Plant, Inc.,., a Philippine company while the
60% is owned by Fred Corporation, a Filipino-owned Philippine corporation. Ensite Co. also
owns 100% of the shares of Susanto Co., an Indonesian company which has a duly licensed
Philippine branch. Due to worldwide restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided
to sell all its shares in Philippine Stamping Plant, Inc. and Susanto Co. The negotiations for the
buy-out and the signing of the Agreement of Sale were all done in the Philippines. The
Agreement provides that the purchase price will be paid to Ensite Ltds bank account in the U.S.
and that title to the Philippine Stamping Plant, Inc. and Susanto Co. shall be transferred to
General Co., in Toronto Canada where stock certificates will be delivered. General Co. seeks
your advice as to whether or not it will subject the payments of the purchase price to withholding
tax. Explain your advice.
SUGGESTED ANSWER: The payments of the
purchase price will be subject to withholding tax. Considering that all the activities (sales)
occurred within the Philippines, the income is considered as income from within, subject to
Philippine income taxation. Ensite, Ltd. being a foreign corporation is to be taxed on its income
derived
from
sources
within
the
Philippines.
16. Ensite, Ltd. is a Canadian corporation, which has a duly licensed Philippine branch
engage in trading activities in the Philippines. Ensite, Ltd.. also invested directly in 40% of the
shares of stock of Philippine Stamping Plant, Inc.., a Philippine corporation. These shares are
booked in the Head Office of Ensite, Ltd.. and are not reflected as assets of the Philippine
branch. In 2009, Philippine Stamping Plant, Inc.. declared dividends to its stockholders. Before
remitting the dividends to Ensite Ltd.,., Philippine Stamping Plant, Inc. Co. seeks your advice as
to whether it will subject the remittance to withholding tax. There is no need to discuss WT
rates,
if
applicable.
Focus
your
discussion
on
what
is
the
issue.
SUGGESTED ANSWER: Philippine Stamping Plant, Inc.. should subject the remittance to
withholding tax.. Since Philippine Stamping Plant. is a Philippine corporation, its shares of stock
have obtained a business situs in the Philippines, hence the dividends are considered as
income from within. Ensite. Ltd., being a foreign corporation, should be subject to tax on its
income from within.
17. Philippine Stamping Plant, Inc., a Philippine corporation, has an executive Larry
who is a Filipino citizen. Philippine Stamping Plant, Inc,. has a subsidiary in Malaysia (Kuala
Lumpur Manufacturing, Inc.) and will assign Larry for an indefinite period to work full time for
Kuala Lumpur Manufacturing, Inc.. Larry will bring his family to reside in Malaysia and will lease
out his residence in the Philippines. The salary of Larry will be shouldered 50% by Philippine
Stamping Plant, Inc.. while the other 50% plus housing, cost of living and educational
allowances of Larrys dependents will be shouldered by Kuala Lumpur Manufacturing, Inc..
Philippine Stamping Plant, Inc.. will credit the 50% of Larrys salary to his Philippine bank
account. Larry will sign the contract of employment in the Philippines. He will also be receiving
rental
income
for
the
lease
of
his
Philippine
residence.
Are these salaries, allowances and rentals subject to Philippine income tax? Explain briefly.
SUGGESTED ANSWER: The salaries and allowances of Larry, being derived from labor or
personal services rendered outside of the Philippines is considered as income from without.
Since Larry is an OCW, then he is to be taxed only on his income derived from within the
Philippines such as the rentals on his Philippine residence, and not on his income from without.
18.
Obama Airlines, Inc., a foreign airline company which does not maintain any
flight to and from the Philippines sold air tickets in the Philippines, through a general sales
agent, relating to the carriage of passengers and cargo between two points, both outside the
Philippines.
a.
Is Obama, Inc., subject to income taxes on the sale of the tickets ?

SUGGESTED ANSWER: Yes. The source of income which is taxable is that activity
which produced the income. The sale of tickets in the Philippines is the activity that
determines whether such income is taxable in the Philippines.
The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines. the flow of wealth
proceeded from and occurred, within the Philippine territory, enjoying the protection accorded by
the Philippine Government. In consideration of such protection, the flow of wealth should share
the burden of supporting the government. [Commissioner of Internal Revenue v. British
Overseas Airways Corporation (BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in the Philippines are engaged in or doing
business in the Philippines and their income from sales of passage documents here is income
from within the Philippines. Thus, the off-line air carrier liable for the 32% (now 30%) tax on its
taxable income. [South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356,
February 16, 2010 citing Commissioner of Internal Revenue v. British Overseas Airways
Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA 395]
b.
Supposing that Obama, Inc., sells tickets outside of the Philippines for
passengers it carry from Gold City, South Africa to the Philippines but returns to South Africa
without any cargo or passengers. Would it then be subject to any Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any
income tax because the activity which generated the income (the sale of the tickets) was
performed outside of the Philippines.
It is not subject to the carriers tax based on gross Philippine billings because there were no lifts
that originated from the Philippines. Gross Philippine Billings refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and
the place of payment of the ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]
c.
Would your answer be the same if Obama, Inc. sold tickets outside of the
Philippines for travelers who are going to picked up by Obama, Inc., planes from the Diosdado
Macapagal Intl. Airport at Clark, Angeles, Pampanga, bound for Nairobi, Kenya ? Reason out
your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the
carriers tax based on Gross Philippine Billings. (GPB).
Gross Philippine Billings refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the
ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur from the
Philippines, income is included in GPB. (South African Airways v. Commissioner of Internal
Revenue, G.R. No. 180356, February 16, 2010)
19.
No improper delegation of legislative authority to tax. The power to tax is
inherent in the State, such power being inherently legislative, based on the principle that taxes
are a grant of the people who are taxed, and the grant must be made by the immediate
representatives of the people; and where the people have laid the power, there it must remain
and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R.
Nos. 167274-75, July 21, 2008)
CONSTITUTIONAL LIMITATIONS
1.
Constitutional limitations on the power of taxation . The general or indirect
constitutional limitations as well as the specific or direct constitutional limitations.

2. The general or indirect constitutional limitations on the power of taxation are:

a.
Due process clause;
b.
Equal protection clause;
c.
Freedom of the press;
d.
Religious freedom;
e.
No taking of private property without just compensation;
f.
Non-impairment clause;
g.
Law-making process:
1)
Bill should embrace only one subject
expressed
in the title thereof;
2)
Three (3) readings on three separate days;
3)
Printed copies in final form distributed three
(3) days before passage.
h.
Presidential power to grant reprieves, commutations and pardons and remittal of
fines and forfeiture after conviction by final judgment.
3.
The specific or direct constitutional limitation.
a.
No imprisonment for non-payment of a poll tax;
b.
Taxation shall be uniform and equitable;
c.
Congress shall evolve a progressive system of taxation;
d.
All appropriation, revenue or tariff bills shall originate exclusively in the House of
Representatives, but the Senate may propose and concur with amendments;
e. The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he
does not object;
f.
Delegated power of the President to impose tariff rates, import and export
quotas, tonnage and wharfage dues:
1)
Delegation by Congress
2)
through a law
3)
subject to Congressional limits and
restrictions
4)
within the framework of national development program.
g.
Tax exemption of charitable institutions, churches, parsonages and convents
appurtenant thereto, mosques, and all lands, buildings and improvements of all kinds actually,
directly and exclusively used for religious, charitable or educational purposes;
h.
No tax exemption without the concurrence of majority vote of all members of
Congress;
i.
No use of public money or property for religious purposes except if priest is
assigned to the armed forces, penal institutions, government orphanage or leprosarium;
j.
Money collected on tax levied for a special purpose to be used only for such
purpose, balance if any, to general funds;
k.
The Supreme Court's power to review judgments or orders of lower courts in all
cases involving the legality of any tax, impose, assessment or toll or the legality of any penalty
imposed in relation to the above;
l.
Authority of local government units to create their own sources of revenue, to
levy taxes, fees and other charges subject to guidelines and limitations imposed by Congress
consistent with the basic policy of local autonomy;
m.
Automatic release of local government's just share in national taxes;
n.
Tax exemption of all revenues and assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative educational
institutions subject to limitations provided by law including restrictions on dividends and
provisions for reinvestment of profits;

p.
Tax exemption of grants, endowments, donations or contributions used actually,
directly and exclusively for educational purposes subject to conditions prescribed by law.
5.
Equal protection of the law clause is subject to reasonable classification. If the
groupings are characterized by substantial distinctions that make real differences, one class
may be treated and regulated differently from another. The classification must also be germane
to the purpose of the law and must apply to all those belonging to the same class. (Tiu, et al., v.
Court of Appeals, et al., G.R. No. 127410, January 20, 1999)
6.
Requisites for valid classification. All that is required of a valid classification is
that it be reasonable, which means that
a.
the classification should be based on
substantial distinctions which make for real differences,
b.
that it must be germane to the purpose of the law;
c.
that it must not be limited to existing conditions only; and
d.
that it must apply equally to each member of the class.
The standard is satisfied if the classification or distinction is based on a reasonable
foundation or rational basis and is not palpably arbitrary. [ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008]
7.
Equal protection does not demand absolute equality. It merely requires that all
persons shall be treated alike, under like circumstances and conditions, both as to the privileges
conferred and liabilities enforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
It is imperative to duly establish that the one invoking equal protection and the person to
which she is being compared were indeed similarly situated, i.e., that they committed identical
acts for which they were charged with the violation of the same provisions of the NIRC; and that
they presented similar arguments and evidence in their defense - yet, they were treated
differently. (Santos, supra)
8.
Tests to determine validity of classification.
The United States Supreme Court
has established different tests to determine the validity of a classification and compliance with
the equal protection clause. The recognized tests are:
a.
The traditional (or rational basis) test.
b.
The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class) test.
9.
The traditional (or rational basis) test used in order to determine the validity of
classification. The classification is valid if it is rationally related to a constitutionally permissible
state interest.
The complainant must prove that the classification is invidous, wholly arbitrary, or
capricious, otherwise the classification is presumed to be valid. (Lindsley v. Natural Carboinic
Gas Co., 220 U.S. 61; McGowan v. Maryland, 366 U.S. 420; United States Railroad Retirement
Board v. Fritz, 449 U.S. 166)
10.
The strict scrutiny (or compelling interest) test used in order to determine the
validity of the classification. Government regulation that intentionally discriminates against a
suspect class such as racial or ethnic minorities, is subject to strict scrutiny and considered to
violate the equal protection clause unless found necessary to promote a compelling state
interest.
A classification is necessary when it is narrowly drawn so that no alternative, less
burdensome means is available to accomplish the state interest.
Thus, it was held that denial of free public education to the children of illegal aliens
imposes an enormous and lasting burden based on a status over which the children have no

control is violative of equal protection because there is no showing that such denial furthers a
substantial state goal. (Plyler v. Doe, 457 U.S. 202)
11.
The intermediate level of scrutiny (or quasi-suspect class) test used in order to
determine the validity of he classification. Classification based on gender or legitimacy are not
suspect, but neither are they judged by the traditional or rational basis test.
Intentional discriminations against members of a quasi-suspect class violate equal
protection unless they are substantially related to important government objectives. (Craig v.
Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows, but not widowers, has
been held valid for it furthers the state policy of cushioning the financial impact of spousal loss
upon the sex for whom that loss usually imposes a heavier burden. (Kahn v. Shevin, 416 U.S.
351)
12.
Equality and uniformity of taxation may mean the same as equal protection. In
such a case, the terms would mean that all subjects and objects of taxation which are similarly
situated shall be subject to the same burdens and granted the same privileges without any
discrimination whatsoever.
13.
It is inherent in the power to tax that the State be free to select the subjects of
taxation, and it has been repeatedly held that, "inequalities which result from a singling out of
one particular class of taxation, or exemption, infringe no constitutional limitation."
(Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)
9. Benjie is a law-abiding citizen who pays his real estate taxes promptly. Due to a
series of typhoons and adverse economic conditions, an ordinance is passed by Soliman City
granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the
condonation of all penalties on fines resulting from the late payment.
Arguing that the ordinance rewards delinquent tax payers and discriminates against
prompt ones, Benjie demands that he be refunded an amount equivalent to one-half of the real
property taxes he paid. The municipal attorney rendered an opinion that Benjie cannot be
reimbursed because the ordinance did not provide for such reimbursement. Benjie files suit to
declare the ordinance void on the ground that it is a class legislation. Will his suit prosper ?
Explain your answer briefly.
SUGGESTED ANSWER: No. There is no class legislation because there is no violation
of the equal protection suit. There is a valid classification between those who already paid their
taxes and those who have not. Furthermore, the taxing authority has the prerogative to select
the subjects and objects of taxation, including granting a 50% discount in the payment of
unpaid real estate taxes, and the condonation of all penalties on fines resulting from late
payment.
10.
The rewards law to tax collectors does not violate equal protection. The equal
protection clause recognizes a valid classification, that is, a classification that has a reasonable
foundation or rational basis and not arbitrary. With respect to RA 9335, its expressed public
policy is the optimization of the revenue-generation capability and collection of the BIR and the
BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR
and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the
said agencies. Moreover, the law concerns only the BIR and the BOC because they have the
common distinct primary function of generating revenues for the national government through
the collection of taxes, customs duties, fees and charges.
Indubitably, such substantial distinction is germane and intimately related to the purpose
of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA

