“PRiMUS CUT AND PASTE:
The
The BAR STAR NOTES”
in
TAXATI0N
With selected Supreme Court decisions
up to May 10, 2009
VER: 09.05.12
by
ABELARDO T. DOMONDON
How to use the Notes: These Notes in the form of
textual materials and representative review questions were
specially prepared by Prof. Domondon for the exclusive
use of Bar Candidates who attended his 2009 lectures on
Taxation, and others he has personally authorized.
The purpose of these Notes is to test the candidate’s
ability to answer probable questions that may be asked in the
September 33, 2009 Bar Examinations in Taxation. The last
version to be released is Ver. 09.08.17 which may
substantially alter the contents of this Ver. 09.05.12 Be sure
to secure the last version to replace this version.
DO NOT MEMORIZE the suggested answers. Some of
the answers were purposely made to be lengthy in order to
serve as explanatory devices. This is so because you do not
have time anymore to refer back to your review materials.
The materials are arranged in accordance with the bar
examination coverage. The actual bar questions may not be
so arranged. Likewise, these Notes are only indicative of the
areas from where Bar questions may be sourced.
questions shown in these Notes may or may not be exactly
worded in the actual Bar questions.
The reader is advised to take note of the areas marked
with stars:
If pressed for time, the reader should read only the
items marked  and  . These areas represent 80% to
90% of the sources of questions that would probably be given
in the 2009 Bar exams. The reader should merely browse
the areas marked  and the unmarked areas because they
represent only 10% to 20% of the areas from where questions
may probably be sourced this year.
WARNING:
These materials are copyrighted and/or based on the
writer’s 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 Bar
reviewees the author has personally authorized.
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.
Only copies with the signature of Prof. Domondon, or
his authorized representative and the corresponding number
on this page are considered authorized copies. Holders of
authorized copies are requested not to lend their copies for
reproduction through Xerox or otherwise.
 2
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
 1. Why are tax laws construed strictly against the
State and liberally in favor of the State ?
SUGGESTED ANSWER: 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)
2. 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.
3. 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)
4. 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)
5. What is the effect of a BIR reversal of a previous
ruling interpreting a law as exempting a taxpayer ?
SUGGESTED ANSWER: 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)
6. Why is the right to collect taxes
imprescriptible ?
SUGGESTED ANSWER:
a. As a general rule, revenue laws are not intended to be
liberally construed, and exemptions are not given retroactive
application, considering that taxes are the lifeblood of the government
and in Holmes’ memorable metaphor, the price we pay for civilization,
tax laws must be faithfully and strictly implemented. (Commissioner
of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007)
However, statutes may provide for prescriptive periods for the
collection of particular kinds of taxes.
b. Tax laws, unlike remedial laws, are not to be applied
retroactively. Revenue laws are substantive laws and their application
must not be equated with remedial laws. (Acosta, supra)
7. It is said that taxes are the lifeblood of the
government and any delay in its collection would impair
the rendition of government services. May the collection
of taxes be restrained by a court ?
SUGGESTED ANSWER: As a general rule, “No court shall
have the authority to grant an injunction to restrain the collection of
any national internal revenue tax, fee or charge.” (Sec. 218, NIRC)
However, the Court of Tax Appeals is empowered to enjoin the
collection of taxes through administrative remedies when collection
could jeopardize the interest of the government or taxpayer. (Sec. 11,
Rep. Act No. 1125)
 3

8.What are the grounds and procedure for
suspension of collection of taxes ?
SUGGESTED ANSWER: Where the collection of the amount
of the taxpayer’s liability, sought by means of a demand for payment,
by levy, distraint or sale of property of the taxpayer, or by whatever
means, as provided under existing laws, may jeopardize the interest of
the government or the taxpayer, an interested party may file a motion
for the suspension of the collection of the tax liability (Sec. 1, Rule 10,
RRCTA effective December 15, 2005) with the Court of Tax Appeals.
The motion for suspension of the collection of the tax may be
filed together with the petition for review or with the answer, or in a
separate motion filed by the interested party at any stage of the
proceedings. (Sec. 3, Rule 10, RRCTA effective December 15, 2005)
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 state’s 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 citing Lutz v. Araneta, 98
Phil. 148, 152 (1955); in turn citing Great Atl. & Pac. Tea Co. v.
Grosjean, 302 U.S. 412; U.S. v. Biutler, 297 U.S. 1; McCulloch v.
Maryland, 4 Wheaton 316] 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. Explain the compensatory purpose of taxation.
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)
11. What are the distinctions between a tax and a
license fee ?
SUGGESTED ANSWER: The following are the distinctions
between a tax and a license fee:
a. PURPOSE: A tax is imposed for revenue purposes
WHILE a license fee is imposed for regulatory purposes. (Unless it is
a joint exercise of both the police power and the power of taxation)
b. BASIS: A tax is imposed under the power of taxation
WHILE a license fee is imposed under police power.
c. AMOUNT: There is no limit as to the amount of a tax
WHILE the amount of license fee that could be collected is limited to
the cost of the license and the expenses of police surveillance and
regulation.
d. TIME OF PAYMENT: Taxes are normally paid after the
start of a business WHILE a license fee before the commencement of
business.
e. EFFECT OF NON-PAYMENT: Failure to pay a tax does
not make the business illegal WHILE failure to pay a license fee
makes the 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.
12. Distinguish taxation from police power.
SUGGESTED ANSSWER: 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 citing U. S.
Chief Marshall who once said, the power to tax involves the power to
destroy, McCulloch v. Maryland, 4 Wheaton 316, cited in Sison v.
Ancheta, G. R. No. L – 59431, July 25, 130 SCRA 654) and the belief
that taxes are lifeblood of the state. (Southern Cross Cement
Corporation v. Cement Manufacturers Association of the Philippines,
et al., G. R. No. 158540, August 3, 2005 citing “[T]axes being the
lifeblood of the government, their prompt and certain availability is of
the essence.” Sison v. Ancheta, id., citing Vera v. Fernandez, G. R.
No. L-31364, March 30, 1979, 89 SCRA 199]
These considerations necessitated the evolution of taxation as
a distinct legal concept from police power. (Southern Cross Cement
Corporation, supra)
If the question asks for an enumeration of the distinctions
between the power of taxation and police power, the candidate should
reformulate no. 17 above.
 4
13. What is the purpose of the Sugar Adjustment
Act ?
SUGGESTED ANSWER: The Sugar Adjustment Act which
increased existing taxes on sugar was enacted to stabilize the sugar
industry to prepare it for the loss of its quota in the U.S. market was
levied for a regulatory purpose to protect and promote the sugar
industry which is also for a public purpose. (Lutz v. Araneta, 98 Phil.
148)
The Philsugin fund, an imposition on sugar, to raise funds to
conduct research for the improvement of the sugar industry, is for the
purpose of stabilizing the sugar industry which one of the pillars of the
Philippine economy which affects the welfare of the State. The levy is
not so much an exercise of the power of taxation, nor the imposition of
a special levy, but the exercise of police power which is for the general
welfare of the entire country, therefore for a public purpose. (Republic
v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9, 1966)
14. Section 40 (g) of the Public Service Act
authorizes the collection of “x x x fees as reimbursement
of its expenses in the authorization, supervision and/or
regulation of the public services: x x x g) For each permit,
authorizing the increase in equipment, the installation of
new units or authorizing the increase of capacity, or the
extension of means or general extensions in the services,
twenty centavos for each one hundred pesos or fraction of
the additional capital necessary to carry out the permit.”
(paraphrasing supplied)
Is the imposition a tax measure ? Explain.
SUGGESTED ANSWER: No. It is not a tax measure but a
simple regulatory provision for the collection of fees imposed pursuant
to the exercise of the State’s police power. A tax is imposed under
the taxing power of government principally for the purpose of raising
revenues. The law in question, however, merely authorizes and
requires the collection of fees for the reimbursement of the
Commission’s expenses in the authorization, supervision and/or
regulation of public services. (Republic, etc., v. International
Communications Corporation (ICC), G. R. No. 141667, July 17, 2006)
15. How may the power of taxation also be used to
implement power of eminent domain ?
SUGGESTED ANSWER: 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)]
16. What is purpose for the limitations on the
power of taxation ?
SUGGESTED ANSWER: 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 ANSWER: The inherent limitations are
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.
 5
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. When are taxes considered as being for a
public purpose ?
SUGGESTED ANSWER: 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.
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. Define a taxpayer’s suit.
SUGGESTED ANSWER: Taxpayers’ suit is a case where the
act complained of directly involves the illegal disbursement of public
funds derived from taxation. (Justice Melo, dissenting in Kilosbayan,
Inc. v. Guingona, Jr., 232 SCRA 110)
4. What is locus standi ?
SUGGESTED ANSWER: Locus standi is “a right of
appearance in a court of justice on a given question. (Abaya v.
Ebdane, G. R. No. 167919, February 14, 2007)
It is a party’s personal and substantial interest in the case, such
that the party has sustained or will sustain (Ibid.)direct injury as a
result of the government act being challenged. It calls for more than
just a generalized grievance.
A party need not be a party to the contract to challenge its
validity. (Ibid.)
5. What is meant by the term “material interest” ?
SUGGESTED ANSWER: The term “interest” means a material
interest, an interest in issue affected by the decree, as distinguished
from mere interest in the question involved, or a mere incidental
interest. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)
6. What is the rationale for locus standi ?
SUGGESTED ANSWER: The rationale for requiring a party
who challenges the constitutionality of a statute to allege such a
personal stake in the outcome of the controversy is “to ensure that a
concrete adverseness which sharpens the presentation of issues upon
which the court so largely depends for illumination of different
constitutional questions.” (Abaya v. Ebdane, G. R. No. 167919,
February 14, 2007)
7. When may locus standi be brushed aside ?
SUGGESTED ANSWER: In cases of paramount importance
where serious constitutional questions are involved, the standing
requirements may be relaxed and a suit may be allowed to prosper
even where there is no direct injury to the party claiming the right of
judicial review. [Coconut Oil Refiners Association, Inc., etc., et al., vs.
Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Bayan
(Bagong Alyansang Makabayan) v. Zamora, G. R. No. 138570,
October 10, 2000, 342 SCRA 449, in turn citing Kilosbayan, Inc. v.
Guingona, Jr., G. R. No. 113375, May 5, 1994, 232 SCRA 110]
 8. What are the requirements that must be
met before taxpayers, concerned citizens and legislators
may be accorded standing to sue ?
SUGGESTED ANSWER:
a. The case should involve constitutional issues;
b. For taxpayers, there must be a claim of illegal
disbursement of public funds or that the tax measure is
unconstitutional.
c. For voters, there must be a showing of obvious interest
in the validity of the election law in question.
d. For concerned citizens, there must be a showing that
the issues raised are of transcendental importance which must be
settled early.
e. For legislators, there must be a claim that the official
action complained of infringes upon their prerogatives as legislators.
(David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G.
R. No. 171396, May 3, 2006)
 9. What are the requisites for challenging
constitutionality of law including a tax law ?