9335 fully satisfy the demands of equal protection. (ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008)
11.
The prosecution of one guilty person while others equally guilty are not
prosecuted, however, is not, by itself, a denial of the equal protection of the laws. Where the
official action purports to be in conformity to the statutory classification, an erroneous or
mistaken performance of the statutory duty, although a violation of the statute, is not without
more a denial of the equal protection of the laws.
The unlawful administration by officers of a statute fair on its face, resulting in its
unequal application to those who are entitled to be treated alike, is not a denial of equal
protection unless there is shown to be present in it an element of intentional or purposeful
discrimination. This may appear on the face of the action taken with respect to a particular
class or person, or it may only be shown by extrinsic evidence showing a discriminatory design
over another not to be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12.
Equal protection should not be used to protect commission of crime. While all
persons accused of crime are to be treated on a basis of equality before the law, it does not
follow that they are to be protected in the commission of crime. It would be unconscionable, for
instance, to excuse a defendant guilty of murder because others have murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal laws as to some persons
should be converted into a defense for others charged with crime, the result would be that the
trial of the district attorney for nonfeasance would become an issue in the trial of many persons
charged with heinous crimes and the enforcement of law would suffer a complete breakdown.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
13.
Illustration of double taxation in local taxation. there is indeed double taxation if
Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794,
since these are being imposed: (1) on the same subject matter the privilege of doing business
in the City of Manila; (2) for the same purpose to make persons conducting business within
the City of Manila contribute to city revenues; (3) by the same taxing authority City of Manila;
(4) within the same taxing jurisdiction within the territorial jurisdiction of the City of Manila; (5)
for the same taxing periods per calendar year; and (6) of the same kind or character a local
business tax imposed on gross sales or receipts of the business. (The City of Manila, et al., v.
Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845, August 4, 2009)
14.
A lawful tax on a new subject, or an increased tax on an old one, does not
interfere with a contract or impairs its obligation, within the meaning of the constitution.
(Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)
15.
The withdrawal of a tax exemption should not be construed as prohibiting future
grants of exemption from all taxes. (Philippine Long Distance Telephone Company, Inc., v. City
of Davao, et al., etc., G. R. No. 143867, August 22, 2001)
16.
Tax exemptions in franchises are always subject to withdrawal. A legislative
franchise is granted with the express condition that it is subject to amendment, alteration, or
repeal. (1987 Constitution, Art. XII, Sec. 11)
It is enough to say that the parties to a contract cannot, through the exercise of prophetic
discernment, fetter the exercise of the taxing power of the State. For not only are existing laws
read into contracts in order to fix obligations as between parties, but the reservation of essential
attributes of sovereign power is also read into contracts as a basic postulate of the legal order.

The policy of protecting contracts against impairment presupposes the maintenance of a

government which retains adequate authority to secure the peace and good order of society.
(Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16,
2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone Company, Inc., v. City
of Davao, et al., etc., G. R. No. 143867, August 22, 2001 made the observation that since
Smarts franchise was granted after the effectivity of the Local Government Code that its tax
exemption privilege was reinstated. However, Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008 is explicit in its holding that Smart is
not entitled to a tax exemption.
17. When withdrawal of a tax exemption impairs the obligation of contracts. The
Contract Clause has never been thought as a limitation on the exercise of the States power of
taxation save only where a tax exemption has been granted for a valid consideration. (Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008)
citing Tolentino v. Secretary of Finance, G. R. No. 115455, August 25, 1994, 235 SCRA 630,
685) The author opines that since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds application to the others)
18. The primary reason for the withdrawal of tax exemption privileges granted to
government owned and controlled corporations and all other units of government was that such
privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly
situated enterprises, hence resulting in the need for these entities to share in the requirements
of development, fiscal or otherwise, by paying the taxes and other charges due them.
(Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)
19.
National Power Corporation (NPC) is of the insistence that it is not subject to the
payment of franchises taxes imposed by the Province of Isabela because all of its shares are
owned by the Republic of the Philippines. It is thus, an instrumentality of the National
Government which is exempt from local taxation. As such it is not a private corporation engaged
in business enjoying franchise
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v.
City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of
Davao, a local government unit, to impose and collect a local franchise tax because the Local
Government Code has withdrawn all tax exemptions previously enjoyed by all persons and
authorized local government units to impose a tax on business enjoying a franchise tax
notwithstanding the grant of tax exemption to them.
20.
In lieu of all taxes in the franchise of ABS-CBN does not exempt it from local
franchise taxes. It does not expressly provide what kind of taxes ABS-CBN is exempted from. It
is not clear whether the exemption would include both local, whether municipal, city or
provincial, and national tax. Whether the in lieu of all taxes provision would include exemption
from local tax is not unequivocal.
The right to exemption from local franchise tax must be clearly established and cannot be
made out of inference or implications but must be laid beyond reasonable doubt. Verily, the
uncertainty in the in lieu of all taxes provision should be construed against ABS-CBN. ABSCBN has the burden to prove that it is in fact covered by the exemption so claimed but has
failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008)

NOTES AND COMMENTS: This is practically the same holding in an earlier case
involving another telecommunications company Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that since
practically all franchises granted to telecommunications companies are similarly worded that the
above doctrine finds application to the others.)
21. In lieu of all taxes refers to national internal revenue taxes and not to local
taxes. The in lieu of all taxes clause applies only to national internal revenue taxes and not to
local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a
similar case involving a demand for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than
income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause
does not apply to local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise
states that the grantee shall "continue to be liable for income taxes payable under Title II of the
National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns
filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized
representative in accordance with the National Internal Revenue Code." Moreover, the same
paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal
Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu
of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to
local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause
does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to
local taxes, Congress would have expressly mentioned the exemption from municipal and
provincial taxes. Congress could have used the language in Section 9(b) of Clavecilla's old
franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description levied, established or
collected by any authority whatsoever, municipal, provincial or national, from which the grantee
is hereby expressly exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes. Congress used
the "in lieu of all taxes" clause only in reference to national internal revenue taxes. The only
interpretation, under the rule on strict construction of tax exemptions, is that the "in lieu of all
taxes" clause in Smart's franchise refers only to national and not to local taxes.
[Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008
citing Philippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594
(2003)]
NOTES AND COMMENTS: The author opines that the above finds application to all
telecommunications companies.
22.
The in lieu of all taxes clause in the franchise of ABS-CBN has become functus
officio with the abolition of the franchise tax on broadcasting companies with yearly gross
receipts exceeding Ten Million Pesos. The clause in lieu of all taxes does not pertain to VAT
or any other tax. It cannot apply when what is paid is a tax other than a franchise tax. Since the
franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million
pesos has been abolished, the in lieu of all taxes clause has now become functus officio,
rendered inoperative. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier case
involving another telecommunications company. Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that since

practically all franchises granted to telecommunications companies are similarly worded that the
above doctrine finds application to the others.)
23.
Double taxation in its generic sense, this means taxing the same subject or
object twice during the same taxable period. In its particular sense, it may mean direct duplicate
taxation, which is prohibited under the constitution because it violates the concept of equal
protection, uniformity and equitableness of taxation. Indirect duplicate taxation is not
anathematized by the above constitutional limitations.
24. Elements of direct duplicate taxation:
a.
Same
1)
Subject or object is taxed twice
2)
by the same taxing authority
3)
for the same taxing purpose
4)
during the same taxable period
b.
Taxing all of the subjects or objects for the first time without taxing all of them for the
second time.
If any of the elements are absent then there is indirect duplicate taxation which is not prohibited
by the constitution.
NOTES AND COMMENTS:
a.
Presence of the 2nd element violates the equal protection clause. If only the 1st
element is present, taxing the same subject or object twice, by the same taxing authority, etc.,
there is no violation of the equal protection clause because all subjects and objects that are
similarly situated are subject to the same burdens and granted the same privileges without any
discrimination whatsoever,
The presence of the 2nd element, taxing all of the subjects and objects for the first time,
without taxing all for the second time, results to discrimination among subjects and objects that
are similarly situated, hence violative of the equal protection clause.
25. Double taxation a valid defense against the legality of a tax measure if the double
taxation is direct duplicate taxation, because it would violate the equal protection clause of the
constitution.
26.
When an item of income is taxed in the Philippines and the same income is
taxed in another country, this would be known as international juridical double taxation which is
the imposition of comparable taxes in two or more states on the same taxpayer in respect of the
same subject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C.
Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)
27. Methods for avoiding double taxation (indirect duplicate taxation).
a.
Tax treaties which exempts foreign nationals from local taxation and local
nationals from foreign taxation under the principle of reciprocity.
b.
Tax credits where foreign taxes are allowed as deductions from local taxes that
are due to be paid.
c.
Allowing foreign taxes as a deduction from gross income.
28.
Tax credit generally refers to an amount that is subtracted directly from ones
total tax liability, an allowance against the tax itself, or a deduction from what is owned.
A tax credit reduces the tax due, including whenever applicable the income tax that is
determined after applying the corresponding tax rates to taxable income. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

29.
A tax deduction is defined as a subtraction fro income for tax purposes, or an
amount that is allowed by law to reduce income prior to the application of the tax rate to
compute the amount of tax which is due.
A tax deduction reduces the income that is subject to tax in order to arrive at taxable
income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No.
159647, April 15, 2005)
30.
The petitioners allege that the R-VAT law is constitutional because the Bicameral
Conference Committed has exceeded its authority in including provisions which were never
included in the versions of both the House and Senate such as inserting the stand-by authority
to the President to increase the VAT from 10% to 12%; deleting entirely the no pass-on
provisions found in both the House and Senate Bills; inserting the provision imposing a 70%
limit on the amount of input tax to be credited against the output tax; and including the
amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition
to the value-added tax. Thus, there was a violation of the constitutional mandate that revenue
bills shall originate exclusively from the House of Representatives.
Are the contentions of such weight as to constitute grave abuse of discretion which may
invalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the
changes and modifications made by the Bicameral Conference Committee were germane to
subjects of the provisions referred to it for reconciliation.
The Bicameral Conference Committee merely exercised the judicially recognized longstanding legislative practice of giving said conference committee ample latitude for
compromising differences between the Senate and the House. [Abakada Guro Party List (etc.)
v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases]
31. The VAT while regressive is NOT violative of the mandate to evolve a progressive
system of taxation. Do you agree ? The mandate to Congress is not to prescribe but to evolve
a progressive system of taxation. Otherwise, sales taxes which perhaps are the oldest form of
indirect taxes, would have been prohibited with the proclamation of the constitutional provision.
Sales taxes are also regressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R.
No. 168056, September 1, 2005 and companion cases citing Tolentino v. Secretary of Finance,
et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]
32.
All revenues and assets of non-stock, non-profit educational institutions that are
actually, directly and exclusively used for educational purposes shall be exempt from taxation.
33.
Revenues and assets of proprietary educational institutions, including those
which are cooperatively owned, may be entitled to exemptions subject to limitations provided by
law including restrictions on dividends and provisions for reinvestments. There is no law at the
present which grants exemptions, other the exemptions granted to cooperatives.
OTHER CONCEPTS
1. Distinguish tax from debt.
TAX
DEBT
Basis
based on law
based on contract or judgment