SUGGESTED ANSWER: The party bringing suit must show
“not only that the law or act is invalid, but also that he has sustained
or is in immediate, or imminent danger of sustaining some direct
injury as a result of its enforcement and not merely that he suffers
thereby in some indefinite way.” (Soriano III v. Lista, et al., G. R.
No. 153881, March 24, 2003)

10. Locus standi being merely a matter of
procedure, have been waived in certain instances where a
 6
party who is not personally injured may be allowed to
bring suit. Give some examples.
SUGGESTED ANSWER: 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. Taxpayer’s 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)
11. The petitioners impugn the validity of the
establishment of tax and duty-free shops within the Subic
Special Economic Zone (SSEZ) and the removal of
consumer goods and items from the zones without
payment of corresponding duties and taxes for the reason
that this constitute executive legislation in violation of the
rule on separation of powers, that only “raw material,
capital and equipment” should be allowed the privilege.
Rule on the objections and reason out your answer briefly.
SUGGESTED ANSWER: The objections should not be given
credence. It is legal to setup duly authorized duty-free shops in the
SSEZ to sell tax and duty-free consumer items in the Secured Area.
This is in line with the policy enunciated in the law that “the Subic
Special Economic Zone shall be developed into a self-sustaining,
industrial, commercial, financial and investment center to generate
employment opportunities in and around the zone and to attract and
promote productive foreign investments.”
While it is true that Section 12 (b) of Rep. Act No. 7227
mentions only raw materials, capital and equipment, this does not
necessarily mean that the tax and duty free buying privilege is limited
to these types of articles to the exclusion of consumer goods.
It must be remembered that in construing statutes, the proper
course is to start out and follow the true intent of the Legislature and to
adopt that sense which harmonizes best with the context and
promotes to the fullest manner the policy and objects of the
Legislature.
The concept of inclusio unius est exclusio alterius does not find
application because the phrase “tax and duty-free importations of raw
materials, capital and equipment” was merely cited as an example of
incentives that the SSEZ is authorized to grant, in line with its being a
free port zone. Thus, the legislative intent is that consumer goods
entering the SSEZ which satisfy the needs of the zone and are
consumed there are not subject to duties and taxes in accordance
with Philippine law. (Coconut Oil Refiners Association, Inc., etc., et
al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005)
` Would your answer be the same if a Presidential
Proclamation allowed for the limited withdrawal from the
Clark Special Economic Zone or the John Hay Economic
Zone of consumer goods tax and duty-free ?
SUGGESTED ANSWER: The answer would not be the same.
This time the Presidential Proclamation would be invalid as the
statutory tax exempt privilege was granted only to the Subic Special
Economic Zone and not to John Hay or Clark. This is so because the
Constitution mandates that no law granting tax exemption shall be
passed without the concurrence of a majority of all the members of
Congress. (Coconut Oil Refiners Association, Inc., etc., et al., v.
Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing John Hay
People’s Alternative Coalition, et al., v. Lim, etc., et al., G.R. No.
119775, October 24, 2003, 414 SCRA 356)
Furthermore, the law is very clear that the “exportation or
removal of goods from the territory of the Subic Special Economic
Zone to other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and
other relevant tax laws of the Philippines.” (Ibid.)
11-A. Nature of actual case or controversy. An
actual case or controversy involves a conflict of legal rights, an
assertion of opposite legal claims susceptible of judicial adjudication.
(ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No.
166715, August 14, 2008 citing Cruz, Isagani, PHILIPPINE
CONSTITUTIONAL LAW, 1995 edition, p. 23)
11-B. Criteria of being ripe for judicial determination.
A closely related requirement is ripeness, that is, the question must
be ripe for adjudication. And a constitutional question is ripe for
adjudication when the governmental act being challenged has a
direct adverse effect on the individual challenging it . (ABAKADA Guro
Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008
citing Bernas, Joaquin, THE 1987 CONSTITUTION OF THE REPUBLIC
OF THE PHILIPPINES: A COMMENTARY, 1996 edition, pp. 848-849)
Thus, to be ripe for judicial adjudication, the petitioner must show a
personal stake in the outcome of the case or an injury to himself that
can be redressed by a favorable decision of the Court. [ABAKADA
Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v. Secretary of
 7
Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J.,
separate opinion]
11-C. Personal injury must be shown for judicial
controversy to be ripe for judicial determination. In this
case, aside from the general claim that the dispute has ripened into
a judicial controversy by the mere enactment of the law even without
any further overt act. (ABAKADA Guro Party List, etc., v. Purisima, etc.,
et al., G. R. No. 166715, August 14, 2008 citing La Bugal-B’Laan Tribal
Association, Inc. v. Ramos, G.R. No. 127882, 01 December 2004, 445
SCRA 1)
Thus, where petitioners fail either to assert any specific and
concrete legal claim or to demonstrate any direct adverse effect of
the law on them or are unable to show a personal stake in the
outcome of this case or an injury to themselves their petition is
procedurally infirm. (ABAKADA Guro Party List, etc., supra)
11-D. Constitutionality of law is exception to the
doctrine of “ripe for judicial determination”. This
notwithstanding, public interest requires the resolution of the
constitutional issues raised by petitioners. The grave nature of their
allegations tends to cast a cloud on the presumption of
constitutionality in favor of the law. And where an action of the
legislative branch is alleged to have infringed the Constitution, it
becomes not only the right but in fact the duty of the judiciary to
settle the dispute. [ABAKADA Guro Party List, etc., v. Purisima, etc., et
al., G. R. No. 166715, August 14, 2008 citing Tañada v. Angara, 338 Phil.
546 (1997)]
 12. The VAT law provides that, the President,
upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%) after any of the
following conditions have been satisfied. “(i) value-added
tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%) or (ii) national government deficit as a
percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).”
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]]
13. The power to tax should be exercised only within
the territorial boundaries of the taxing authority. In theory, it is
only within a state’s territorial boundaries that a state could give
protection, hence it is only within that territory that it could demand
support in the form of taxes.
14. Situs of taxation is the place or the authority that
has the power to collect taxes. It is premised upon the symbiotic
relation between the taxpayer and the State.
15. The place that gives protection is the place that has
the right to demand that it be supported in the form of taxes so it
could continually give protection.
16. The situs of real property taxes is the place where
the property is located because it is that place that gives
protection. The applicable concept is lex situs or lex rei sitae.
17. The situs of taxation of tangible personal property is
the place where the owner is located because it is that place that
gives protection to the owner which protection extends to the tangible
personal property. The applicable concept is mobilia sequuntur
personam.
18. Intangible personal property may have obtained a
business situs in a particular place even if located elsewhere.
Thus, the dividends earned from domestic corporations are
considered as income from within, irrespective where the shares of
stock of such domestic corporation is located.
19. The situs of income taxation is determined by the
nationality, residence of the taxpayer and source of income.
Please refer to general principles of income taxation under income
taxation.
 8
20. The situs of excise taxes is the place where the
privilege is exercised because it is that place that gives
protection.
21. The situs of transfer taxes, such as estate and
donor’s taxes, is determined by the nationality and residence of
the taxpayer and the place where the property is located. Please
refer to estate and donor’s taxes.

22. Juliane a non-resident alien appointed as
a commission agent by a domestic corporation with a
sales commission of 10% all sales actually concluded and
collected through her efforts. The local company withheld
the amount of P107,000 from her sales commission and
remitted the same to the BIR.
She filed a claim for refund alleging that her sales
commission is not taxable because the same was a
compensation for her services rendered in Germany and
therefore considered as income from sources outside the
Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor which
determines the source of income of personal services is not the
residence of the payor, or the place where the contract for service is
entered into, or the place of payment, but the place where the services
were actually performed.
Since the activity of securing the sales were in Germany, then
the income did not originate from sources from within the Philippines.
(Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793,
August 29, 2006)
NOTE AND COMMENTS: In the above case, the Supreme
Court reiterated the rule that “source of income” relates to the
property, activity or service that produced the income. With respect to
rendition of labor or personal service, it is the place where the labor or
service was performed that determines the source of the income.
The above Baier-Nickel case discussed the import of the
landmark cases (Howden and BOAC) involving sources of income for
tax purposes both of which may be dangerous for Bar purposes:
23. A domestic insurance company decided to
reinsure with a foreign reinsurer the risks it has
undertaken with its local clients. The foreign reinsurer
does not have an office, neither does it do business in the
Philippines. Are the reinsurance premiums subject to
Philippine income taxation ?
SUGGESTED ANSWER: Yes because the undertaking of the
foreign insurance company to indemnify the local insurance company
is the activity that produced the income.
The reinsurance premiums remitted to the foreign reinsurer had
for their source the undertaking to indemnify the local insurer against
liability. Said undertaking is the activity that produced there insurance
premiums, and the same took place in the Philippines. The reinsured,
the liabilities insured and the risk originally undertaken by the local
insurance company, upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. (Alexander
Howden & Co., Ltd. v. Collector of Internal Revenue, 121 Phil. 579; 13
SCRA 601 (1965) cited in Baier-Nickel)
 24. BOAC, 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.
Is BOAC 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 cited in
Bauer-Nickel)
NOTES AND COMMENTS: The concept of imposition of the
gross Philippine billings that taxes only flights that originate from the
Philippines apply only to resident foreign corporations doing business
in the Philippines [Sec. 28 (A) (3) (a), NIRC of 1997] AND NOT TO
incomes of non-resident foreign corporations that are taxed on the
gross income. [Sec. 28 (B) (1)]
25. No improper delegation of legislative authority
to tax. The power to tax is inherent in the State, such power being
 9
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 citing COOLEY TAXATION, 3rd Ed., p. 43 cited in
DIMAAMPAO, TAX PRINCIPLE AND REMEDIES, p. 13)
26. Instances where the national revenue officers
had ventured in the area of unauthorized administrative
legislation.