Failure to Pay
may result in imprisonment
no imprisonment
Mode of Payment
generally payable in money
payable in money, property or service
Assignability
not assignable
assignable
Payment
unless it becomes a debt is not subject to compensation or set-off
may be a subject
Interest
does not draw interest unless delinquent
draws interest if stipulated or delayed
Authority
imposed by public authority
can be imposed by private individuals
Prescription
Prescriptive periods for tax under NIRC
debt under the Civil Code
WARNING: Do not use the above arrangement in answering Bar questions.
2.
Compensation takes place by operation of law, where the local government and
the taxpayer are in their own right reciprocally debtors and creditors of each other, and that the
debts are both due and demandable, in consequence of Articles 1278 and 1279 of the Civil
Code. (Domingo v. Garlitos, 8 SCRA 443)
3. May there be compensation or set-off between a national tax and a debt ? Reason out
your answer.
SUGGESTED ANSWER: As a general rule, there could
be no compensation or set-off between a tax and a debt for the following reasons:
a.
Lifeblood theory.
b.
Taxes are not contractual obligations but arise out of a duty to, and are the positive acts of
government, to the making and enforcing of which the personal consent of the individual
taxpayer is not required. (Republic v. Mambulao Lumber Co., 4 SCRA 622)
c.
Taxes cannot be the subject of compensation because the government and taxpayer
are not mutually creditors and debtors of each other and a claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off.
Thus, it is correct to say that the offsetting of a taxpayers tax refund with its alleged tax
deficiency is unavailing under Art. 1279 of the Civil Code. (South African Airways v.
Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010 reiterating Caltex
Philippines, Inc. v. Commission on Audit, which applied Francia v. Intermediate Appellate Court)
4. Exceptions: When set-off or compensation allowed for local taxes.
a.
Where both claims already become overdue and demandable as well as fully liquidated.
Compensation takes place by operation of law under Art. 1200 in relation to Arts. 1279 and 1290
all of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
b.
Compensation takes place by operation of law, where the government and the taxpayer are in
their own right reciprocally debtors and creditors of each other, and that the debts are both due
and demandable. This is in consequence of Article 1278 and 1279 of the Civil Code. (Domingo

v. Garlitos, 8 SCRA 443)

c.
,The Supreme
Court upheld the validity of a set-off between the taxpayer and the government. In both cases,
the claims of the taxpayers therein were certain and liquidated. The claims were certain since
there were no doubts or disputes as to their refundability. In fact, the government admitted the
fact of over-payment.
(Commissioner of
Internal Revenue v. Esso Standard Eastern,
Inc., 172 SCRA 364)
d.
In case of a tax overpayment, the BIRs
obligation to refund or off-set arises from the moment the tax was paid. REASON: Solutio
indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc 172 SCRA 364)
e.
While judgment should be rendered in favor of Republic for unpaid taxes, judgment
ought at the same time to issue for Sampaguita Pictures commanding payment to the latter by
the Republic of the value of the backpay certificates which the Republic received. (Republic v.
Ericta, 172 SCRA 623)
5. Gilbert obtained a judgment for a sum of money against the municipality of
Camiling. The judgment has become final although execution has not issued. Upon receiving
an assessment for municipal sales taxes from the Municipal Treasurer, Gilbert executed a
partial assignment of his judgment sufficient to cover the assessment in favor of the Municipality.
May the Municipal Treasurer validly accept the assignment? Why?
SUGGESTED ANSWER: Yes. The parties in this case are mutually debtors and
creditors of each other, and since both of the claims became overdue, demandable and fully
liquidated, compensation takes place by operation of law. Such was the holding in Domingo v.
Garlitos, 8 SCRA 443, a case decided by the Supreme Court whose factual antecedents are
similar
to
the
problem.
6.
In case of doubt, tax laws must be construed strictly against the State and liberally in
favor of the taxpayer because taxes, as burdens which must be endured by the taxpayer, should
not be presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine
Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
7.
Interpretation in the imposition of taxes, is not the similar doctrine as that applied
to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed
as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be
imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to be extended by implication. In answering the
question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to
be construed most strongly against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. [Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008 citing CIR v. Court of Appeals, 338 Phil. 322,
330-331 (1997)]
As burdens, taxes should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws. (Ibid., citing CIR v. Philippine American Accident Insurance
Company, Inc., G.R. No. 141658, March 18, 2005, 453 SCRA 668)

8.
Strict interpretation of tax exemption laws. Taxes are what civilized people pay
for civilized society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions
are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A
claim of tax exemption must be clearly shown and based on language in law too plain to be
mistaken. Otherwise stated, taxation is the rule, exemption is the exception. (Quezon City, et
al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing Mactan
Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261
SCRA 667, 680) The burden of proof rests upon the party claiming the exemption to prove that it

is in fact covered by the exemption so claimed. (Quezon City, supra citing Agpalo, R.E.,
Statutory Construction, 2003 ed., p. 301)
9.
Rationale for strict interpretation of tax exemption laws. The basis for the rule on
strict construction to statutory provisions granting tax exemptions or deductions is to minimize
differential treatment and foster impartiality, fairness and equality of treatment among taxpayers.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
He who claims an exemption from his share of common burden must justify his claim that the
legislature intended to exempt him by unmistakable terms. For exemptions from taxation are
not favored in law, nor are they presumed. They must be expressed in the clearest and most
unambiguous language and not left to mere implications. It has been held that exemptions are
never presumed the burden is on the claimant to establish clearly his right to exemption and
cannot be made out of inference or implications but must be laid beyond reasonable doubt. In
other words, since taxation is the rule and exemption the exception, the intention to make an
exemption ought to be expressed in clear and unambiguous terms. (Quezon City, supra citing
Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)
10.
Why are tax exemptions are strictly construed against the taxpayer and liberally
in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State.
11.
In case of a tax overpayment, where the BIRs obligation to refund or set-off
arises from the moment the tax was paid under the principle of solutio indebeti. (Commissioner
of Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
12.
But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001
which held that in order for the rule on solutio indebeti to apply it is an essential condition that
the petitioner must first show that its payment of the customs duties was in excess of what was
required by the law at the time the subject 16 importations of milk and milk products were made.
Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in
favor of the Collector of Customs.
13.
Strict interpretation of a tax refund that partakes of the nature of a tax does not
apply to tax refund based on erroneous payment or where there is no law that authorizes
collection of the tax. There is parity between tax refund and tax exemption only when the
former is based either on a tax exemption statute or a tax refund statute. (Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are not founded principally on legislative
grace but on the legal principle which underlies all quasi-contracts abhorring a persons unjust
enrichment at the expense of another. [Commissioner, supra citing Ramie Textiles, Inc. v. Hon.
Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons v. City of Manila, et al., 117 Phil. 985 (1963)]
The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract,
solutio indebiti, which covers not only mistake in fact but also mistake in law. (Commissioner,
supra citing CIVIL CODE, Arts. 2142, 2154 and 2155)
The Government is not exempt from the application of solutio indebiti. (Commissioner, supra
citing Commissioner of Internal Revenue v. Firemans Fund Insurance Co., G.R. No. L-30644, 9
March 1987, 148 SCRA 315, 324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat &
Sons v. City of Manila, supra)
Indeed, the taxpayer expects fair dealing from the Government, and the latter has the duty to
refund without any unreasonable delay what it has erroneously collected. (Commissioner, supra
citing Commissioner of Internal Revenue v. Tokyo Shipping Co., supra at 338) If the State
expects its taxpayers to observe fairness and honesty in paying their taxes, it must hold itself

against the same standard in refunding excess (or erroneous) payments of such taxes. It
should not unjustly enrich itself at the expense of taxpayers. [Commissioner, supra citing AB
Leasing and Finance Corporation v. Commissioner of Internal Revenue, 453 Phil. 297 in turn
citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510, 518 (2000)] And
so, given its essence, a claim for tax refund necessitates only preponderance of evidence for its
approbation like in any other ordinary civil case. (Commissioner, supra)
14.
Tax refunds premised upon a tax exemption strictly construed, Tax exemption is
a result of legislative grace. And he who claims an exemption from the burden of taxation must
justify his claim by showing that the legislature intended to exempt him by words too plain to be
mistaken. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75, July 21, 2008 citing Surigao Consolidated Mining Co. Inc. v. Commissioner of
Internal Revenue and Court of Tax Appeals, 119 Phil. 33, 37 (1963)]
The rule is that tax exemptions must be strictly construed such that the exemption will not
be held to be conferred unless the terms under which it is granted clearly and distinctly show
that such was the intention. [Commissioner, supra citing Phil. Acetylene Co. v. Commission of
Internal Revenue, et al., 127 Phil. 461, 472 (1967); Manila Electric Company v. Vera, G.R. No.
L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao Consolidated Mining Co. Inc. v.
Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax exemption or tax refund. In
such case, the rule of strict interpretation against the taxpayer is applicable as the claim for
refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed
unless granted in the most explicit and categorical language. The taxpayer must show that the
legislature intended to exempt him from the tax by words too plain to be mistaken.
[Commissioner, supra with a note to see Surigao Consolidated Mining Co. Inc. v. CIR, supra at
732-733; Philex Mining Corp. v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999);
Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-892 (1998); .
Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd., 314 Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a previous ruling interpreting a law as exempting a
taxpayer. A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a
perpetual exemption in his favor, for after all the government is never estopped from collecting
taxes because of mistakes or errors on the part of its agents. (Lincoln Philippine Life Insurance
Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
16.
A tax amnesty is a general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or
a tax law.
It partakes of an absolute waiver by the government of its right to collect what is due it
and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty,
much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty,
similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor
of the taxing authority. (Philippine Banking Corporation, etc., v. Commissioner of Internal
Revenue, G. R. No. 170574, January 30, 2009)
17.
The purpose of tax amnesty is to
a. give tax evaders who wish to relent a chance to
start a clean slate, and to
b. give the government a chance to collect
uncollected tax from
tax evaders
without having to go
through the tedious process of a tax case. (Banas, Jr. v. Court
of Appeals, et al., G.R. No. 102967, February 10, 2000)

18.
Tax amnesty distinguished from tax exemption.
a.
Tax amnesty is an immunity from all criminal, civil and administrative liabilities
arising from nonpayment of taxes (People v. Castaneda, G.R. No. L-46881, September 15,
1988) WHILE a tax exemption is an immunity from civil liability only. It is an immunity or
privilege, a freedom from a charge or burden to which others are subjected. (Florer v. Sheridan,
137 Ind. 28, 36 NE 365)
b.
Tax amnesty applies only to past tax periods, hence of retroactive application
(Castaneda, supra) WHILE tax exemption has prospective application.
19.
Tax avoidance is the use of legally permissible means to reduce the tax while
tax evasion is the use of illegal means to escape the payment of taxes.
20.
Tax evasion connotes the integration of three factors:
a.
The end to be achieved, i.e., the payment of less than that known by the
taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due;
b.
an accompanying state of mind which is described as being evil on bad faith,
willful, or deliberate and not accidental; and
c.
a course of action or failure of action which is unlawful. (Commissioner of
Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14,
2004)
21.
Tax avoidance distinguished from tax evasion.
a.
Tax avoidance is legal while tax evasion is illegal.
b.
The objective of tax avoidance in most instances is merely to reduce the tax that
is due while is tax evasion the object is to entirely escape the payment of taxes.
c.
Tax evasion warrants the imposition of civil, administrative and criminal penalties
while tax avoidance does not.

22.
Tax sparing is a provision in some tax treaties which provides that the state of
residence allows as credit the amount that would have been paid, as if no reduction has been
made. (Vogel, Klaus on Double Taxation Conventions, Third Edition, p.1255 cited in Segarra,
Venice H, Tax Treaties: Trick or treat ?, Philippine Daily Inquirer, December 6, 2002, p. C5)
There may be instances where a particular income is exempt from taxation in order to
encourage foreign investments which may lead to economic development. If the tax credit
method is used, there would be no more tax to credit since there is no more tax to credit as a
result of the tax exemption. Consequently, when the tax method credit method is applied to
these items of income, such incentives are siphoned off since, in effect, the tax benefits are
cancelled out. (Ibid.) Thus, the need for the tax sparing provision.
NATIONAL INTERNAL REVENUE CODE
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE
1.
Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits inquiry into bank
deposits. As exceptions to Rep. Act No. 1405, the Commissioner of Internal Revenue is only
authorized to inquire into the bank deposits of:
a.
a decedent to determine his gross estate; and
b.
any taxpayer who has filed an application for compromise of his tax liability by
reason of financial incapacity to pay his tax liability. [Sec. 5 (F), NIRC of 1997]

c.

A taxpayer who authorizes the Commissioner to inquire into his bank deposits.
2.
Purpose of the NIRC of 1997. Revenue generation has undoubtedly been a
major consideration in the passage of the Tax Code. (Commissioner of Internal Revenue v.
Fortune
Tobacco
Corporation,
G.
R.
Nos.
167274-75,
July
21,
2008)
3.
Purpose of shift from ad valorem system to specific tax system in taxation of
cigarettes. The shift from the ad valorem system to the specific tax system is likewise meant
to promote fair competition among the players in the industries concerned, to ensure an
equitable distribution of the tax burden and to simplify tax administration by classifying
cigarettes, among others, into high, medium and low-priced based on their net retail price and
accordingly graduating tax rates. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
TAX ON INCOME
1.
The Tax Code has included under the term corporation partnerships, no matter
how created or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997]
2.
In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing Mertens
that the term partnership includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is
carried on.
3.
Certain business organizations do not fall under the category of corporations under the
Tax Code, and therefore not subject to tax as corporations, include:
a.
General professional partnerships;
b.
Joint venture or consortium formed for the purpose of undertaking construction projects
engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an operation
or consortium agreement under a service contract with the Government. [1st sentence, Sec. 22
(B), BIRC of 1997]
4. Co-heirs who own inherited properties which produce income should not automatically be
considered as partners of an unregistered corporation subject to income tax for the following
reasons:
a. The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived. There must be an unmistakable intention to form a partnership or joint
venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)
b.
There is no contribution or investment of additional capital to increase or expand the
inherited properties, merely continuing the dedication of the property to the use to which it had
been put by their forebears. (Ibid.)
c.
Persons who contribute property or funds to a common enterprise and agree to share
the gross returns of that enterprise in proportion to their contribution, but who severally retain
the title to their respective contribution, are not thereby rendered partners. They have no
common stock capital, and no community of interest as principal proprietors in the business
itself from which the proceeds were derived. (Elements of the Law of Partnership by Floyd R.
Mechem, 2nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)
5.
The common ownership of property does not itself create a partnership between the
owners, though they may use it for purpose of making gains, and they may, without becoming

partners, are among themselves as to the management and use of such property and the
application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14,
cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
6.
The income from the rental of the house, bought from the earnings of co-owned
properties, shall be treated as the income of an unregistered partnership to be taxable as a
corporation because of the clear intention of the brothers to join together in a venture for making
money out of rentals.
7.
Income is gain derived and severed from capital, from labor or from both
combined. For example, to tax a stock dividend would be to tax a capital increase rather than
the income. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576,
January 20, 1999)
8.
The term taxable income means the pertinent items of gross income specified in
the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized
for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997)
9.
The cancellation and forgiveness of indebtedness may amount to (a) payment of
income; (b) gift; or to a (c) capital transaction depending upon the circumstances.
10.
If an individual performs services for a creditor who, in consideration thereof,
cancels the debt, it is income to the extent of the amount realized by the debtor as
compensation for his services.
11.
An insolvent debtor does not realize taxable income from the cancellation or
forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10th)
12.
The insolvent debtor realizes income resulting from the cancellation or
forgiveness of indebtedness when he becomes solvent.
(Lakeland Grocery Co., v.
Commissioner 36 BTA (F) 289)
13.
If a creditor merely desires to benefit a debtor and without any consideration
therefor cancels the amount of the debt it is a gift from the creditor to the debtor and need not
be included in the latters income.
14.
If a corporation to which a stockholder is indebted forgives the debt, the
transaction has the effect of payment of a dividend. (Sec. 50, Rev. Regs. No. 2)
15.
Members of cooperatives not subject to tax on the interest earned from their
deposits with the cooperative. No less than our Constitution guarantees the protection of
cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments
for social justice and economic development. At the same time, Section 10 of Article II of the
Constitution declares that it is a policy of the State to promote social justice in all phases of
national development. In relation thereto, Section 2 of Article XIII of the Constitution states that
the promotion of social justice shall include the commitment to create economic opportunities
based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions, we
find that an interpretation exempting the members of cooperatives from the imposition of the
final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in
keeping with the letter and spirit of our Constitution. (Dumaguete Cathedral Credit Coopertive
[DCCC)] etc., v. Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)

In closing, cooperatives, including their members, deserve a preferential tax treatment

because of the vital role they play in the attainment of economic development and social justice.
Thus, although taxes are the lifeblood of the government, the States power to tax must give
way to foster the creation and growth of cooperatives. To borrow the words of Justice Isagani A.
Cruz: The power of taxation, while indispensable, is not absolute and may be subordinated to
the demands of social justice. (Ibid., citing Commissioner of Internal Revenue v. American
Express International, Inc. (Philippine Branch), 500 Phil. 586 (2005).
16.
The Global system of income taxation is a system employed where the tax
system views indifferently the tax base and generally treats in common all categories of taxable
income of the individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
17. The Schedular system of income taxation is a system employed where the income
tax treatment varies and is made to depend on the kind or category of taxable income of the
taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
18. Under the National Internal Revenue Code the global system is applicable to taxable
corporations and the schedular to individuals.
19.
Compensation income is considered as having been earned in the place where
the service was rendered and not considered as sourced from the place of origin of the money.
20.
Payment for services, other than compensation income, is considered as having
been earned at the place where the activity or service was performed.
21.
A non-resident alien, who has stayed in the Philippines for an aggregate period
of more than 180 days during any calendar year, shall be considered as a non-resident alien
doing business in the Philippines. Consequently, he shall be subject to income tax on his
income derived from sources from within the Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized deductions including the personal and additional
exemptions subject to the rule on reciprocity.
22. What are considered as de minimis benefits not subject to withholding tax on
compensation income of both managerial and rank and file employees ?
SUGGESTED ANSWER:
a.
Monetized unused vacation leave credits of employees not exceeding ten (10)
days during the year;
b.
Medical cash allowance to dependents of employees not exceeding P750.00
per employee per semester or P125 per month;
c.
Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to
not more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f.
Laundry allowance not exceeding P300 per month;
g.
Employees achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible persona property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000.00 received by an employee
under an established written plan which does not discriminate in favor of highly paid employees;
h.
Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;

i.
Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and
j.
Daily meal allowance for overtime work not exceeding twenty five percent (25%)
of the basic minimum wage.
The amount of de minimis benefits conforming to the ceiling herein prescribed shall not
be considered in determining the P30,000 ceiling of other benefits provided under Section 32
(B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these
regulations, the excess shall be taxable to the employee receiving the benefits only if such
excess is beyond the P30,000.00 ceiling, provided, further, that any amount given by the
employer as benefits to its employees, whether classified as de minimis benefits or fringe
benefits, shall constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev.
Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
23.
Income subject to final tax refers to an income collected through the
withholding tax system. The payor of the income withholds the tax and remits it to the
government as a final settlement of the income tax as a final settlement of the income tax due
on said income. The recipient is no longer required to include the income subjected to a final
tax as part of his gross income in his income tax return.
24. Distinguish exclusions from deductions.
SUGGESTED ANSWER:
a.
Exclusions from gross income refer to a flow of wealth to the taxpayer which are
not treated as part of gross income for purposes of computing the taxpayers taxable income,
due to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by
statute; and (3) It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2)
WHILE deductions are the amounts which the law allows to be subtracted from gross income in
order to arrive at net income.
b.
Exclusions pertain to the computation of gross income WHILE deductions
pertain to the computation of net income.
c.
Exclusions are something received or earned by the taxpayer which do not form
part of gross income WHILE deductions are something spent or paid in earning gross income.
An example of an exclusion from gross income are life insurance proceeds, and an
example of a deduction are losses.
25. What are excluded from gross income ?
SUGGESTED ANSWER:
a.
Proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured whether in a single sum or otherwise.
b.
Amounts received by the insured as a return of premiums paid by him under life
insurance, endowment or annuity contracts either during the term, or at maturity of the term
mentioned in the contract, or upon surrender of the contract.
c.
Value of property acquired by gift, bequest, devise, or descent.
d. Amounts received, through accident or health insurance or Workmens Compensation
Acts as compensation for personal injuries or sickness, plus the amounts of any damages
received on whether by suit or agreement on account of such injuries or sickness.
e.
Income of any kind to the extent required by any treaty obligation binding upon
the Government of the Philippines.
f.
Retirement benefits received under Republic Act No. 7641. Retirement received
from reasonable private benefit plan after compliance with certain conditions. Amounts received
for beyond control separation. Foreign social security, retirement gratuities, pensions, etc.
USVA benefits, SSS benefits and GSIS benefits.

 26.
What are the conditions for excluding retirement benefits from gross
income, hence tax-exempt ?
SUGGESTED ANSWER:
a.
Retirement benefits received under Republic Act No. 7641 and those received
by officials and employees of private firms, whether individual or corporate, in accordance with
the employers reasonable private benefit plan approved by the BIR.
b.
Retiring official or employee
1)
In the service of the same employer for at least ten (10) years;
2)
Not less than fifty (50) years of age at time of retirement;
3)
Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The
retiring official or employee should not have previously availed of the privilege under the
retirement plan of the same or another employer. [1st par., Sec. 2.78 (B) (1), Rev. Regs. No. 298]
27. What kind of separation (retirement) pay is excluded from gross income, hence
tax-exempt ?
SUGGESTED ANSWER:
a.
Any amount received by an official, employee or by his heirs,
b.
From the employer
c.
As a consequence of separation of such official or employee from the service of
the employer because of
1)
Death, sickness or other physical disability; or
2)
For any cause beyond the control of said official or employee [Sec. 32 (B) (6) (b),
NIRC of 1997], such as retrenchment, redundancy and cessation of business. [1st par., Sec.
2.78 (B), (1) (b), Rev. Regs. No. 2-98]
28.
What are the Itemized deductions from gross income and who may avail of them ?
a. Ordinary and necessary trade, business or professional expenses.
b.
The amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayers profession, trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other from compensation income are allowed to
deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with the taxpayers profession.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other from compensation income are allowed to
deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other from compensation income are allowed to
deduct these expenses. Domestic corporations, estates and trusts may also deduct this

expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
e.
Bad debts due to the taxpayer, actually ascertained to be worthless and charged
off within the taxable year, connected with profession, trade or business, not sustained between
related parties.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other from compensation income are allowed to
deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
f.
Depreciation or a reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other from compensation income are allowed to
deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
g.
Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually a
natural resource.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other from compensation income are allowed to
deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
h. Charitable and other contributions. Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
Domestic
corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign
corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
i. Research and development expenditures treated as deferred expenses paid or incurred by
the taxpayer in connection with his trade, business or profession, not deducted as expenses
and chargeable to capital account but not chargeable to property of a character which is subject
to depreciation or depletion.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other from compensation income are allowed to
deduct these expenses. Domestic corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on their gross incomes from within may
also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.

j. Contributions to pension trusts. Resident citizens, resident alien individuals and nonresident
alien individuals who are engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Domestic corporations, estates
and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
k. Insurance premiums for health and hospitalization. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and business, on their
gross incomes other from compensation income are allowed to deduct these expenses.
Nonresident citizens and nonresident alien individual engaged in trade or business in the
Philippine on their gross incomes from within may also deduct these premiums.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and resident alien on their gross
incomes and from compensation income are allowed to deduct these premiums. Nonresident
citizens on their gross incomes from within may also deduct this expense. Nonresident alien
individuals engaged in trade or business in the Philippines are allowed to deduct these
exemptions under reciprocity.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
29. Distinguish ordinary expenses from capital expenditures.
SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade
or business of the taxpayer WHILE capital expenditures are those incurred to improve assets
and benefits for more than one taxable year. Ordinary expenses are usually incurred during a
taxable year and benefits such taxable year. Necessary expenses are those which are
appropriate or helpful to the business.
30. What are the requisites for the deductibility of business expenses ?
SUGGESTED ANSWER: The following are the requisites for deductibility of business
expenses:
a.
Compliance with the business test:
1)
Must be ordinary and necessary;
2)
Must be paid or incurred within the taxable
year;
3)
Must be paid or incurred in carrying on a trade or business.
4)
Must not be bribes, kickbacks or other illegal
expenditures
b. Compliance with the substantiation test. Proof by evidence or records of the
deductions allowed by law including compliance with the business test.
31. What are the requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and auditing services ?
SUGGESTED ANSWER:
a.
the expense must be ordinary and necessary;
b.
it must have been paid or incurred during the taxable year dependent upon the
method of accounting upon the basis of which the net income is computed.
c.
it must be supported by receipts, records or other pertinent papers.
(Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February
12, 2007)