a. By adding the qualification that the tax due after the
12% increase becomes effective shall not be lower than the tax
actually paid prior to 1 January 2000, Revenue Regulation No. 17-99
effectively imposes a tax which is the higher amount between the ad
valorem tax being paid at the end of the three (3)-year transition
period and the specific tax under paragraph C, sub-paragraph (1)-
(4), as increased by 12%—a situation not supported by the plain
wording of Section 145 of the Tax Code. (Commissioner of Internal
Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21,
2008)
b. Respondent was not informed in writing of the law and
the facts on which the assessment of estate taxes was made
pursuant to Section 228 of the 1997 Tax Code, as amended by
Republic Act (R.A.) No. 8424. She was merely notified of the
findings by the Commissioner, who had simply relied upon the old
provisions of the law and Revenue Regulation No. 12-85 which was
based on the old provision of the law. The Court held that in case of
discrepancy between the law as amended and the implementing
regulation based on the old law, the former necessarily prevails. The
law must still be followed, even though the existing tax regulation at
that time provided for a different procedure. (Ibid., Commissioner of
Internal Revenue v. Reyes, G.R. No. 159694, 27 January 2006, 480 SCRA
382 in turn citing Philippine Petroleum Corp. v. Municipality of Pililla, Rizal,
198 SCRA 82, 88, 3 June 1991, likewise citing Shell Philippines, Inc. v.
Central Bank of the Philippines, 162 SCRA 628, 634, 27 June 1988)
c. The tax authorities gave the term “tax credit” in
Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly
disparate from what R.A. No. 7432 provides. Their interpretation
muddled up the intent of Congress to grant a mere discount privilege
and not a sales discount. The Court, striking down the revenue
regulation, held that an administrative agency issuing regulations
may not enlarge, alter or restrict the provisions of the law it
administers, and it cannot engraft additional requirements not
contemplated by the legislature. (Ibid., Commissioner of Internal
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April
2005, 456 SCRA 414)
d. Commissioner Jose Ong issued Revenue
Memorandum Order (RMO) No. 15-91, as well as the clarificatory
Revenue Memorandum Circular (RMC) 43-91, imposing a 5%
lending investor’s tax under the 1977 Tax Code, as amended by
Executive Order (E.O.) No. 273, on pawnshops. The Commissioner
anchored the imposition on the definition of lending investors
provided in the 1977 Tax Code which, according to him, was broad
enough to include pawnshop operators. However, the Court noted
that pawnshops and lending investors were subjected to different tax
treatments under the Tax Code prior to its amendment by the
executive order; that Congress never intended to treat pawnshops in
the same way as lending investors; and that the particularly involved
section of the Tax Code explicitly subjected lending investors and
dealers in securities only to percentage tax. And so the Court
affirmed the invalidity of the challenged circulars, stressing that
“administrative issuances must not override, supplant or modify the
law, but must remain consistent with the law they intend to carry
out.” (Ibid., citing Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc., 453 Phil. 1043 (2003), at 1052 in turn citing Commissioner
of Internal Revenue v. Court of Appeals, G.R. No. 108358, 20 January
1995, 240 SCRA 368, 372; Romulo, Mabanta, Buenaventura, Sayoc & De
los Angeles v. Home Development Mutual Fund, G.R. No. 131082, 19 June
2000; 333 SCRA 777, 786)
e. The then acting Commissioner issued RMC 7-85,
changing the prescriptive period of two years to ten years for claims
of excess quarterly income tax payments, thereby creating a clear
inconsistency with the provision of Section 230 of the 1977 Tax
Code. The Court nullified the circular, ruling that the BIR did not
simply interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress. [Ibid., Philippine Bank of Communications
v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)]
f. The Supreme Court ruled as invalid RMO 4-87 which
had construed the amnesty coverage under E.O. No. 41 (1986) to
include only assessments issued by the BIR after the promulgation
of the executive order on 22 August 1986 and not assessments
made to that date. The Supreme Court resolved in the negative.
[Ibid., Commissioner of Internal Revenue v. CA, et al., 310 Phil. 392 (1995)]
27. The rule-making power must be confined to details
for regulating the mode or proceedings in order to carry into
effect the law as it has been enacted.
a. It cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the statute.
[Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R.
Nos. 167274-75, July 21, 2008 citing Landbank of the Philippines v. Court
of Appeals, 327 Phil. 1047, 1052 (1996)] An administrative agency
issuing regulations may not enlarge, alter or restrict the provisions of
 10
the law it administers, and it cannot engraft additional requirements a. No imprisonment for non-payment of a poll tax;
not contemplated by the legislature. (Ibid., Commissioner of Internal b. Taxation shall be uniform and equitable;
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 c. Congress shall evolve a progressive system of taxation;
April 2005, 456 SCRA 414) d. All appropriation, revenue or tariff bills shall originate
The “plain meaning rule” or verba legis in statutory exclusively in the House of Representatives, but the Senate may
construction should be applied such that where the words of a propose and concur with amendments;
statute are clear, plain and free from ambiguity, it must be given its e. The President shall have the power to veto any particular
literal meaning and applied without attempted interpretation. (Ibid.) item or items in an appropriation, revenue, or tariff bill, but the veto
b. Administrative regulations must always be in harmony shall not affect the item or items to which he does not object;
with the provisions of the law because any resulting discrepancy f. Delegated power of the President to impose tariff rates,
between the two will always be resolved in favor of the basic law. import and export quotas, tonnage and wharfage dues:
[Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. 1) Delegation by Congress
Nos. 167274-75, July 21, 2008 citing Landbank of the Philippines v. Court 2) through a law
of Appeals, 327 Phil. 1047, 1052 (1996)] 3) subject to Congressional limits and
restrictions
CONSTITUTIONAL LIMITATIONS 4) within the framework of national development
program.
1. What are the constitutional limitations on the power of g. Tax exemption of charitable institutions, churches,
taxation ? parsonages and convents appurtenant thereto, mosques, and all
SUGGESTED ANSWER: The general or indirect constitutional lands, buildings and improvements of all kinds actually, directly and
limitations as well as the specific or direct constitutional limitations. exclusively used for religious, charitable or educational purposes;
h. No tax exemption without the concurrence of majority

2. What are the general or indirect constitutional vote of all members of Congress;
limitations on the power of taxation ? i. No use of public money or property for religious
SUGGESTED ANSWER: The general or indirect constitutional purposes except if priest is assigned to the armed forces, penal
limitations are the following: institutions, government orphanage or leprosarium;
a. Due process clause; j. Money collected on tax levied for a special purpose to be
b. Equal protection clause; used only for such purpose, balance if any, to general funds;
c. Freedom of the press; k. The Supreme Court's power to review judgments or
d. Religious freedom; orders of lower courts in all cases involving the legality of any tax,
e. No taking of private property without just compensation; impose, assessment or toll or the legality of any penalty imposed in
f. Non-impairment clause; relation to the above;
g. Law-making process: l. Authority of local government units to create their own
1) Bill should embrace only one subject expressed sources of revenue, to levy taxes, fees and other charges subject to
in the title thereof; guidelines and limitations imposed by Congress consistent with the
2) Three (3) readings on three separate days; basic policy of local autonomy;
3) Printed copies in final form distributed three (3) m. Automatic release of local government's just share in
days before passage. national taxes;
h. Presidential power to grant reprieves, commutations and n. Tax exemption of all revenues and assets of non-stock,
pardons and remittal of fines and forfeiture after conviction by final non-profit educational institutions used actually, directly and
judgment. exclusively for educational purposes;
o. Tax exemption of all revenues and assets of proprietary or
 3. What are the specific or direct cooperative educational institutions subject to limitations provided by
constitutional limitation ? law including restrictions on dividends and provisions for reinvestment
SUGGESTED ANSWER: of profits;
 11
p. Tax exemption of grants, endowments, donations or
contributions used actually, directly and exclusively for educational
purposes subject to conditions prescribed by law.
3-A. No denial of due process when the respondent
is given the opportunity to file affidavits and other
pleadings during the preliminary investigation. A In the exercise of its power to make classifications for the purpose of
respondent cannot claim denial of due process when she was
given the opportunity to file her affidavits and other pleadings and
submit evidence before the DOJ during the preliminary investigation
of her case and before the Information was filed against her.
Due process is merely an opportunity to be heard. In addition,
preliminary investigation conducted by the DOJ is merely
inquisitorial. It is not a trial of the case on the merits. Its sole
purpose is to determine whether a crime has been committed and
whether the respondent therein is probably guilty of the crime. It is
not the occasion for the full and exhaustive display of the parties’
evidence. Hence, if the investigating prosecutor is already satisfied
that he can reasonably determine the existence of probable cause
based on the parties’ evidence thus presented, he may terminate the
proceedings and resolve the case. (Santos v. People, et al, G. R. No.
173176, August 26, 2008 citing De Ocampo v. Secretary of Justice, G.R.
No. G.R. No. 147932, 25 January 2006, 480 SCRA 71, 81-82)
4. 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)
4-A. The equal protection of the laws clause of the
Constitution allows classification. Classification in law, as in
the other departments of knowledge or practice, is the grouping of
things in speculation or practice because they agree with one
another in certain particulars. A law is not invalid because of simple
inequality. The very idea of classification is that of inequality, so that
it goes without saying that the mere fact of inequality in no manner
determines the matter of constitutionality.
All that is required of a valid classification is that it be
reasonable, which means that the classification should be based on
substantial distinctions which make for real differences, that it must
be germane to the purpose of the law; that it must not be limited to
existing conditions only; and that it must apply equally to each
member of the class. This Court has held that 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]
4-B. State has discretion to make the classification.
enacting laws over matters within its jurisdiction, the state is
recognized as enjoying a wide range of discretion. It is not necessary
that the classification be based on scientific or marked differences of
things or in their relation. Neither is it necessary that the
classification be made with mathematical nicety. Hence, legislative
classification may in many cases properly rest on narrow
distinctions, for the equal protection guaranty does not preclude the
legislature from recognizing degrees of evil or harm, and legislation
is addressed to evils as they may appear. [ABAKADA Guro Party List,
etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]
4-C. Equal protection does not demand absolute
equality. The equal protection clause exists to prevent undue favor
or privilege. It is intended to eliminate discrimination and oppression
based on inequality. Recognizing the existence of real differences
among men, the equal protection clause 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 citing Himagan v. People, G.R. No. 113811, 7
October 1994, 237 SCRA 538, 551.
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)
 5. What are the requisites for the validity of a
classification ?
SUGGESTED ANSWER: Classification, to be valid, must
(a) rest on substantial distinctions,
(b) be germane to the purpose of the law,
(c) not be limited to existing conditions only, and
(d) apply equally to all members of the same class. (Tiu, et
al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)
 12
6. The law grant of tax and duty-free status
under Rep. Act No. 7227, to retailers inside the SSEZ
without granting the same to those outside the SSEZ. Is
there a violation of the equal protection clause ?
SUGGESTED ANSWER: There is no violation of equal
protection because there exists a valid classification as shown below:
a. Significant distinctions exist between the two groups.
Those outside of the SSEZ maintain their business within Philippine
customs territory while those within the SSEZ operate within the so-
called “separate customs territory.” To grant the same privileges
would clearly defeat the statue’s intent to carve a territory out of the
military reservations in Subic Bay where free flow of goods and capital
is maintained.
b. The classification is germane to the purpose of Rep. Act
No. 7227. As held in Tiu, the real concern of the law is to convert the
lands formerly occupied by the US military bases into economic or
industrial areas. In furtherance of such objective, Congress deemed it
necessary to extend economic incentives, in terms of a complete
package of tax incentives and other benefits, to the establishments
within the zone to attract and encourage foreign and local investors.
c. The classification is not limited to the existing conditions
when the law was promulgated but to future conditions as well,
inasmuch as the law envisioned the former military reservation to
ultimately develop into a self-sustaining investment center.
d. The classification applies equally to all retailers found
within the “secured area.” As ruled in Tiu, the individuals and
businesses within the “secured area,” being in like circumstances or
contributing directly to the achievement of the end purposes of the
law, are not categorized further. They are all similarly treated, both in
privileges granted and in obligations required. (Coconut Oil Refiners
Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527,
July 29, 2005 citing Tiu, et al., v. Court of Appeals, et al., G.R. No.
127410, January 20, 1999, 301 SCRA 278)

7. Is the statutory grant of tax and duty-free
importation into the Subic Special Economic Zone
violative the “preferential use” concept of the
Constitution ?