 32.
TMG Corporation is issuing the accrual method of accounting. In 2005
XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these
firms only during the following year 2006. Since the bills for legal and auditing services were
received only in 2006 and paid in the same year, TMG deducted the same from its 2006 gross
income. The BIR disallowed the deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the
professional and legal fees in the year they were incurred in 2005 and not in 2006 because at
the time the services were rendered in 2005, there was already an obligation to pay them.
(Commissioner of Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231, February
12, 2007)
NOTES AND COMMENTS:
a.
Accounting methods for tax purposes comprise a set of rules for determining
when and how to report income and deductions. (Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231, February 12, 2007)
The two (2) principal accounting methods for recognition of income are the (a) accrual
method; and the (b) cash method.
b.
Recognition of income and expenses under the accrual method of accounting.
Amounts of income accrue where the right to receive them becomes fixed, where there is
created an enforceable liability. Liabilities, are incurred when fixed and determinable in nature
without regard to indeterminacy merely of time of payment.. (Commissioner of Internal Revenue
v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)
The accrual of income and expense is permitted when the all-events test has been met.
(Ibid.)
c.
All-events test. This test requires:
1)
fixing of a right to income or liability to pay; and
2)
the availability of the reasonable accurate determination of such income or
liability.
The test does not demand that the amount of such income or liability be known
absolutely, only that a taxpayer has at his disposal the information necessary to compute the
amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain; if its basis is
unchangeable, the test is satisfied where a computation may be unknown, but is not as much
as unknowable, within the taxable year. The amount of liability does not have to be determined
exactly,; it must be determined with reasonable accuracy implies something less than an exact
or completely accurate amount.
The propriety of an accrual must be judged by the fact that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year. Accrual
method of accounting presents largely a question of fact; such that the taxpayer bears the
burden of proof of establishing the accrual of an item of income or deduction. (Commissioner of
Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)
d.
Under the cash method income is to be construed as income for tax purposes only upon
actual receipt of the cash payment. It is also referred to as the cash receipts and
disbursements method because both the receipt and disbursements are considered. Thus,
income is recognized only upon actual receipt of the cash payment but no deductions are
allowed from the cash income unless actually disbursed through an actual payment in cash.
33. The fringe benefits tax is a final withholding tax imposed on the grossed-up
monetary value of fringe benefits furnished, granted or paid by the employer to the employee,
except rank and file employees. [1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]

 34. What is meant by fringe benefit for purposes of taxation ?

SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good,
service, or other benefit furnished or granted in cash or in kind by an employer to an individual
employee (except rank and file employees), such as but not limited to:
a.
Housing;
b.
Expense account;
c.
Vehicle of any kind;
d.
Household personnel, such as maid, driver and others;
e.
Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
f.
Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
g.
Expenses for foreign travel;
h.
Holiday and vacation expenses;
i.
Educational assistance to the employee or his dependents; and
j.
Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33 (B),
Rev. Regs. No. 3-98]
35.
Fringe benefits that are not subject to the fringe benefits tax:
a.
When the fringe benefit is required by the nature of, or necessary to the trade,
business or profession of the employer; or
b.
When the fringe benefit is for the convenience or advantage of the employer.
[Sec. 32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c.
Fringe benefits which are authorized and exempted from income tax under the
Tax Code or under any special law;
d.
Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
e.
Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
f.
De minimis benefits as defined in the rules and regulations to be promulgated by
the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. [1st
par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]
36. De minimis benefits are facilities and privileges (such as entertainment, medical
services, or so-called courtesy discounts on purchases), furnished or offered by an employer
to his employees. They are not considered as compensation subject to income tax and
consequently to withholding tax, if such facilities are offered or furnished by the employer merely
as a means of promoting the health, goodwill, contentment, or efficiency of his employees.
[Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
37. Preferred shares are considered capital regardless of the conditions under which
such shares are issued and dividends or interests paid thereon are not allowed as deductions
from the gross income of corporations. (Revenue Memorandum Circular No. 17-71)
38. Bad debts are those which result from the worthlessness or uncollectibility, in
whole or in part, of amounts due the taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 599)
39.

Who are related parties ?

SUGGESTED ANSWER: The following are related parties:

a.
Members of the same family. The family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants;
b.
An individual and a corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for such individual;
c.
Two corporations more than fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for the same individual;
d.
A grantor and a fiduciary of any trust; or
e.
The fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust; or
f.
A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]
40. What are the requisites for valid deduction of bad debts from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to the taxpayer which must be valid and
legally demandable;
b. The same must be connected with the taxpayers trade, business or practice of
profession;
c. The same must not be sustained in a transaction entered into between related parties;
d. The same must be actually charged off the books of accounts of the taxpayer as of the
end of the taxable year; and
e. The debt must be actually ascertained to be worthless and uncollectible during
the taxable year;
f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E)
(1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; Philippine
Refining Corporation v. Court of Appeals, et al., 256 SCRA 667]
g. Must have been reported as receivables in the income tax return of the current or prior
years. (Sec. 103, Rev. Regs. No. 2)
:
41. What is the tax benefit rule ?
SUGGESTED ANSWER: The tax benefit rule posits that the recovery of bad debts
previously allowed as deduction in the preceding year or years shall be included as part of the
taxpayers gross income in the year of such recovery to the extent of the income tax benefit of
said deduction.
NOTES AND COMMENTS:
a.
If in the year the taxpayer claimed deduction of bad debts written-off, he realized
a reduction of the income tax due from him on account of the said deduction, his subsequent
recovery thereof from his debtor shall be treated as a receipt of realized taxable income. (Sec.
4, Rev. Regs. 5-99)
b.
If the said taxpayer did not benefit from the deduction of the said bad debt
written-off because it did not result to any reduction of his income tax in the year of such
deduction (i.e. where the result of his business operation was a net loss even without deduction
of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere
recovery or a return of capital, hence, not treated as receipt of realized taxable income. (Sec. 4,
Rev. Regs. 5-99)
42.
Depreciation is the gradual diminution in the useful value of tangible property
resulting from ordinary wear and tear and from normal obsolescence. The term is also applied
to amortization of the value of intangible assets the use of which in the trade or business is
definitely limited in duration.

43.
a.
b.
c.

The methods of depreciation are the following:

Straight line method;
Declining balance method;
Sum of years digits method; and
d.
Any other method prescribed by the Secretary of Finance upon the
recommendation of the Commissioner of Internal Revenue:
1)
Apportionment to units of production;
2)
Hours of productive use;
3)
Revaluation method; and
4)
Sinking fund method.
44.
What are personal and additional exemptions ?
SUGGESTED ANSWER: These are the theoretical persona, living and family expenses
of an individual allowed to be deducted from the gross or net income of an individual taxpayer.
These are arbitrary amounts which have been calculated by our lawmakers to be roughly
equivalent to the minimum of subsistence, taking into account the personal status and additional
qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts
have been predetermined by our lawmakers and until our lawmakers make new adjustments on
these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as
predetermined by Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No.
159991, November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil.
414, 418 (1918)]
45. What is the amount allowed as basic personal exemption ?
SUGGESTED ANSWER: There shall be allowed a basic personal exemption amounting
to Fifty thousand pesos (P50,000) for each individual taxpayer.
In the case of married individuals where only one of the spouse is deriving gross income,
only such spouse shall be allowed the personal exemption. [Sec. 35 (A), NIRC of 1997 as
amended by Rep. Act No. 9504; Sec. 2.79 (I) (1) (a), Rev. Regs. No. 2-98 as amended by Rev.
Regs. No. 10-2008]
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that each of the spouses
may claim the P50,000.00. Thus, the total familial basic personal exemption for spouses is
P100,000.00.
Furthermore, the distinctions between the concepts of single, married and head of the
family for purpose of availing of the basic personal exemption has already been eliminated by
Rep. Act No. 9504.
45. What are the amounts of additional exemptions ?
SUGGESTED ANSWER: An individual,
a.
whether single or married,
b.
shall be allowed an additional exemption of Twenty-Five Thousand Pesos
(P25,000.00)
c.
for each qualified dependent child,
d.
provided that the total number of dependents for which additional exemptions
may be claimed
1)
shall not exceed four (4) dependents. [1st par., Sec. 2.79 (I) (1) (b), Rev. Regs.
No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec.
35 (B), NIRC of 1997 as amended by Rep. Act No. 9504]
NOTES AND COMMENTS:

a.
It is clear that under the amendment, single individuals may now claim for the
additional exemptions. Furthermore, the concept of head of a family does not find application
anymore.
b.
A dependent means
a.
a legitimate, illegitimate or legally adopted child
b.
chiefly dependent upon and living with the taxpayer
c.
if such dependent is
1)
not more than twenty-one (21) years of age,
2)
unmarried and
3)
not gainfully employed or
d.
if such dependent,
1)
regardless of age
2)
is incapable of self-support
3)
because of mental or physical defect. [2nd par., Sec. 2.79 (I) (1) (b), Rev.
Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and numbering supplied;
Sec. 35 (b), NIRC of 1997, as amended by Rep. Act No. 9504]
c.
It is to be noted that under the NIRC of 1997, as amended by Rep. Act No.
9504, only qualified dependent children are considered for additional exemptions.
Grandparents, parents, as well, as brothers or sisters, and other collateral relatives are not
qualified dependents to be claimed as additional exemptions.
However, if they are senior citizens they may qualify as additional exemptions under the
Senior Citizens Law but not under the NIRC of 1997, as amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents provided for in the National Internal
Revenue Code, as amended, and as such, individual taxpayers caring for them, be they
relatives or not shall be accorded the privileges granted by the Code insofar as having
dependents are concerned. [last par. Sec. 5 (a), Rep. Act No. 7432, as amended by Rep. Act
9257, The Expanded Senior Citizens Act of 2003]
47. Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real properties
considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003)
The term capital assets means property held by the taxpayer (whether or not connected
with his trade or business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or
c. Property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business, or
d. Property used in the trade or business, of a character which is subject to the allowance for
depreciation; or real property used in the trade or business of the taxpayer. [Sec. 39 (A) (1),
NIRC of 1997, capitalized words, numbering and arrangement supplied; Sec. 2.a, Rev. Regs.
No. 7-2003]
48. Examples of capital assets:
a.
Stock and securities held by taxpayers other than dealers in securities;
b.
Jewelry not used for trade and business;
c.
Residential houses and lands owned and used as such;
d.
Automobiles not used in trade and business;
e.
Paintings, sculptures, stamp collections, objects of arts which are not used in
trade or business;

f.
Inherited large tracts of agricultural land which were subdivided pursuant to the
government mandate under land reform, then sold to tenants. (Roxas v. Court of Tax Appeals,
etc. L-25043, April 26, 1968)
g.
Real property used by an exempt corporation in its exempt operations, such as a
corporation included in the enumeration of Section 30 of the Code, shall not be considered used
for business purposes, and therefore considered as capital asset. (last sentence, 3rd par., Sec.
3.b, Rev. Regs. No. 7-2003)
h.
Real property, whether single detached, townhouse, or condominium unit, not used in
trade or business as evidenced by a certification from the Barangay Chairman or from the head
of administration, in case of condominium unit, townhouse or apartment, and as validated from
the existing available records of the Bureau of Internal Revenue, owned by an individual
engaged in business, shall be treated as capital asset. (last par., Sec. 3.b., Rev. Regs. No. 72003)
49. Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of a taxpayer if on hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
c. Real property used in trade or business (i.e. buildings and/or improvements), of a
character which is subject to the allowance for depreciation; or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 72003)
50.. Examples of ordinary assets hence not capital assets:
a.
The machinery and equipment of a manufacturing concern subject to
depreciation;
b. The tractors, trailers and trucks of a hauling company;
c. The condominium building owned by a realty company the units of which are for rent
or for sale;
d.
The wood, paint, varnish, nails, glue, etc. which are the raw materials of a
furniture factory;
e.
Inherited parcels of land of substantial areas located in the heart of Metro
Manila, which were subdivided into smaller lots then sold on installment basis after introducing
comparatively valuable improvements not for the purpose of simply liquidating the estate but to
make them more saleable ; the employment of an attorney-in-fact for the purpose of developing,
managing, administering and selling the lots; sales made with frequency and continuity; annual
sales income from the sales was considerable; and the heir was not a stranger to the real estate
business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by introduction of good roads, concrete gutters,
drainage and lighting systems converts the property to an ordinary asset. The property forms
part of the stock in trade of the owner, hence an ordinary asset. This is so, as the owner is now
engaged in the business of subdividing real estate. (Calasanz v. Commissioner of Internal
Revenue, 144 SCRA at p. 672)
51. Tax treatment of real properties that have been transferred. Real properties
classified as capital or ordinary asset in the hands of the seller/transferor may change their
character in the hands of the buyer/transferee. The classification of such property in the hands
of the buyer/transferee shall be determined in accordance with the following rules:

a. Real property transferred through succession or donation to the heir or donee who is not
engaged in the real estate business with respect to the real property inherited or donated, and
who does not subsequently use such property in trade or business, shall be considered as a
capital asset in the hands of the heir or donee.
b. Real property received as dividend by stockholders who are not engaged in the real estate
business and who not subsequently use such real property in trade or business shall be treated
as capital assets in the hands of the recipient even if the corporation which declared the real
property dividend is engaged in real estate business.
c. The real property received in an exchange shall be treated as ordinary asset in the hands of
the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate
business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not
engaged in real estate business, will use in business the property received in the exchange.
(Sec. 3.f., Rev. Regs. No. 7-2003)
52. The tax is imposed upon capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property located in the Philippines, classified as
capital assets. [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations No. 7-2003 has defined
real property as having the same meaning attributed to that term under Article 415 of Republic
Act No. 386, otherwise known as the Civil Code of the Philippines. (Sec. 2.c, Rev. Regs. No.
7-2003)
53. Transactions covered by the presumed capital gains tax on real property:
a.
sale,
b.
exchange,
c.
or other disposition, including pacto de retro sales and other forms of
conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement supplied]
d.
Sale, exchange, or other disposition includes taking by the government through
condemnation proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v.
Court of Tax Appeals, et al., 121 Phil. 861)
54.
In case the mortgagor exercises his right of redemption within one (1) year from
the issuance of the certificate of sale, in a foreclosure of mortgage sale of real property, no
capital gains tax shall be imposed because no capital gains has been derived by the mortgagor
and no sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
55. In case of non-redemption of the property sold upon a foreclosure of mortgage sale,
the presumed capital gains tax shall be imposed, based on the bid price of the highest bidder
but only upon the expiration of the one year period of redemption provided for under Sec. 6 of
Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the
expiration of the said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
56. The basis for the final presumed capital gains tax of six per cent (6%) is whichever
is the higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each zone or area as determined by
the Commissioner of Internal Revenue after consultation with competent appraisers both from
the private and public sectors; or
2) the fair market value as shown in the schedule of values of the Provincial and City
Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]

It does not matter whether there was an actual gain or loss because the tax is a
presumed capital gains tax. It is the transaction that is taxed not the gain.
57. Holding period not applied to the taxation of the presumed capital gains derived from
the sale of real property considered as capital assets.
58. The tax liability, of individual taxpayers (not corporate), if any, on gains from sales
or other dispositions of real property, classified as capital assets, to the government or any of its
political subdivisions or agencies or to government owned or controlled corporations shall be
determined, at the option of the taxpayer, by including the proceeds as part of gross income to
be subjected to the allowable deductions and/or personal and additional exemptions, then to the
schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the
final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6 (E),
both of the NIRC of 1997]
59. The seller of the real property, classified as a capital asset, pays the presumed
capital gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A) (3) in
relation to Sec. 24 (D) (1), both of the NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25 (B) in
relation to Sec. 24 (D) (1), both of the NIRC of 1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
60. Excepted from the payment of the presumed capital gains tax are those presumed
to have been realized from the disposition by natural persons of their principal place of
residence
a.
the proceeds of which is fully utilized in acquiring or constructing a new principal
residence;
b.
within eighteen (18) calendar months from the date of sale or disposition
c.
the BIR Commissioner shall have been duly notified by the taxpayer within thirty
(30) days from the date of sale or disposition through a prescribed return of his intention to avail
of the tax exemption; and
d.
the said tax exemption can only be availed of once every ten (10) years. [Sec.
24 (D) (2), NIRC of 1997]
61.
MBC was incorporated in 1961 and engaged in commercial banking operations
since 1987. On May 22, 1987, it ceased operations that year by reason of insolvency and its
assets and liabilities were placed under the charge of a government-appointed receiver. On
June 23, 1999, the BSP authorized MBC to operate as a thrift bank.
In 2000, It filed its tax return for the year 1999 paying the amount of P33 million computed
in accordance with the minimum corporate income tax (MCIT). It sought the BIRs ruling on
whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned
from 1999. BIR then ruled that cessation of business activities as a result of being placed under
involuntary receivership may be an economic reason for suspending the imposition of the MCIT.
As a result of the ruling MBC filed an application for refund of the P33 million. Due to the
BIRs inaction, MBC filed a petition for review with the CTA.

The CTA denied the petition on the ground that MBC is not a newly organized corporation.
In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1,
1998 as it did not close its business operations in 1987 but merely suspended the same. Even
if placed under receivership, the corporate existence was never affected. Thus, it falls under the
category of an existing corporation recommencing its banking operations.
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the fourth
taxable year immediately following the year in which the corporation commenced its business
operations. [Sec. 27 (E) (1), NIRC of 1997]
The date of commencement of operations of a thrift bank is the date it was registered with
the SEC or the date when the Certificate of Authority to Operate was issued to it by the
Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No. 4-95)
Clearly then. MBC is entitled to the grace period of four years from June 23, 1999 when it
was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it.
(Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August
26, 2006)
NOTES AND COMMENTS:
a.
The MCIT and when should be imposed and the four (4) year grace period. A
minimum corporate income tax of two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum corporate income tax is greater than
the tax computed under Subsection (A) of this section for the taxable year. [Sec. 27 (E) (1),
NIRC of 1997]
b.
Period when a corporation becomes subject to the MCIT. (5) Specific rules for
determining the period when a corporation becomes subject to the MCIT (minimum corporate
income tax) For purposes of the MCIT, the taxable year in which business operations commenced
shall be the year in which the domestic corporation registered with the Bureau of Internal
Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years shall be covered by the
MCIT beginning January 1, 1998. x x x (Rev. Regs. No. 9-98)
Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118,
August 26, 2006 did not apply Rev. Regs. No. 9-98 because Rev. Regs. No. 4-95 specifically
refers to thrift banks.)
c.
Purpose of the four (4) year grace period. The intent of Congress relative to the
MCIT is to grant a four (43) year suspension of tax payment to newly organized corporations.
Corporations still starting their business operations have to stabilize their venture in order to
obtain a stronghold in the industry. It does not come as a surprise then when many companies
reported losses in their initial years of operations.
Thus, in order to allow new corporations to grow and develop at the initial stages of their
operations, the lawmaking body saw the need to provide a grace period of four years from their
registration before they pay their minimum corporate income tax. (Manila Banking Corporation
v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
ESTATE TAXES
1. In determining the gross estate of a decedent, are his properties abroad to be
included, and more particularly, what constitutes gross estate ?
SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen or a resident alien.

The gross estate of a Filipino citizen or a resident alien comprises all his real property,
wherever situated; all his personal property, tangible, intangible or mixed, wherever situated, to
the extent of his interest existing therein at the time of his death.
The gross estate of a non-resident alien comprises all his real property, situated in the
Philippines; all his personal property, tangible, intangible or mixed, situated in the Philippines, to
the extent of his interest existing therein at the time of his death.
2.
William Smith, an American citizen, was a permanent resident of the
Philippines. He died in San Francisco, California. He left 10,000 shares of San Miguel
Corporation, a condominium unit at the Twin Towers Building at Pasig, Metro Manila and a
house and lot in Miami, Florida.
What assets shall be included in the Estate Tax Return to be filed with the BIR ?
SUGGESTED ANSWER: All of the assets should be included in the Estate Tax Return to be
filed with the BIR.
Smith, an American citizen and a permanent resident of the Philippines is considered, for
Philippine estate tax purposes, a resident alien. Consequently, the assets to be included in the
Estate Tax Return to be filed with the BIR should be all property, real or personal, tangible,
intangible or mixed, wherever situated, to the extent of the interest that Smith has at the time of
his death. Thus, all of the properties enumerated in the problem irrespective of where they are
situated are includible in the gross estate of Smith.
3. Proceeds of life insurance includible in a decedents gross estate.
a.
The decedent takes the insurance policy on his own life
1) The amounts are receivable by
a)
the decedents estate,
b)
his executor, or
c)
administrator irrespective of whether or not the insured retained
the power of revocation, OR
2)
The amounts are receivable by any beneficiary
designated in the policy of insurance as revocable beneficiary.
[Sec. 85
(E), NIRC of 1997]
b.
One, other than the decedent takes the insurance policy on the life of the
decedent
1)
The amounts are receivable by
a)
the decedents estate,
b)
his executor, or
c)
administrator
2)
irrespective of whether or not the insured retained the
power
of revocation.
4. Proceeds of life insurance NOT included in a decedents gross estate.
a.
The decedent takes the insurance policy on his own life, and
b.
the proceeds are receivable by a beneficiary designated as irrevocable. [Sec. 85
(E), NIRC of 1997)
NOTES AND COMMENTS: The beneficiary must not be the decedents estate, executor
or administrator, because the proceeds are includible as part of gross estate whether or not the
decedent retained the power of revocation. (Ibid.)
c.
Where the insurance was NOT taken by the decedent upon his own life and the
beneficiary is not the decedents estate, his executor or administrator.

4.
Items deductible from the gross estate of a resident or nonresident Filipino
decedent or resident alien decedent:
a.
Expenses, losses, claims, indebtedness and taxes;
b.
Property previously taxed;
c.
Transfers for public use;
d.
The Family Home up to a value not exceeding P1 million;
e.
Standard deduction of P1 million;
f.
Medical expenses not exceeding P500,000.00;
g.
Amount of exempt retirement received by the heirs under Rep. Act Mo. 4917;
h.
Net share of the surviving spouse in the conjugal partnership.
5.
There is no transfer in contemplation of death if there is no showing that the
transferor retained for his life or for any period which does not in fact end before his death: (1)
the possession or enjoyment of, or the right to the income from the property, or (2) the right,
either alone or in conjunction with any person, to designate the person who shall possess or
enjoy the property or the income therefrom. [Sec. 85 (B), NIRC of 1997]
6. Vanishing deduction (deduction for property previously taxed), defined. The
deduction allowed from the gross estates of citizens, resident aliens and nonresident estates
for properties which were previously subject to donors or estate taxes. The deduction is called
a vanishing deduction because the deduction allowed diminishes over a period of five (5) years.
It is also known as a deduction for property previously taxed.
7. Vanishing deduction (property previously taxed) allowed as a deduction from the
gross estate of a Filipino citizen, whether resident or not, of a resident alien decedent, or of a
nonresident alien decedent.
a.
An amount equal to the value specified below of
b.
Any property forming a part of the gross estate situated in the Philippines
c
Of any person who died within five years prior to the death of the decedent, or
transferred to the decedent by gift within five years prior to his death,
d.
Where such property can be identified as having been received by the decedent
from the donor by gift, or from such prior decedent by gift, bequest, devise, or inheritance, or
e.
Which can be identified as having been acquired in exchange for property so
received:
100% of the value if the prior decedent died within one year prior to the death of the
decedent, or if the property was transferred to him by gift within the same period prior to his
death;
80% of the value if the prior decedent died more than one year but not more than two years
prior to the death of the decedent, or if the property was transferred to him by gift within the
same period prior to his death;
60% of the value if the prior decedent died more than two years but not more than three
years prior to the death of the decedent, or if the property was transferred to him by gift within
the same period prior to his death;
40% of the value if the prior decedent died more than three years but not more than four
years prior to the death of the decedent, or if the property was transferred to him by gift within
the same period prior to his death; and
20% of the value if the prior decedent died more than four years but not more than five
years prior to the death of the decedent, or if the property was transferred to him by gift within
the same period prior to his death. [Sec. 86 (A) (2) and (B) (2), NIRC of 1997, numbering,
arrangement and underlining supplied]

 8.
The approval of the court sitting in probate, or as a settlement tribunal over the
estate of the deceased is not a mandatory requirement for the collection of the estate. The
probate court is determining issues which are not against the property of the decedent, or a
claim against the estate as such, but is against the interest or property right which the heir,
legatee, devisee, etc. has in the property formerly held by the decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable, the same can no
longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al.,
273 SCRA 47)
DONORS TAXES
1.
What is the donors tax rate if the donee is a stranger ?
SUGGESTED ANSWER:
When the donee or beneficiary is a stranger, the tax payable
by the donor shall be 30% of the net gifts.
2.
For purposes of the donors tax who is a stranger ?
SUGGESTED ANSWER: A stranger is a is person who is not a:
a.
Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal
descendant; or
b.
Relative by consanguinity in the collateral line within the fourth degree of
relationship. [Sec. 99 (B), NIRC of 1997]
NOTES AND COMMENTS: All relatives by affinity, irrespective of the degree, are
considered as strangers.
3.