SUGGESTED ANSWER: No. The mere fact that the law
authorizes the importation and trade of foreign goods does not suffice
to declare it unconstitutional on this ground.
While the Constitution does not encourage the unlimited entry
of foreign goods, services and investments into the country, it does
not prohibit them either. In fact, it allows an exchange on the basis of
equality and reciprocity, frowning only in foreign competition that is
unfair. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres,
etc., et al., G. R. No. 132527, July 29, 2005 citing Tanada v. Angara,
G. R. No. 118295, May 2, 1997, 272 SCRA 18)
8. 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.
9. Uniformity may have a restrictive meaning different
from equality and equal protection. It would mean then that the
same rate shall be imposed for the same subjects and objects within
the territorial boundaries of a taxing authority.
10. 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)
10-A. The law providing financial rewards to tax
collectors is constitutional. Public service is its own reward.
Nevertheless, public officers may by law be rewarded for exemplary
and exceptional performance. A system of incentives for exceeding
the set expectations of a public office is not anathema to the concept
of public accountability. In fact, it recognizes and reinforces
dedication to duty, industry, efficiency and loyalty to public service of
deserving government personnel.
The U.S. Supreme Court validated a law which awards to
officers of the customs as well as other parties an amount not
exceeding one-half of the net proceeds of forfeitures in violation of
the laws against smuggling. [ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing United
States v. Matthews, 173 U.S. 381 (1899)]
The offer of a portion of such penalties to the collectors is to
stimulate and reward their zeal and industry in detecting fraudulent
attempts to evade payment of duties and taxes. [ABAKADA Guro
Party List, etc., supra citing Dorsheimer v. United States, 74 U.S. 166
(1868)]
In the same vein, employees of the BIR and the BOC may by
law be entitled to a reward when, as a consequence of their zeal in
the enforcement of tax and customs laws, they exceed their revenue
targets. Public service is its own reward. Nevertheless, public
officers may by law be rewarded for exemplary and exceptional
 13
performance. A system of incentives for exceeding the set
expectations of a public office is not anathema to the concept of
public accountability. In fact, it recognizes and reinforces dedication
to duty, industry, efficiency and loyalty to public service of deserving
government personnel. (ABAKADA Guro Party List, etc., supra)
10-B. Rewards law establishes safeguards to ensure
that the reward system will not create “bounty hunters.”
The Attrition Act of 2005 RA 9335 establishes safeguards to ensure
that the reward will not be claimed if it will be either the fruit of
“bounty hunting or mercenary activity” or the product of the irregular
performance of official duties. One of these precautionary measures
is embodied in Section 8 of the law:
SEC. 8. Liability of Officials, Examiners and Employees
of the BIR and the BOC. – The officials, examiners, and
employees of the [BIR] and the [BOC] who violate this Act or
who are guilty of negligence, abuses or acts of malfeasance
or misfeasance or fail to exercise extraordinary diligence in
the performance of their duties shall be held liable for any
loss or injury suffered by any business establishment or
taxpayer as a result of such violation, negligence, abuse,
malfeasance, misfeasance or failure to exercise extraordinary
diligence. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al.,
G. R. No. 166715, August 14, 2008)
10-C. The rewards law to tax collectors does not
violate equal protection. Equality guaranteed under the equal
protection clause is equality under the same conditions and among
persons similarly situated; it is equality among equals, not similarity
of treatment of persons who are classified based on substantial
differences in relation to the object to be accomplished. When things
or persons are different in fact or circumstance, they may be treated
in law differently.
The guaranty of equal protection of the laws is not a guaranty
of equality in the application of the laws upon all citizens of the
[S]tate. It is not, therefore, a requirement, in order to avoid the
constitutional prohibition against inequality, that every man, woman
and child should be affected alike by a statute. Equality of operation
of statutes does not mean indiscriminate operation on persons
merely as such, but on persons according to the circumstances
surrounding them. It guarantees equality, not identity of rights.
The Constitution does not require that things which are
different in fact be treated in law as though they were the same. The
equal protection clause does not forbid discrimination as to things
that are different. It does not prohibit legislation which is limited
either in the object to which it is directed or by the territory within
which it is to operate. [ABAKADA Guro Party List, etc., v. Purisima, etc.,
et al., G. R. No. 166715, August 14, 2008]
The equal protection clause recognizes a valid classification,
that is, a classification that has a reasonable foundation or rational
basis and not arbitrary.1[22] 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.
Both the BIR and the BOC are bureaus under the DOF. They
principally perform the special function of being the instrumentalities
through which the State exercises one of its great inherent functions
– taxation. 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. supra)]
10-D. 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.
But a discriminatory purpose is not presumed, there must be a
showing of “clear and intentional discrimination. [Santos v. People, et
al, G. R. No. 173176, August 26, 2008 citing People v. Dela Piedra, 403
Phil. 31, 54-56 (2001)]
10-E. There is no denial of equal protection where
the prosecution exercises its discretion in determining
1
 14
probable cause. The discretion of who to prosecute depends on
the prosecution’s sound assessment whether the evidence before it
can justify a reasonable belief that a person has committed an
offense. The presumption is that the prosecuting officers regularly
performed their duties, and this presumption can be overcome only
by proof to the contrary, not by mere speculation. There must be
evidence to overcome this presumption. The mere allegation a
Cebuana, was charged with the commission of a crime, while a
Zamboangueña, was not, is insufficient to support a conclusion that
the prosecution officers acted in denial of the equal protection of the
laws. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
10-F. 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. The remedy for
unequal enforcement of the law in such instances does not lie in the
exoneration of the guilty at the expense of society x x x. Protection
of the law will be extended to all persons equally in the pursuit of
their lawful occupations, but no person has the right to demand
protection of the law in the commission of a crime.
Likewise, [i]f 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)
11. A fixed annual license fee on those engaged in the
business of general enterprise was also imposed on the sale of
bibles by a religious sect. Is this valid or violative of the
constitutionally guaranteed freedom of religion ?
SUGGESTED ANSWER: It is not valid because it violates the
constitutionally guaranteed freedom of religion. As a license fee is
fixed in amount and unrelated to the receipts of the taxpayer, such a
license fee, when applied to a religious sect is actually imposed as a
condition for the free exercise of religion. A license fee “restrains in
advance those constitutional liberties of press and religion and
inevitably tends to suppress their exercise.”
12. 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. Even though such
taxation may affect particular contracts, as it may increase the debt of
one person and lessen the security of another, or may impose
additional burdens upon one class and release the burdens of
another, still the tax must be paid unless prohibited by the constitution,
nor can it be said that it impairs the obligations of any existing contract
in its true and legal sense. (Tolentino v. Secretary of Finance, et al.,
and companion cases, 235 SCRA 630)
13. Under the now prevailing Constitution, where there is
neither a grant nor prohibition by statute, the taxing power of
local governments must be deemed to exist although Congress
may provide statutory limitations and guidelines in order to
safeguard the viability and self-sufficiency of local government units
by directly granting them general and broad tax powers. (City
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No.
127708, March 25, 1999)
13-A. Franchise tax is a direct tax. The franchise tax
is a percentage tax imposed only on franchise holders. It is
imposed under Section 119 of the Tax Code and is a direct
liability of the franchise grantee. (Quezon City, et al., v. ABS-
CBN Broadcasting Corporation, G. R. No. 166408, October 6,
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.)
14. The Local Government Code explicitly authorizes
provinces and cities, notwithstanding “any exemption granted
by any law or other special law” to impose a tax on businesses
enjoying a franchise. Indicative of the legislative intent to carry out
the constitutional mandate of vesting broad tax powers to local
government units, the Local Government Code has withdrawn tax
exemptions or incentives theretofore enjoyed by certain entities. (City
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No.
127708, March 25, 1999)
15. Philippine Long Distance Telephone Company, Inc., v.
City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld
the authority of the City of Davao, a local government unit, to impose
and collect a local franchise tax because the Local Government has
withdrawn all tax exemptions previously enjoyed by all persons and
authorized local government units to impose a tax on business
 15
enjoying a franchise tax notwithstanding the grant of tax exemption to
them.
16. Explain the concept of the “paradigm
shift” in local government taxation.
SUGGESTED ANSWER: “Paradigm shift” from exclusive
Congressional power to direct grant of taxing power to local legislative
bodies. The power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given direct authority to levy
taxes, fees and other charges pursuant to Article X, section 5 of the
1987 Constitution. (Batangas Power Corporation v. Batangas City, et
al. G. R. No. 152675, and companion case, April 28, 2004 citing
National Power Corporation v. City of Cabanatuan, G. R. No. 149110,
April 9, 2003)
17. The fundamental law did not intend the direct grant to
local government units to be absolute and unconditional, the
constitutional objective obviously is to ensure that, while local
government units are being strengthened and made more
autonomous, the legislature must still see to it that:
a. the taxpayer will not be over-burdened or saddled with
multiple and unreasonable impositions;
b. each local government unit will have its fair share of
available resources;
c. the resources of the national government will be unduly
disturbed; and
d. local taxation will be fair, uniform and just. (Manila
Electric Company v. Province of Laguna, et al., G.R. No. 131359, May
5, 1999)
17-A. Taxing power of the local government is
limited. The taxing power of local governments is limited in the
sense that Congress can enact legislation granting tax exemptions.
While the system of local government taxation has changed
with the onset of the 1987 Constitution, the power of local
government units to tax is still limited.
While the power to tax by local governments may be
exercised by local legislative bodies, no longer merely be virtue of a
valid delegation as before, but pursuant to direct authority conferred
by Section 5, Article X of the Constitution, the basic doctrine on local
taxation remains essentially the same, “the power to tax is [still]
primarily vested in the Congress.” (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)
17-B. Further amplification by Bernas of the local
government’s 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)
17-C. Reconciliation of the local government’s
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 government’s 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
 16
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]
18. The withdrawal of a tax exemption should not be
construed as prohibiting future grants of exemption from all
taxes. Indeed, the grant of taxing powers to local government units
under the Local Government Code 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. (Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August
22, 2001)
18-A. Tax exemptions in franchises are always
subject to withdrawal. Moreover, Smart’s franchise was 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.
In truth, the Contract Clause has never been thought as a
limitation on the exercise of the State’s 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)
19. When Congress approved a provision that, “Any
advantage, favor, privilege, exemption, or immunity granted under
existing franchises, or may hereafter be granted, shall ipso facto
become part of previously granted telecommunications franchises and
shall be accorded immediately and unconditionally to the grantees of
such franchises: Provided, however, That the foregoing shall neither
apply to nor affect provisions of telecommunications franchises
concerning territory covered by the franchise, the life span of the
franchise, or the type of service authorized by the franchise.”
(Underscoring supplied) there was no intention for it to operate as
a blanket tax exemption to all telecommunications entities.
Applying the rule of strict construction of laws granting tax exemptions
and the rule that doubts should be resolved in favor of municipal
corporations in interpreting statutory provisions on municipal taxation,
it was held that said provisions cannot be considered as extending its
application to franchises such as that of PLDT. (Philippine Long
Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R.