What is the tax base for donations ?

SUGGESTED ANSWER: The net gifts made during the calendar year. [Sec. 99 (A),
NIRC of 1997]
4.
For purposes of the donors tax, what is meant by net gifts ?
SUGGESTED ANSWER: The net economic benefit from the transfer that accrues to the
donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the
donee the obligation to pay the mortgage liability, then the net gift is measured by deducting
from the fair market value of the property the amount of the mortgage assumed. (last par., Sec.
11, Rev. Regs.No.2-2003)
5.
How are gifts of personal property to be valued for donors tax purposes ?
SUGGESTED ANSWER: The market value of the personal property at the time of the gift
shall be considered the amount of the gift. (Sec. 102, NIRC of 1997)
6.
What is the valuation of donated real property for donors tax purposes ?
SUGGESTED ANSWER: The real property shall be appraised at its fair market value as
of the time of the gift.
However, the appraised value of the real property at the time of the gift shall be whichever
is the higher of:
a.
the fair market value as determined by the Commissioner of Internal Revenue
(zonal valuation) or
b.
the fair market value as shown in the schedule of values fixed by the Provincial
and City Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC of 1997]

 7.
A died leaving as his only heirs, his surviving spouse B, and three minor children,
X, Y and Z. Since B does not want to participate in the distribution of the estate, she renounced
her hereditary share in the estate.
a.
Is the renunciation subject to donors tax ? Explain.
SUGGESTED ANSWER: No. The general renunciation by an heir, including the
surviving spouse, as in the case B, of her share in the hereditary estate left by the decedent is
not subject to donors tax. (4th par., Sec. 11, Rev. Regs. No. 2-2003)
This is so because the general renunciation by B was not specifically and categorically
done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the
hereditary estate.
b.
Supposing that instead of a general renunciation, B renounced her hereditary
share in As estate to X who is a special child, would your answer be the same ? Explain.
SUGGESTED ANSWER: My answer would be different. The renunciation in favor of X
would be subject to donors tax.
This is so because the renunciation was specifically and categorically done in favor of X
and identified heir to the exclusion or disadvantage of Y and Z, the other co-heirs in the
hereditary estate. (4th par., Sec. 11, Rev. Regs. No. 2-2003)
8. Give some donations that are exempt from donors tax.
SUGGESTED ANSWER:
a.
The first P100,000.00 net donation during a calendar year is exempt from
donors tax [Sec. 99 (A), NIRC of 1997] made by a resident or non resident;
b.
The donation by a resident or non-resident of a prize to an athlete in an
international sports tournament held abroad and sanctioned by the national sports association is
exempt from donors tax (Sec. 1, Rep. Act No. 7549)
c.
Political contributions made by a resident or non-resident individual if registered
with the COMELEC irrespective of whether donated to a political party or individual.
However, the Corporation Code prohibits corporations from making political
contributions. (Corp. Code, Title IV, Sec. 36.9)
d.
Dowries or gifts made on account of marriage and before its celebration or
within one year thereafter by residents who are parents to each of their legitimate, recognized
natural, or adopted children to the extent of the first ten thousand pesos (P10,000.00);
e.
Gifts made by residents or non-residents to or for the use of the National
Government or any entity created by any of its agencies which is not conducted for profit, or to
any political subdivisions of the said Government;
f.
Gifts made by residents or non residents in favor of an educational and/or
charitable, religious, cultural or social welfare corporation, institution, foundation, trust or
philanthropic organization or research institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes. [Sec. 101 (A), NIRC of 1997, numbering and arrangement supplied]
g.
Gifts made by non-resident aliens outside of the Philippines to Philippine
residents are exempt from donors taxes because taxation is basically territorial. The
transaction, which should have been subject to tax was made by non-resident aliens and took
place outside of the Philippines.
9. What is the concept of donation or gift splitting ? Illustrate.
SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous
calendar years in order to avail of lower donors taxes.
In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his first cousin. The
P200,000.00 is the totality of the net gifts for 2008. If he donated the P200,000.00 in 2008

the first P100,000 would be exempt and the remaining P50,000.00 would be subject to donors
tax
If Leon spreads the P200,000 donation over two (2) calendar years, donating
P100,000.00 on December 30, 2008 and the remaining P100,000.00 on January 1, 2009 the
transaction would be exempt from donors tax. This is so even if the donation is separated only
by two days because the basis is the calendar year. Leon would be enjoying the exemption for
the first P100,000.00 net gifts for each calendar year.
10.
A, who is engaged in the car buy and sell business sold to B P7 million
Jaguar for only P4 million. The proper VAT on the sale was paid. If you are the BIR examiner
assigned to review the sale, would you issue a tax assessment on the transaction ? Explain
your answer briefly.
SUGGESTED ANSWER: Donors taxes would be due on the insufficiency of
consideration.
Where property, other than real property that has been subjected to the final capital
gains tax, is transferred for less than an adequate and full consideration in money or moneys
worth, then the amount by which the fair market value of the property at the time of the
execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a
Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall
be deemed a gift, and shall be included in computing the amount of gifts made during the
calendar year. (5th par., Sec. 11, Rev. Regs. No. 2-2003)
VALUE-ADDED TAXES (VAT)
WARNING !!! Approximately 10% of the total questions asked in the Bar Examination are
sourced from VAT and its concepts. This area is probably the most difficult area to forecast
because there are no statistically perceived patterns. The author has retained the Stars
System for VAT. Considering the limited period of time, the reader is advised to focus on areas
marked with stars and just browse the unmarked areas.
1.
Value-added tax (VAT) is a tax which is imposed only on the increase in
the worth, merit or importance of goods, properties or services, and not on the total value of the
goods or services being sold or rendered.
2. Nature of VAT. VAT is an indirect tax that may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. As such, it should be
understood not in the context of the person or entity that is primarily, directly liable for its
payment, but in terms of its nature as a tax on consumption. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing
various authorities}
VAT is a percentage tax imposed on any person whether or not a franchise grantee, who
in the course of trade or business, sells, barters, exchanges, leases, goods or properties,
renders services. It is also levied on every importation of goods whether or not in the course of
trade or business. The tax base of the VAT is limited only to the value added to such goods,
properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and
can be passed on to the buyer. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 2008)
3. Effect of exemptions from VAT which is an indirect tax. If a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve

the same party as a purchaser from its indirect burden of the VAT shifted to it by its VATregistered suppliers, the purchase transaction is not exempt.
REASON: The VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services. [Commissioner of
Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005)
4.
Illustration of effects of exemptions from VAT which is an indirect tax.
A VAT
exempt seller sells to a non-VAT exempt purchaser. The purchaser is subject to VAT because
the VAT is merely added as part of the purchase price and not as a tax because the burden is
merely shifted. The seller is still exempt because it could pass on the burden of paying the tax
to the purchaser.
5.
The VAT is a tax on consumption. Meaning of consumption as used under the
VAT system. Consumption is "the use of a thing in a way that thereby exhausts it."
Applied to services, the term means the performance or "successful completion of a
contractual duty, usually resulting in the performer's release from any past or future liability x x
x" Unlike goods, services cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a "predetermined end of a course" when
determining the service "location or position x x x for legal purposes." [Commissioner of Internal
Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007]
6.
Illustration of the meaning of consumption as used under the VAT system. For
example the services rendered by a local firm to its foreign client are performed or successfully
completed upon its sending to a foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the Philippines, are therefore also
consumed in the Philippines. Such facilitation service has no physical existence, yet takes
place upon rendition, and therefore upon consumption, in the Philippines. [Commissioner of
Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8,
2007]
7.
a.

Who are liable for the value-added tax.

Any person who, in the course of his trade or business,
1)
Sells, barters, exchanges or leases goods

or

properties, or
2)
renders services, and
b.
any person who imports goods xxx
However, in the case of importation of taxable goods, the importer, whether an individual
or corporation and whether or not made in the course of his trade or business, shall be liable to
VAT xxx. (Rev. Regs. No. 16-2005,Sec. 4.105-1, paraphrasing supplied)
8. Various VAT methods and systems.
a.
Cost deduction method. This is a single-stage tax which is payable only by the
original sellers.
(Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,
September 1, 2005 and companion cases) This was subsequently modified and a mixture of
cost deduction method and tax credit method was used to determine the value-added tax
payable. (Ibid.)
b.
Tax credit method. This method relies on invoices, an entity can credit against
or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs
and imports. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No.
153866, February 11, 2005]

If at the end of a taxable period, the output taxes charged by a seller are equal to the
input taxes passed on by the suppliers, no payment is required. It is when the output taxes
exceed the input taxes that the excess has to be paid.
If however, the input taxes exceed the output taxes, the excess shall be carried over to
the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively
zero-rated transactions or from acquisition of capital goods, any excess over the output taxes
shall instead be refunded to the taxpayer or credited against other internal revenue taxes. (Ibid.)
9.
How the VAT is imposed on the increase in worth, merit or improvement of the
goods or services. The VAT utilizes the concept of the output and input taxes.
Output VAT less Input VAT = VAT due on the increase in worth, merit or improvement f the
goods or services.
10.
The right to credit the input tax be limited by legislation because it is a mere
creation of law. Prior to the enactment of multi-stage sales taxation, the sales taxes paid at
every level of distribution are not recoverable from the taxes payable. With the advent of
Executive Order No. 273 imposing a 10% multi-stage tax on all sales, it was only then that the
crediting of the input tax paid on purchase or importation of goods and services by VATregistered persons against the output tax was established. This continued with the Expanded
VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit
input tax as against the output tax is clearly a privilege created by law, a privilege that also the
law can limit. It should be stressed that a person has no vested right in statutory privileges.
(ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207, October 15, 2005, and
companion cases, on the motion for reconsideration)
11.
Output tax is the value-added tax due on the sale or lease or taxable
goods, properties or services by any VAT-registered person.
12.
Input tax is the value-added tax due on or paid by a VAT-registered
person on importation of good or local purchases of goods or services, including lease or use of
properties, in the course of his trade or business. (Rev. Regs. No. 4.110-1, 1st par.)
13.
Included in the input tax.
a.
the transitional input tax and
b.
the presumptive input tax xxx.
It includes
c.
input taxes which can be directly attributed to transactions subject to the VAT
plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or
exempt activity. (Rev. Regs. No. 4.110-1, 1st par., 2nd sentence,. And 2nd par., paraphrasing,
arrangement and numbering supplied )
14.
Concept of transitional input tax credits on beginning inventories. Taxpayers who
become VAT-registered persons upon exceeding the minimum turnover of P1,500,000.00 in any
12-month period, or who voluntarily register even if their turnover does not exceed
P1,500,000.00 (except franchise grantees of radio and television broadcasting whose threshold
is P10,000,000.00) shall be entitled to a transitional input tax on the inventory on hand as of the
effectivity of their VAT registration, on the following:
a.
goods purchased for resale in their present condition;
b.
materials purchased for further processing, but which have not yet undergone
processing;
c.
goods which have been manufactured by the taxpayer;
d.
goods in process for sale; or

e.
goods and supplies for use in the course of the taxpayers trade or business as a
VAT-registered person. [Rev. Regs. No. 16-2005, Sec.4.111-1, (a), 1st par., arrangement and
numbering supplied]
15.
Concept of presumptive input tax credits. Persons or firms engaged in the
processing of sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and
packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against
the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of
primary agricultural products which are used as inputs to their production.
As used in this paragraph, the term processing shall mean pasteurization, canning and
activities which through physical or chemical process alter the exterior texture or form or inner
substance of a product in such a manner as to prepare it for special use to which it could not
have been put in its original form or condition. [Rev. Regs. No. 16-2005, Sec.4.111-1, (b)]
16.
The VAT registration fee does NOT violate religious freedom. The VAT
registration fee imposed on non-VAT enterprises which includes among others, religious sects
which sells and distributes religious literature is not violative of religious freedom, although a
fixed amount is not imposed for the exercise of a privilege but only for the purpose of defraying
part of the cost of registration.
The registration fee is thus more of an administrative fee, one not imposed on the
exercise of a privilege, much less a constitutional right. (Tolentino v. Secretary of Finance, et
al., and companion cases, 235 SCRA 630)
17.
Interpretation of the term In the Course of Trade or Business as used in the
VAT system. The term "doing business" or course of business conveys the idea of business
being done, not from time to time, but all the time. It does not include isolated transactions.
(Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28,
2006)
18.
Pursuant to a government program of privatization, NDC, a VATregistered entity created for the purpose of selling real property, decided to sell to private
enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation
(NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are
3,700 DWT Tween-Decker, "Kloeckner" type vessels. The vessels were constructed for the NDC
between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its whollyowned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis,
to the NMC.
The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder was to pay "a
value added tax of 10% on the value of the vessels." Magsaysay Lines, Inc., offered to buy the
shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc.,
and FIM Limited of the Marden Group based in Hongkong . The bid was approved by the
Committee on Privatization, and a Notice of Award was issued to Magsaysay Lines.
Is the sale subject to VAT ?
SUGGESTED ANSWER: No. The term
"carrying on business" does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing progressively all the acts
normally incident thereof; while "doing business" conveys the idea of business being done, not
from time to time, but all the time. "Course of business" is what is usually done in the
management of trade or business.
"Course of business" or "doing business" connotes
regularity of activity. In the instant case, the sale was an isolated transaction.
The sale which was involuntary and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with regularity. It should be emphasized

that the normal VAT-registered activity of NDC is leasing personal property.