No. 143867, August 22, 2001)
19-A. “In lieu of all taxes in the franchise of ABS-
CBN does not exempt it from local franchise taxes.” The
“in lieu of all taxes” provision in the franchise of ABS-CBN does not
expressly provide what kind of taxes ABS-CBN is exempted from. It
is not clear whether the exemption would include both local, whether
municipal, city or provincial, and national tax. Whether the “in lieu of
all taxes provision” would include exemption from local tax is not
unequivocal.
The right to exemption from local franchise tax must be clearly
established and cannot be made out of inference or implications but
must be laid beyond reasonable doubt. Verily, the uncertainty in the
“in lieu of all taxes” provision should be construed against ABS-CBN.
ABS-CBN has the burden to prove that it is in fact covered by the
exemption so claimed but has failed to do so. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008.
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.)
19-B. “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
 17
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)]
19-C. 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.
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.)
19-D. Historical background on why ABS-CBN is
subject to VAT and not to the franchise tax. At the time of
the enactment of its franchise on May 3, 1995, ABS-CBN was
subject to 3% franchise tax under Section 117(b) of the 1977
National Internal Revenue Code (NIRC), as amended.
On January 1, 1996, R.A. No. 7716, otherwise known as the
Expanded Value Added Tax Law, took effect and subjected to VAT
those services rendered by radio and/or broadcasting stations.
Notably, under the same law, “telephone and/or telegraph systems,
broadcasting stations and other franchise grantees” were omitted
from the list of entities subject to franchise tax. The impression was
that these entities were subject to 10% VAT but not to franchise tax.
Subsequently, R.A. No. 8241 took effect on January 1, 1997
containing more amendments to the NIRC. Radio and/or television
companies whose annual gross receipts do not exceed
P10,000,000.00 were granted the option to choose between paying
3% national franchise tax or 10% VAT
On the other hand, radio and/or television companies with
yearly gross receipts exceeding P10,000,000.00 were subject to
10% VAT, pursuant to Section 102 of the NIRC.
On January 1, 1998, R.A. No. 8424 was passed confirming
the 10% VAT liability of radio and/or television companies with yearly
gross receipts exceeding P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became effective on
July 1, 2005. The said law further amended the NIRC by increasing
the rate of VAT to 12%. The effectivity of the imposition of the 12%
VAT was later moved from January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the matter,
ABS-CBN is subject to the payment of VAT. It does not have the
option to choose between the payment of franchise tax or VAT since
it is a broadcasting company with yearly gross receipts exceeding
Ten Million Pesos (P10,000,000.00). (Quezon City, et al., v. ABS-
CBN Broadcasting Corporation, G. R. No. 166408, October 6, 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.)
20. 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.
 18
Indirect duplicate taxation is not anathematized by the above
constitutional limitations.
21. What are the elements of direct duplicate
taxation ?
SUGGESTED ANSWER:
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.
22. 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.
23. 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)
24. What are the methods for avoiding double
taxation (indirect duplicate taxation) ?
SUGGESTED ANSWER: The following are the methods of
avoiding double 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.
25. Tax credit generally refers to an amount that is
subtracted directly from one’s 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)
26. 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)
27. 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
 19
Bicameral Conference Committee were germane to subjects of the
provisions referred to it for reconciliation.
The Bicameral Conference Committee merely exercised the
judicially recognized long-standing 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 citing Philippine Judges Association v. Pardo, G. R.
No. 105371, November 11, 1993, 227 SCRA 703; Tolentino v.
Secretary of Finance, et al., G. R. No. 115455, August 25, 1994,
235SCRA 630]
28. The VAT is assailed as being regressive and
therefore violative of the mandate to evolve a progressive
system of taxation. Do you agree ? Explain your answer.
SUGGESTED ANSWER: No. The VAT does not violate the
progressive system of taxation. 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]
29. 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.
30. 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. What is a tax amnesty ?
SUGGESTED ANSWER: 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 citing Commissioner
of Internal Revenue v. Marubeni Corp., 423 Phil. 862, 874 (2001).
1-A. 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)
2. Distinguish tax amnesty from tax exemption.
SUGGESTED ANSWER:
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.
3. Define tax avoidance and tax evasion.
SUGGESTED ANSWER: 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.
NOTES AND COMMENTS:
a. Tax evasion connotes the integration of three
factors:
1) 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;
2) an accompanying state of mind which is described
as being “evil” on “bad faith,” “willful,” or ”deliberate and not
accidental”; and
3) 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)
 20
4. Distinguish between the tax avoidance
and tax evasion.
SUGGESTED ANSWER:
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.
5. What are the reasons why national taxes cannot be
the subject of compensation and set-off with debts ?
SUGGESTED ANSWER:
a. The 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. The government and the taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is no such
debt, demand, contract or judgment as is allowed to be set-off. (Caltex
Philippines, Inc. v. Commission on Audit, 208 SCRA 726, 756)
6. 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)
7. In case of a tax overpayment, where the BIR’s
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)
8. 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.
9. A direct tax is a tax for which a taxpayer is directly
liable on the transaction or business it engages in, without
transferring the burden to someone else. Examples are individual
and corporate income taxes, transfer taxes, and residence taxes.
(Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
168056, September 1, 2005 and companion cases, citing Maceda v.
Macaraig, Jr., G.R. No. 88291, June 8, 1993, 223 SCRA 217)
10. The main difference between direct taxes and indirect
taxes is that the burden of direct taxes could not be shifted by the
taxpayer to another while the burden of indirect taxes could be shifted
to another person, such the burden value-added taxes being shifted or
transferred by the taxpayer, the seller, to the buyer.
11. Acesite is the owner and operator of restaurant
which caters to the patrons of a casino operated by PAGCOR
within its premises. it billed PAGCOR for the cost of the food
and beverages consumed by the PAGCOR’s patrons as well as
the lease of the premises plus the VAT on these items. PAGCOR
paid Acesite minus the VAT claiming exemption while Acesite, in
order to avoid legal implications, paid the P30 million tax and
applied for a refund on the ground of solutio indebeti.
Acesite cites the tax exemption grant in PAGCOR’s
franchise as follows: “The exemptions herein granted for earnings
derived from the operations conducted under the franchise specifically
from the payment of any tax, income, or otherwise, as well as any
form of charges, fees or levies, shall inure to the benefit of and
extend to corporation(s), association (s), agency (cies), or
individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the
casino (s) authorized to be conducted under this Franchise and
to those receiving compensation or other remuneration from the
Corporation or operator as a result of essential facilities furnished
and/or technical services rendered to the Corporation or operator.”
(emphasis supplied)
The BIR denied the claim on the ground that PAGCOR is
exempt only from direct taxes and not from indirect taxes so
Acesite may not avail of the exemption. Is this correct ?
SUGGESTED ANSWER: No. As the law is worded the
exemption flows to Acesite. The law is clear that the exemption
extends the exemption to entities or individuals dealing with PAGCOR.
(Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation, G. R. No. 147295, February 16, 2007)
NOTES AND COMMENTS:
a. The above holding should be differentiated from
Philippine Acetylene Co. v. Commissioner of Internal Revenue, 20
SCRA 1056, where the tax exemption did not flow to private entities.
(cited in Abaya v. Ebdane, G. R. No. 167919, February 14, 2007), and
 21
in the following case of Silkair (Singapore) PTE, Ltd., v. Commissioner
of Internal Revenue, G.R. No. 173594, February 6, 2008.
b. So also, the tax exemption of PAGCOR has already
been withdrawn by Rep. Act No. 9337.
12. 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.
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).
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 NPC’s charter, is so couched as to include
indirect tax from the exemption. The amendment under Republic Act
No. 6395 enumerated the details covered by NPC’s 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 [NPC’s 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)
NATIONAL INTERNAL REVENUE CODE
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
INTERNAL REVENUE
 22
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 citing Record of the Senate, pp. 224-225)
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.
 23
7. Income is gain derived and severed from capital, from
labor or from both combined. For example, to tax a stock dividend 17. Under the National Internal Revenue Code the global
would be to tax a capital increase rather than the income. system is applicable to taxable corporations and the schedular to
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. individuals.
No. 108576, January 20, 1999)
 18. What are general principles of income
8. The term taxable income means the pertinent items of taxation in the Philippines OR the situs of income taxation
gross income specified in the Tax Code, less the deductions and/or in the Philippines OR the source rule of income taxation as
personal and additional exemptions, if any, authorized for such types
of income by the Tax Code or other special laws. (Sec. 31, NIRC of
applied in the Philippines ?
SUGGESTED ANSWER:
1997)
a. A citizen of the Philippines residing therein is taxable on
all income derived from sources within and without the Philippines.
9. The cancellation and forgiveness of indebtedness
b. A nonresident citizen is taxable only on income derived
may amount to (a) payment of income; (b) gift; or to a (c) capital
from sources within the Philippines.
transaction depending upon the circumstances.
c. An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas contract worker is
10. If an individual performs services for a creditor who, in
taxable only on income from sources within the Philippines: Provided,
consideration thereof, cancels the debt, it is income to the extent of
That a seaman who is a citizen of the Philippines and who receives
the amount realized by the debtor as compensation for his services.
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade
11. An insolvent debtor does not realize taxable income from
shall be treated as an overseas contract worker.
the cancellation or forgiveness. (Commissioner v. Simmons Gin Co.,
d. An alien individual, whether resident or not of the
43 Fd 327 CCA 10th)
Philippines, is taxable only on income derived from sources within the
Philippines.
12. The insolvent debtor realizes income resulting from the
e. A domestic corporation is taxable on all income derived
cancellation or forgiveness of indebtedness when he becomes
from sources within and without the Philippines.
solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289)
f. A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived from
13. If a creditor merely desires to benefit a debtor and
sources within the Philippines. (Sec. 23, NIRC of 1997)
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
19. Compensation income is considered as having been
latter’s income.
earned in the place where the service was rendered and not
considered as sourced from the place of origin of the money.
14. If a corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect of payment of a
20. Payment for services, other than compensation
dividend. (Sec. 50, Rev. Regs. No. 2)
income, is considered as having been earned at the place where
the activity or service was performed.
15. The Global system of income taxation is a system
employed where the tax system views indifferently the tax base and
21. A non-resident alien, who has stayed in the Philippines
generally treats in common all categories of taxable income of the
for an aggregate period of more than 180 days during any calendar
individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
year, shall be considered as a non-resident alien doing business in
the Philippines. Consequently, he shall be subject to income tax on
16. The Schedular system of income taxation is a system
his income derived from sources from within the Philippines. [Sec. 25
employed where the income tax treatment varies and is made to
(A) (1), NIRC]
depend on the kind or category of taxable income of the taxpayer.
(Tan v. del Rosario, Jr., 237 SCRA 324, 331)
 24
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 taxpayer’s 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
Workmen’s 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
 25
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 employer’s
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. [1 st
par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]
27. What kind of separation (retirement) pay
is excluded from gross income, hence tax-exempt ?
SUGGESTED ANSWER:
a. Any amount received by an official, employee or by his
heirs,
b. From the employer
c. As a consequence of separation of such official or
employee from the service of the employer because of
1) Death, sickness or other physical disability; or
2) For any cause beyond the control of said official or
employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as
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 taxpayer’s 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 taxpayer’s 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
 26
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.
 27
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;
 28
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.
5-99)
39. Who are related parties ?
SUGGESTED ANSWER: The following are related parties:
a. Members of the same family. The family of an individual
shall include only his brothers and sisters (whether by the whole or
half-blood), spouse, ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent
(50%) in value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual;
c. Two corporations more than fifty percent (50%) in value
of the outstanding stock of which is owned, directly or indirectly, by or
for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if
the same person is a grantor with respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36
(B), NIRC of 1997]
40. What are the requisites for valid deduction of
bad debts from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to the taxpayer
which must be valid and legally demandable;
b. The same must be connected with the taxpayer’s 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 ?
 29
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 taxpayer’s
gross income in the year of such recovery to the extent of the income
tax benefit of said deduction.
42. 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)
43. 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)
44. 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.
45.
a.
The methods of depreciation are the following:
Straight line method;
b. Declining balance method;
c. Sum of years digits method; and
d. Any other method prescribed by the Secretary of
Finance upon the recommendation of the Commissioner of Internal
Revenue:
1) Apportionment to units of production;
2) Hours of productive use;
3) Revaluation method; and
4) Sinking fund method.
46. 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)]
 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]

47-A. 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
 30
certification from the Barangay Chairman or from the head of
administration, in case of condominium unit, townhouse or apartment,
and as validated from the existing available records of the Bureau of
Internal Revenue, owned by an individual engaged in business, shall
be treated as capital asset.” (last par., Sec. 3.b., Rev. Regs. No. 7-
2003)
 48. Ordinary assets shall refer to all real
properties specifically excluded from the definition of
capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind
which would properly be included in the inventory of a taxpayer if on
hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business; or
c. Real property used in trade or business (i.e. buildings and/or
improvements), of a character which is subject to the allowance for
depreciation; or
d. Real property used in trade or business of the taxpayer.
(Sec. 2. b, Rev. Regs. No. 7-2003)
49.. 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)
 50. 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)
51. 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)
52. 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]
 31
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)
53. 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]
54. 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]
55. 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.
56. Holding period not applied to the taxation of the
presumed capital gains derived from the sale of real property
considered as capital assets.
57. 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]
58. 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]
59. 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]
60. A final withholding tax (FWT) of 20% on passive
income is collected from the interest income of banks. It
likewise has to pay a 5% gross receipts tax (GRT) on gross
receipts which includes their passive income. XYZ Bank now
claims that the GRT should be computed after deducting the
20% passive income tax on the ground that the monies or
receipts that do not redound to the benefit of the taxpayer are
not part of its gross receipts. To impose the GRT without
deducting the 20% would be double taxation. It also contends
that since the 20% was withheld at source and is paid directly to
 32
the government, then the bank has not received the same. Thus,
it should not be included in the gross receipts subject to tax.
Resolve the issue of whether the 20% FWT on the bank’s
passive income form part of the taxable gross receipts for the
purpose of computing the 5% GRT.
SUGGESTED ANSWER: No. The word “gross” must be used
in its plain and ordinary meaning. It is defined as “whole, entire, total,
without deduction.” Thus, the 20% should not be deducted for
purposes of computing the 5% gross receipts tax.
Receipt may either be actual or constructive. There is prior to
the withholding a constructive receipt of the interest, otherwise there
would be no interest from where the 20% tax may be withheld from.
There is no double taxation because there are two kinds of
taxes, the 20% FWT which is an income tax and the 5% GRT which is
a percentage tax. (Commissioner of Internal Revenue v. Citytrust
Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and
companion case)
NOTES AND COMMENTS:
a. Commissioner of Internal Revenue v. Manila Jockey
Club, 108 Phil. 821 (1960) is different from Commissioner of
Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No.
139786, September 27, 2006 and companion case. Manila Jockey
Club paid amusement taxes on its commission in the total amount of
bets called wager funds and did not include the 5½% of the fund
which went to the Board on Races and to the owners of horses and
jockeys. The Supreme Court rules that the gross receipts of Manila
Jockey Club should not include the 5½% because although delivered
to the Club, such money has been especially earmarked by law or
regulation for other persons.
Manila Jockey does not apply because what happened there
was earmarking and not withholding. Earmarking is not the same as
withholding. Amounts earmarked do not form part of gross receipts
because these are by law or regulation reserved for some person
other than the taxpayer, although delivered or received. On the
contrary, amounts withheld form part of gross receipts because there
are in constructive possession and not subject to any reservation, the
withholding agent being merely a conduit in the collection process.
(Commissioner of Internal Revenue v. Citytrust Investment Phils.,
Inc., G. R. No. 139786, September 27, 2006 and companion case)
b. There are distinctions between the 20% FWT on
interest income and the 5% GRT on banks. Since the two are
different there is no double taxation.
1) FWT is an income tax under Title II of the Code
(Tax on Income) while GRT is a percentage tax under Title V of
the Tax Code.
2) Percentage tax is a national tax measured by a
certain percentage of the gross selling price or gross value in
money of goods sold, bartered or imported; or of the gross
receipts or earnings derived by any person engaged in the sale
of services while an income tax is a national tax imposed on the
net or gross income realized in a taxable year.
3) Income tax is subject to withholding while
percentage is not. (Commissioner of Internal Revenue v.
Citytrust Investment Phils., Inc., G. R. No. 139786, September
27, 2006 and companion case)
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 BIR’s
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 BIR’s 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)
 33
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. The gross estate for purposes of estate
taxation of Filipino citizens, whether residents or
nonresidents and resident alien includes the value at the time of
his death of all his real property, wherever situated, personal property,
whether tangible, intangible or mixed, wherever situated, to the extent
of the interest existing therein of the decedent at the time of his death.
2. The gross estate for purposes of estate
taxation of non-resident aliens includes the value at the time of
his death of all the real property situated in the Philippines, personal
property whether tangible, intangible or mixed, situated in the
Philippines, to the extent of the interest therein of the decedent at the
time of his death.
3. 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.
4. Not every inter-vivos transfer in anticipation of death is
considered “transfer in contemplation of death” for purposes of
determining the property to be included in the gross estate of a
decedent.
5. To be considered a “transfer in contemplation of
death” “the decedent has at any time made a transfer, by trust or
otherwise, in contemplation of or intended to take effect in possession
or enjoyment at or after death” [Sec. 85 (B), NIRC of 1997]. It is clear
that the properties are not transferred in contemplation of or intended
to take effect in possession or enjoyment at or after death.
6. There is no transfer in contemplation of death if there is
no showing 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
 34
person who shall possess or enjoy the property or the income SUGGESTED ANSWER: The net economic benefit from
therefrom.” [Sec. 85 (B), NIRC of 1997] the transfer that accrues to the donee. Accordingly, if a
mortgaged property is transferred as a gift, but imposing upon
7. The approval of the court sitting in the donee the obligation to pay the mortgage liability, then the
probate, or as a settlement tribunal over the estate of the net gift is measured by deducting from the fair market value of
deceased is not a mandatory requirement for the the property the amount of the mortgage assumed. (last par.,
collection of the estate. The probate court is determining issues Sec. 11, Rev. Regs.No.2-2003)
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 5. How are gifts of personal property to be valued
the heir, legatee, devisee, etc. has in the property formerly held by the for donor’s tax purposes ?
decedent. SUGGESTED ANSWER: The market value of the personal
The notices of levy were regularly issued within the prescriptive property at the time of the gift shall be considered the amount of the
period. gift. (Sec. 102, NIRC of 1997)
The tax assessment having become final, executory and
enforceable, the same can no longer be contested by means of a 6. What is the valuation of donated real property
disguised protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA
for donor’s tax purposes ?
47)
SUGGESTED ANSWER: The real property shall be appraised
at its fair market value as of the time of the gift.
DONOR’S TAXES However, the appraised value of the real property at the time of
the gift shall be whichever is the higher of:

1. What is the donor’s tax rate if the donee is a a. the fair market value as determined by the
stranger ? Commissioner of Internal Revenue (zonal valuation) or
SUGGESTED ANSWER: When the donee or b. the fair market value as shown in the schedule of values
beneficiary is a stranger, the tax payable by the donor shall be 30% of fixed by the Provincial and City Assessors. [Sec. 102, in relation to
the net gifts. Sec. 88 (B) both of the NIRC of 1997]


2. For purposes of the donor’s tax who is a 7. A died leaving as his only heirs, his surviving
stranger ? spouse B, and three minor children, X, Y and Z. Since B
SUGGESTED ANSWER: A stranger is a is person who is not does not want to participate in the distribution of the
a: estate, she renounced her hereditary share in the estate.
a. Brother, sister (whether by whole or half-blood), spouse, a. Is the renunciation subject to donor’s tax ?
ancestor and lineal descendant; or
Explain.
b. Relative by consanguinity in the collateral line within the
SUGGESTED ANSWER: No. The general renunciation by an
fourth degree of relationship.” [Sec. 99 (B), NIRC of 1997]
heir, including the surviving spouse, as in the case B, of her share in
NOTES AND COMMENTS: All relatives by affinity, irrespective
the hereditary estate left by the decedent is not subject to donor’s
of the degree, are considered as strangers.
tax. (4th par., Sec. 11, Rev. Regs. No. 2-2003)
This is so because the general renunciation by B was not
3. What is the tax base for donations ? specifically and categorically done in favor of identified heir/s to the
SUGGESTED ANSWER: The net gifts made during the exclusion or disadvantage of the other co-heirs in the hereditary
calendar year. [Sec. 99 (A), NIRC of 1997] estate.
b. Supposing that instead of a general
4. For purposes of the donor’s tax, what is meant
renunciation, B renounced her hereditary share in A’s
by “net gifts ?”
 35
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 donor’s 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 donor’s tax.
SUGGESTED ANSWER:
a. The first P100,000.00 net donation during a calendar
year is exempt from donor’s 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 donor’s
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 donor’s 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 donor’s 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 donor’s 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 donor’s 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 sold to B and 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: Donor’s 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 money’s 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)
1. Define value-added tax (VAT).
SUGGESTED ANSWER: 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.
 36
2. What is the nature of VAT ?
SUGGESTED ANSWSER: 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}
As an indirect tax on services, its main object is the
transaction itself or, more concretely, the performance of all kinds of
services conducted in the course of trade or business in the
Philippines. These services must be regularly conducted in this
country, undertaken in “pursuit of a commercial or an economic
activity,” for a valuable consideration, and not exempt under the Tax
Code, other special laws, or any international agreement.
(Commissioner, of Internal Revenue v. American Express
International, Inc. (Philipppine Branch), G. R. No. 152609, June 29,
2005 citing various cases and 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. What is the effect on exemptions of VAT
being an indirect tax ? Reason out and illustrate your
answer.
SUGGESTED ANSWER: If a special law merely exempts a
party as a seller from its direct liability for payment of the VAT, but
does not relieve the same party as a purchaser from its indirect
burden of the VAT shifted to it by its VAT-registered suppliers, the
purchase transaction is not exempt.
REASON: The VAT is a tax on consumption, the amount of
which may be shifted or passed on by the seller to the purchaser of
the goods, properties or services. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005)
Illustration: 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.