This
finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC
was created for the primary purpose of selling real property. (Commissioner of Internal Revenue
v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)
19.
Under the Value Added Tax (VAT), the tax is imposed on sales, barter, or
exchange or goods and services. The VAT is also imposed on certain transactions deemed
sales which include:
a.
Transfer,
use or consumption not in the course of business or properties originally intended for sale or
for use in the course of business. xxx
b.
Distribution or transfer to:
1)
Shareholders or investors as share in the profits of the VAT- registered
person; xxx or
2)
Creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within sixty (60) days following
the date such goods were consigned. Consigned goods returned by the consignee within the
60-day period are not deemed sold.
d.
Retirement from or cessation of business, with respect to all goods on hand,
1)
whether capital goods, stock-in-trade, supplies or materials as of the date
of such retirement, or cessation,
2)
whether or not the business is continued by the new owner or successor.
xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7, paraphrasing, arrangement and numbering
supplied]
20.
Transactions considered retirement or cessation of business deemed sale
subject to VAT.
a.
Change of ownership of the business. There is change in the ownership of the business
where a single proprietorship incorporates; or
1)
the proprietor of a single proprietorship sells his entire business.
b.
Dissolution of a partnership and creation of a new partnership which takes over
the business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing, arrangement and
numbering supplied]
21.
Sale of or lease of real properties subject to VAT. Sale of real properties primarily
for sale to customers or held for lease in the ordinary course of trade or business of the seller
shall be subject to VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.)
Thus, capital transactions of individuals are not subject to VAT. Only real estate dealers
are subject to VAT.
22.
On
September 4, 2009, XYZ, Inc., a domestic corporation engaged in the real estate business,
sold a building for P10,000,000.00. Is the sale subject to the value-added tax (VAT)? If so, how
much? Explain.
SUGGESTED ANSWER: Yes. 12% on the gross selling price because the sale was
made in the ordinary course of trade of business of X, a domestic corporation engaged in the
real estate business.
23.
The following sales of real properties are exempt from VAT, namely:
a.
Sale of real properties not primarily held for sale to customers or held for lease
in the ordinary course of trade or business;
b.
Sale of real properties utilized for low-cost housing as defined by RA No. 7279,
otherwise known as the Urban and Development Housing Act of 1992 and other related laws,
such as RA No. 7835 and RA No. 8763.

xxx
xxx
xxx
c.
Sale of real properties utilized for socialized housing as defined under RA No.
7279, and other related laws wherein the price ceiling per unit is P225,000.00 or as may from
time to time be determined by the HUDCC and the NEDA and other related laws.
xxx
xxx
xxx
d.
Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two Million
Give Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of
sale/transfer/disposition was executed on or after November 1, 2005, provided, That not later
than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be
adjusted to its present value using the Consumer Price Index, as published by the National
Statistics Office (NSO); provided, further, that such adjustment shall be published through
revenue regulations to be issued not later than March 31 of each year.
If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the
purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the
aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots, although
covered by separate titles and/or separate tax declarations, when sold or disposed of to one
and the same buyer, whether covered by one or separate Deed of Conveyance, shall be
presumed as a sale of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing and
numbering supplied]
24.
a.
b.
c.

VAT on services and lease of properties.

There shall be levied, assessed, and collected,
a value-added tax equivalent to twelve percent (12%) of gross receipts
derived from the sale or exchange of services,
1)
including the use or lease of properties. [NIRC of
1997, Sec. 108
(A), as amended by R.A. No. 9337, arrangement and numbering supplied]
25.
Sale or exchange of services, defined. The term sale or exchange of
services means the performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, whether in kind or in cash, including those performed or
rendered by the following:
a.
construction and service contractors;
b.
stock,
real
estate,
commercial,
customs
and
immigration
brokers;
c.
lessors of property, whether personal or real;
d.
persons engaged in warehousing services
e.
lessors or
distributors of cinematographic films;
f.
persons engaged in milling,
processing,
manufacturing
or
repacking
goods
for
others;
g.
proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns,
resorts; theaters, and movie houses;
h.
proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers;
i.
dealers in securities;
j.
lending investors;
k.
transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative to their
transport
of
goods
or
cargoes;
l.
common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines;
m.
sales of electricity by generation companies, transmission, and/or distribution
companies;
n.
franchise
grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all

other franchise grantees except franchise grantees of radio and/or television broadcasting
whose annual gross receipts of the preceding year do not exceed Ten Million Pesos
(P10,000,000.00),
and
franchise
grantees
of
gas
and
water
utilities;
o.
non-life insurance companies (except their crop insurances), including surety, fidelity,
indemnity
and
bonding
companies;
and
p.
similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by
R.A. No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1st par., arrangement and numbering
supplied]
26.
Also included in the phrase sale or exchange of services.
a.
The lease or the use of or the right or privilege to use any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like
property or right;
b.
The lease or the use of, or the right to use any industrial, commercial or
scientific equipment;
c.
The supply of scientific, technical, industrial or commercial knowledge or
information;
d.
The supply of any assistance that is ancillary and subsidiary to and is furnished
as a means of enabling the application or enjoyment of any such property, or right as is
mentioned in subparagraph (2) hereof or any such knowledge or information as is mentioned in
subparagraph (3) hereof; or
e.
The supply of services by a non-resident person or his employee in connection
with the use of property or rights belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such non-resident person;
f.
The supply of technical advice, assistance or services rendered in connection
with technical management or administration of any scientific, industrial or commercial
undertaking, venture, project of scheme;
g.
The lease of motion picture films, film tapes and discs;
h.
The lease or the use of or the right to use radio, television, satellite
transmission and cable television time. (Rev. Regs. No. 16-2005, Sec. 4.108-2, 2nd par.)
27.
Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or
properties by a sale by a VAT-registered person is a taxable transaction for VAT purposes but
the sale does not result in any output tax.
However, the input tax on the purchases of goods, properties or services related to such zerorated sale shall be available as tax credit or refund in accordance with Rev. Regulations No. 162005. (Rev. Regs. No. 16-2005, 1st par.)
28. Concept of VAT zero-rating. The tax rate is set at zero. When applied to the tax
base, such rate obviously results in no tax chargeable against the purchaser. The seller of such
transactions charges no output tax, but can claim a refund or a tax credit certificate for the VAT
previously charged by suppliers. [Commissioner of Internal Revenue v. Seagate Technology
(Philippines), G. R. No. 153866, February 11, 2005]
Under a zero-rating scheme, the sale or exchange of a particular service is completely
freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input
tax credit, the tax that is included in the cost of purchases attributable to the sale or exchange.
The tax paid or withheld is not deducted from the tax base. (Commissioner, of Internal Revenue
v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005
citing various cases)

29.
Situs of taxation of zero-rated VAT services such as facilitating the collection of
receivables from credit card members situated in the Philippines and payment to service
establishments in the Philippines. The place where the service is rendered determines the
jurisdiction to impose the VAT
Performed in the Philippines, the service is necessarily subject to its jurisdiction for the
State necessarily has to have a substantial connection to it in order to enforce a zero rate.
The place of payment is immaterial much less is the place where the output of the service will
be further or ultimately used.
This is so because the law neither makes a qualification nor adds a condition in
determining the tax situs of a zero-rated service. (Commissioner of Internal Revenue v.
American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005)
30.
Destination principle under the VAT System. As a general rule, the VAT system
uses the destination principle as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where they are consumed. Thus, exports are
zero-rated, while imports are taxed.
This is also known as the Cross Border Doctrine.
31.
Exception to the destination principle. The law clearly provides for an exception
to the destination principle; that is, for a zero percent VAT rate for services that are performed in
the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the [BSP]."
32.
Rationale for zero-rating of exports. The Philippine VAT system adheres
to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the
cost of goods destined for consumption outside of the territorial border of the taxing authority.
[Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No.
150154, August 9, 2005] The Cross Border Doctrine is also known as the destination principle.
Hence, actual or constructive export of goods and services from the Philippines to a foreign
country must be zero-rated for VAT; while, those destined for use or consumption within the
Philippines shall be imposed the twelve percent (12%) VAT.
33.
Zero-rated sale distinguished from exempt transactions:
a.
A zero-rated sale is a taxable transaction but does not result in an output tax
WHILE an exempt transaction is not subject to the output tax.
b.
The input tax on the purchases of a VAT registered person who has zero-rated
sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is
not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt.
c.
Persons engaged in transactions which are zero rated being subject to VAT are
required to register WHILE registration is optional for VAT-exempt persons.
34.
Zero-rated sales by VAT-registered persons. The following sales by VATregistered persons shall be subject to zero percent (0%) rate:
a.
Export sales;
b.
Considered export sales under Executive Order No. 224;
c.
Foreign currency denominated sale; and
d.
Sales to persons or entities deemed tax-exempt under special law or
international agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2nd par., paraphrasing
supplied)

35.
Sale of gold to the Central Bank considered as export sales. As export sales, the
sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser.
Zero rating is primarily intended to be enjoyed by the seller, which charges no output VAT but
can claim a refund of or a tax credit certificate for the input VAT previously charged to it by
suppliers. (Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204,
August 31, 2005)
36.
Sales to ecozone, such as PEZA, considered export-sale. Notably, while an
ecozone is geographically within the Philippines, it is deemed a separate customs territory and
is regarded in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to
this separate customs territory are deemed as exports and treated as export sales. These sales
are zero-rated or subject to a tax rate of zero percent. (Commissioner of Internal Revenue v.
Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities)
37.
Ecozone, defined. An ECOZONE or a Special Economic Zone has been
described as [S]elected areas with highly developed or which have the potential to be
developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment
and financial centers whose metes and bounds are fixed or delimited by Presidential
Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs),
export processing zones (EPZs), free trade zones and tourist/recreational centers.
The
national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory. [Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]
38.
Zero-rated sale of service, defined. A zero-rated sale of service (by a
VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any
output tax. However, the input tax on purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in accordance with Rev. Regs. No. 162005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a), words in italics supplied)
39. Service performed by American Express in facilitating the collection of
receivables from credit card members situated in the Philippines and payment to service
establishments in the Philippines in behalf of its Hong-Kong based client is subject to VAT but
zero-rated. This is so because it meets all the requirements for VAT imposition, as follows:
a.
It regularly renders in the Philippines the service of facilitating the collection and
payment of receivables belonging to a foreign company that is a clearly separate and distinct
entity.
b.
Such service is commercial in nature; carried on over a sustained period of time;
on a significant scale with a reasonable degree of frequency; and not at random, fortuitous, or
attenuated.
c.
For this service, it definitely receives consideration in foreign currency that is
accounted for in conformity with law.
d.
It is not an entity exempt under any of our laws or international agreements.
(Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch),
G. R. No. 152609, June 29, 2005)
40.
While the service performed by American Express is subject to VAT it is zerorated, and BIR Revenue Regulations that alter the legal requirements for zero-rating are ultra
vires and invalid. The VAT system uses the destination principle which posits that the goods
and services are taxed only in the country where they are consumed,
However, the law itself provides for clear exceptions under which the supply of services
shall be zero-rated, among which are the following:

a.
The service is performed in the Philippines;
b.
The services are within the categories provided for under the Tax Code; and
c.
It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas.
American Express renders assistance to its foreign clients by receiving the bills of service
establishments located in the country and forwarding them to their clients abroad. The services
are performed or successfully completed upon send to its foreign clients the drafts and bills it
has gathered from service establishments here, Its services, having been performed in the
Philippines are therefore also consumed in the Philippines. Thus, its services are exempt from
the destination principle and are zero-rated.
The BIR could not change the law. [Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005]