4. The VAT is a tax on consumption. Explain the
meaning of consumption as used under the VAT system.
Give an example.
SUGGESTED ANSWER: 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."
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. American Express G.R. No.
152609, 29 June 2005, 462 SCRA 197 cited in Commissioner of
Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G.
R. No. 164365, June 8, 2007]
5. Who are liable for the value-added tax ?
SUGGESTED ANSWER:
a. Any person who, in the course of his trade or business,
1) Sells, barters, exchanges or leases goods or
properties, or
2) renders services, and
b. any person who imports goods xxx
However, in the case of importation of taxable goods, the
importer, whether an individual or corporation and whether or not
made in the course of his trade or business, shall be liable to VAT
xxx. (Rev. Regs. No. 16-2005,Sec. 4.105-1, paraphrasing supplied)
6. What are the various VAT methods and
systems ?
SUGGESTED ANSWER:
a. Cost deduction method. This is a single-stage tax
which is payable only by the original sellers. [Abakada Guro Party
 37
List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1,
2005 and companion cases citing Deoferio, Jr. V. A. and Mamalateo,
V.C., The Value Added Tax in the Philippines (First Edition 2000)]
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 citing various
cases and authorities; Abakada Guro Party List (etc.) v. Ermita, etc.,
et al., G. R. No. 168056, September 1, 2005 and companion cases)
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. [Commissioner of Internal Revenue v. Seagate Technology
(Philippines), G. R. No. 153866, February 11, 2005 citing various
cases and authorities]
7. The VAT being imposed on the increase in
worth merit or improvement of the goods or services.
How is this done ?
SUGGESTED ANSWER: The VAT utilizes the concept of the
output and input taxes.
8. Define output tax.
SUGGESTED ANSWER: The value-added tax due on the
sale or lease or taxable goods, properties or services by any VAT-
registered person.
9. Define input tax.
SUGGESTED ANSWER: The VAT 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.)
10. What are included in the input tax.
SUGGESTED ANSWER: It shall also include:
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 )
11. May the right to credit the input tax be limited
by legislation ?
SUGGESTED ANSWER: Yes 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 VAT-registered persons against the output tax was
established. This continued with the Expanded VAT Law (R.A. No.
7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right
to credit input tax as against the output tax is clearly a privilege
created by law, a privilege that also the law can limit. It should be
stressed that a person has no vested right in statutory privileges.
(ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207,
October 15, 2005, and companion cases, on the motion for
reconsideration)
12. What is the concept of transitional input tax
credits on beginning inventories ?
SUGGESTED ANSWER: 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
taxpayer’s trade or business as a VAT-registered person. [Rev.
 38
Regs. No. 16-2005, Sec.4.111-1, (a), 1st par., arrangement and
numbering supplied]
14. What is the concept of presumptive input tax
credits ?
SUGGESTED ANSWER: 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)]
15. Does the VAT registration fee violate religious
freedom ?
SUGGESTED ANSWSER: 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)
 16. Explain the proper interpretation of the
term “In the Course of Trade or Business.
SUGGESTED ANSWSER: VAT is not a singular-
minded tax on every transactional level. Its assessment bears direct
relevance to the taxpayer’s role or link in the production chain.
Hence, as affirmed by Section 99 of the Tax Code and its
subsequent incarnations, the tax is levied only on the sale, barter or
exchange of goods or services by persons who engage in such
activities, in the course of trade or business. These transactions
outside the course of trade or business may invariably contribute to
the production chain, but they do so only as a matter of accident or
incident. As the sales of goods or services do not occur within the
course of trade or business, the providers of such goods or services
would hardly, if at all, have the opportunity to appropriately credit any
VAT liability as against their own accumulated VAT collections since
the accumulation of output VAT arises in the first place only through
the ordinary course of trade or business. (Commissioner of Internal
Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28,
2006)
16-A. Pursuant to a government program of
privatization, NDC, a VAT-registered entity created for the
purpose of selling real property, decided to sell to private
enterprise all of its shares in its wholly-owned subsidiary
the National Marine Corporation (NMC). The NDC decided
to sell in one lot its NMC shares and five (5) of its ships,
which are 3,700 DWT Tween-Decker, "Kloeckner" type
vessels. The vessels were constructed for the NDC
between 1981 and 1984, then initially leased to Luzon
Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased,
on a bareboat basis, to the NMC. 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 sale is not subject to VAT.
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,
September 30, 1955 (97 Phil. 992), 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. [J. Aranas, UPDATED NATIONAL
INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9
(1988)]. "Course of business" is what is usually done in the
management of trade or business. [Idmi v. Weeks & Russel, 99 So.
 39
761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence,
is that "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)

17. 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.” What are these so-called
transactions “deemed sales “ ?
SUGGESTED ANSWER: 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]
18. What transactions considered retirement or
cessation of business “deemed sale” subject to VAT ?
SUGGESTED ANSWER:
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]
19. What sale of or lease of real properties subject
to VAT ?
SUGGESTED ANSWER: 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.
20. On Jan. 10, 2008, X, 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.
21. What sale of real property exempt from
VAT ?
SUGGESTED ANSWER: 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
 40
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]
22. What is the VAT on services and lease of
properties ?
SUGGESTED ANSWER:
a. There shall be levied, assessed, and collected,
b. a value-added tax equivalent to ten percent (10%) of
gross receipts
c. derived from the sale or exchange of services,
1) including the use or lease of properties.
d. Provided, 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 has been satisfied:
1) Value-added tax collection as a percentage of
Gross Domestic product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or
2) National government deficit as a percentage of
GDP of the previous year exceeds one and one-half percent
(1 1/2%). [NIRC of 1997, Sec. 108 (A), as amended by R.A.
No. 9337, arrangement and numbering supplied]
23. “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]
24. X Corporation rendered technical
services through its “work engineers” to PNB and SSS in
the construction of their buildings. The “work engineers”
acted as overseers of X Corporation, rendering their
professional services as employees of X corporation.
Should X Corporation be subjected to VAT or should it be
 41
subjected to tax on the professional services of those
employees themselves? Decide the case with reason.
SUGGESTED ANSWER: X Corporation is subject to VAT.
25. 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.)

26. Zero-rated Sales of Goods or Properties .
A zero-rated sale of goods or properties by a sale by a VAT-
registered person is a taxable transaction for VAT purposes but the
sale does not result in any output tax.
However, the input tax on the purchases of goods, properties or
services related to such zero-rated sale shall be available as tax
credit or refund in accordance with Rev. Regulations No. 16-2005.
(Rev. Regs. No. 16-2005, 1st par.)
 27. 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)
28. 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
(Commissioner of Internal Revenue v. American Express
International, Inc. (Philipppine Branch), G. R. No. 152609, June 29,
2005 citing “[N]o state may tax anything not within its jurisdiction
without violating the due process clause of the [C]constitution.”
Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900,
January 17, 1936, per Malcolm, J.) to impose the VAT
[Commissioner, supra citing Deoferio, Jr. and Mamalateo, The Value
Added Tax in the Philippines (2000), p. 93]
Performed in the Philippines, the service is necessarily subject
to its jurisdiction [Commissioner, supra citing Alejandro, The Law on
Taxation (1966 rev. ed.) p. 33], for the State necessarily has to have
a “substantial connection” [Commissioner, supra citing Garner (ed.
in chief), Black’s Law Dictionary (8th ed., 1999), p. 1503] to it in order
to enforce a zero rate. [Commissioner, supra citing De Leon, The
Fundamentals of Taxation (12th ed., 1998), p. 3] The place of
payment is immaterial [Commissioner, supra citing Deoferio, Jr. and
Mamalateo, The Value Added Tax in the Philippines (2000), p. 93],
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, supra)

29. What is the destination principle the
VAT ?
SUGGESTED ANSWER: As a general rule, the VAT
system uses the destination principle as a basis for the jurisdictional
reach of the tax.
 42
Goods and services are taxed only in the country where they
are consumed. Thus, exports are zero-rated, while imports are
taxed.

30. Is there any exception to the destination
principle ?
SUGGESTED ANSWER: Yes. 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]."
31. 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.

32. 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.
33. Zero-rated sales by VAT-registered persons.
The following sales by VAT-registered persons shall be subject to
zero percent (0%) rate:
a. Export sales;
b. Considered export sales under Executive Order No.
224;
c. Foreign currency denominated sale; and
d. Sales to persons or entities demed tax-exempt under
special law or international agreement. (Rev. Regs. No. 16-2005,
Sec. 4.106-5, 2nd par., paraphrasing supplied)
34. 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)
35. 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)
36. “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]
37. 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
 43
accordance with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005,
Sec. Sec. 4.108-5 (a), words in italics supplied)
 38. 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. (Philipppine Branch), G. R. No.
152609, June 29, 2005)
39. While the service performed by American
Express is subject to VAT it is zero-rated, and BIR
Revenue Regulations that alter the legal requirements for
zero-rating are ultra vires and invalid. The VAT system uses
the destination principle which posits that the goods and services are
taxed only in the country where they are consumed,
However, the law itself provides for clear exceptions under
which the supply of services shall be zero-rated, among which are
the following:
a. The service is performed in the Philippines;
b. The services are within the categories provided for
under the Tax Code; and
c. It is paid for in acceptable foreign currency of the
Bangko Sentral ng Pilipinas.
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.
(Philipppine Branch), G. R. No. 152609, June 29, 2005)

40. A foreign Consortium composed of
BWSC-Denmark, Mitsui Engineering and Shipbuilding
Ltd., and Misui and Co., Ltd., which entered into a
contract with NAPOCOR for the operation and
maintenance of two power barges appointed BWSC-
Denmark as its coordination manager. BWSCMI was
established as the subcontractor to perform the actual
work in the Philippines. The Consortium paid BWSCMI in
acceptable foreign exchange and accounted for in
accordance with the rules and regulations of the BSP.
Through a February 14, 1995 ruling the BIR declared
that BWSCMI may choose to register as a VAT persons
subject to VAT at zero rate. For 1996, it filed the proper
VAT returns showing zero rating. On December 29, 1997,
believing that it is covered by Rev. Regs. 5-96, dated
February 20, 1996, BWSCMI paid 10% output VAT for the
period April-December 1996, through the Voluntary
Assessment Program (VAP).
On January 7, 1999, BWSCMI was able to obtain a
Ruling from the BIR reconfirming that it is subject to VAT
at zero-rating. On this basis, BWSCMI applied for a
refund of the output VAT it paid.
a. Is BWSCMI subject to the 10% VAT or is it zero
rated ?
SUGGESTED ANSWER: Yes. BWSCMI is not zero rated
and is subject to the 10% VAT. It is rendering service for the
Consortium which is not doing business in the Philippines. Zero-
rating finds application only where the recipient of the services are
other persons doing business outside of the Philippines. BWSCMI
provides services to the Consortium which by virtue of its contract
with NAPOCOR is doing business within the Philippines.
(Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January
22, 2007)
b. Could it obtain a refund of the VAT it paid
through the VAP ? Explain.
SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund
of the 10% output VAT it paid the based on the non-retroactivity of
the prejudicial revocation of the BIR Rulings which held that it’s
 44
services are subject to 0% VAT and which BWSCMI invoked in
applying for refund of the output VAT. (Commissioner of Internal
Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao,
Inc., supra)
NOTES AND COMMENTS:
a. Do not confuse the BWSCMI case with the
American Express case. American Express International, Inc.
(Philippine Branch)] is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-resident
foreign client [American Express International, Inc. (Hongkong
Branch)], for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in accordance with BSP rules
and regulations. (Commissioner of Internal Revenue v. Burmeister
and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205,
January 22, 2007)
41. VAT-Exempt transactions, defined.
a. The sale of goods or properties and/or services and the
use or lease of properties that is
b.not subject to VAT (output tax) and
c. the seller is not allowed any tax credit on VAT (input
tax) purchases.
The person making the exempt sale of goods, properties or
services shall not bill any output tax to his customers because the
said transaction is not subject to VAT. [Rev. Regs. No. 16-2005,
Sec. 4.109-1 (A), arrangement and numbering supplied]
42. VAT-exempt transactions distinguished from
VAT-exempt entities. a.
An exempt transaction, on the one hand, involves goods or
services which, by their nature, are specifically listed in and
expressly exempted from the VAT under the Tax Code, without
regard to the tax status – VAT-exempt or not – of the party to the
transaction. An
exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international
agreement to which the Philippines is a signatory, and by virtue of
which its taxable transactions become exempt from VAT.
[Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., G. R. No. 150154, August 9, 2005]
b. An exempt transaction shall not be the subject of any
billing for output VAT but it shall not also be allowed any input tax
credits WHILE an exempt party being zero-rated is allowed to claim
input tax credits.
43. What transactions are from VAT ?
SUGGESTED ANSWER: (Subject to the election by a VAT-
registered person not to be subject to the value-added tax), the
following shall be exempt from VAT:
(A) Sale or importation of agricultural and marine food
products in their original state, livestock and poultry of a kind
generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials therefor.
Livestock shall include cows, bulls and calves, pigs, sheep,
goats and rabbits. Poultry shall include fowls, ducks, geese and
turkey, Livestock or poultry does not include fighting cocks, race
horses, zoo animals and other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such
as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters,
mussels and clams.
Meat, fruit, fish, vegetables and other agricultural and marine
food Products classified under this paragraph shall be considered in
their original state even if they have undergone the simple processes
of preparation or preservation for the market, such as freezing,
drying, salting, broiling, roasting, smoking or stripping, including
those using advanced technological means of packaging, such as
shrink wrapping in plastics, vacuum packing, tetra-pack, and other
similar packaging methods. Polished and/or husked rice, corn grits,
raw cane sugar and molasses, ordinary salt, and copra shall be
considered in their original state.
Sugar whose content of sucrose by weight, in the dry state,
has a polarimeter reading of 99.5o and above are presumed to be
refined sugar.
Cane sugar produced from the following shall be presumed,
for internal revenue purposes, to be refined sugar:
(1) product of a refining process,
(2) products of a sugar refinery, or
(3) product of a production line of a sugar mill
accredited by the BIR to be producing sugar with polarimeter reading
of 99.5o and above, and for which the quedanissued therefor, and
verified by the Sugar Regulatory Administration, identifies the same
to be of a polarimeter reading of 99.5o and above.
Bagasse is not included in the exemption provided for under
this section.
(B) Sale or importation of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals and other animals
generally considered as pets);
 45
“Specialty feeds” refers to non-agricultural feeds or food for
race horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets.
(C) Importation of personal and household effects
belonging to the residents of the Philippines returning from abroad
and nonresident citizens coming to resettle in the Philippines:
Provided, That such goods are exempt from customs duties under
the Tariff and Customs Code of the Philippines;
(D) Importation of professional instruments and
implements, wearing apparel, domestic animals, and personal
household effects (except any vehicle, vessel, aircraft, machinery,
other goods for use in the manufacture and merchandise of any kind
in commercial quantity) belonging to persons coming to settle in the
Philippines, for their own use and not for sale, barter or exchange,
accompanying such persons, or arriving within ninety (90) days
before or after their arrival, upon the production of evidence
satisfactory to the Commissioner of Internal Revenue, that such
persons are actually coming to settle in the Philippines and that the
change of residence is bona fide;
(E) Services subject to percentage tax under Title V of the
Tax Code, as enumerated below:
(1) Sale or lease of goods or properties or the
performance of services of non-VAT-registered persons,
other than the transactions mentioned in paragraphs (A) to
(U) of Sec. 109 (1) of the Tax Code, the annual sales and/or
receipts of which does not exceed the amount of One
Million Five Hundred thousand Pesos (P1,500,000.00),
Provided, That not later than January 31, 2009 and every
three (3) years thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer Price
Index, as published by the National Statistics Office (NSO).
(Sec. 116, Tax Code)
(2) Services rendered by domestic common carriers
by land for the transport of passengers and keepers of
garages. (Sec. 117)
(3) Services rendered by international air/shipping
carriers. (Sec. 118)
(4) Service rendered by franchise grantees of radio
and/or television broadcasting whose annual gross receipts
of the preceding year do not exceed Ten Million Pesos
(P10,000,000.00) and by franchises of gas and water
utilities. (Sec. 119)
(5) Service rendered for overseas dispatch message
or conversation originating from the Philippines. (Sc. 120)
(6) Services rendered by any person, company or
corporation (except purely cooperative companies or
associations ) doing life insurance business of any sort in the
Philippines. (Sec. 123)
(7) Services rendered by fire, marine or
miscellaneous insurance agents of foreign insurance
companies. (Sec. 124)
(8) Services of proprietors, lessees or operators of
cockpits, cabarets, night or day clubs, boxing exhibitions
professional basketball games, jai-Alai and race tracks.
(Sec. 125). and
(9) Receipts on sale, barter or exchange of shares of
stock listed and traded through the local stock exchange or
through initial public offering. (Sec. 127)
(F) Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into raw
sugar;
“Agricultural contract growers” refers to those persons
producing for others poultry, livestock or other agricultural and
marine food products in their original state.
(G) Medical, dental, hospital and veterinary services except
those rendered by professionals;
Laboratory services are exempted. If the hospital or clinic
operates a pharmacy or drug store, the sale of drugs and medicine
is subject to VAT.
(H) Educational services rendered by private educational
institutions, duly accredited by the Department of Education
(DEPED), the Commission on Higher Education (CHED), the
Technical Education And Skills Development Authority (TESDA) and
those rendered by government educational institutions;
“Educational services” shall refer to academic, technical or
vocational education provided by private educational institutions duly
accredited by the DepED, the CHED and TESDA and those
rendered by government educational institutions and it does not
include seminars, in-service training, review classes and other
similar services rendered by persons who are not accredited by the
DepED, the CHED and/or the TESDA.
(I) Services rendered by individuals pursuant to an
employer-employee relationship;
(J) Services rendered by regional or area headquarters
established in the Philippines by multinational corporations which act
as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region and do
not earn or derive income from the Philippines;
(K) Transactions which are exempt under international
agreements to which the Philippines is a signatory or under special
laws, except those under Presidential Decree No. 529 – Petroleum
Exploration Concessionaires under the Petroleum Act of 1949; and;
 46
(L) Sales by agricultural cooperatives duly registered with
the Cooperative Development Authority (CDA) to their members as
well as sale of their produce, whether in its original state or
processed form, to non-members; their importation of direct farm
inputs, machineries and equipment, including spare parts thereof, to
be used directly and exclusively in the production and/or processing
of their produce;
(M) Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered and in good standing with the
Cooperative Development Authority;
(N) Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with the Cooperative Development
Authority: Provided, That the share capital contribution of each
member does not exceed Fifteen thousand pesos (P15,000) and
regardless of the aggregate capital and net surplus ratably
distributed among the members;
Importation by non-agricultural, non-electric and non-credit
cooperatives of machineries and equipment, including spare parts
thereof, to be used by them are subject to VAT.
(O) Export sales by persons who are not VAT-registered;
(P) Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business, or real property utilized for low-cost and socialized housing
as defined by Republic Act No. 7279, otherwise known as the Urban
Development and Housing Act of 1992, and other related laws, such
as RA No. 7835 and RA No. 8765, residential lot valued at One
million five hundred thousand pesos (P 1,500,000) and below, house
and lot, and other residential dwellings valued at Two million five
hundred thousand pesos (P 2,500,000) and below: Provided, That
not later than January 31, 2009 and every three (3) years thereafter,
the amounts herein stated shall be adjusted to their present values
using the Consumer Price Index, as published by the National
Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental not
exceeding Ten thousand pesos (P 10,000) Provided, That not later
than January 31, 2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to its present value using the
Consumer Price Index as published by the National Statistics Office
(NSO);
(R) Sale, importation, printing or publication of books and
any newspaper, magazine, review or bulletin which appears at
regular intervals with fixed prices for subscription and sale and which
is not devoted principally to the publication of paid advertisements;
(S) Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine, equipment and spare parts
thereof for domestic or international transport operations; Provided,
that the exemption from VAT on the importation and local purchase
of passenger and/or cargo vessels shall be limited to those of one
hundred fifty (150) tons and above, including engine and spare parts
of said vessels; Provided, further, that the vessels be imported shall
comply with the age limit requirement, at the time of acquisition
counted from the date of the vessel’s original commissioning, as
follows: (i) for passenger and/or cargo vessels, the age limit is
fifteen years (15) years old, (ii) for tankers, the age limit is ten (10)
years old, and (iii) For high-speed passenger cars, the age limit is
five (5) years old, Provided, finally, that exemption shall be subject to
the provisions of section 4 of Republic Act No. 9295, otherwise
known as “The Domestic Shipping Development Act of 2004.”
(T) Importation of fuel, goods and supplies by persons
engaged in international shipping or air transport operations;
Provided, that the said fuel, goods and supplies shall be used
exclusively or shall pertain to the transport of goods and/or
passenger from a port in the Philippines directly to a foreign port
without stopping at any other port in the Philippines; provided,
further, that if any portion of such fuel, goods or supplies is used for
purposes other than that mentioned in this paragraph, such portion
of fuel, goods and supplies shall be subject to 10% VAT (now 12%);
(U) Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank financial
intermediaries; and
 (V) Sale or lease of goods or properties or the
performance of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts do not
exceed the amount of One million five hundred thousand pesos
(P1,500,000): Provided, That not later than January 31, 2009 and
every three (3) years thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer Price Index as
published by the National Statistics Office (NSO).
For purposes of the threshold of P1,500,000.00, the husband
and wife shall be cnsidered separate taxpayers. However, the
aggregation rule for each taxpayer shall apply. For instance, if a
profesional, aside from the practice ofhis profession, also derives
revenue from other lines of business which are otherwise subject to
VAT, the same shall be combined for purposes of determining
whether the threshold has been exceeded. Thus, the VAT-exempt
sales shall to be icluded in determining the threshold. [NIRC of 1997,
Sec. 109 (1), as amended by R. A. No. 9337; words in italics from
Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses
supplied]
 47
44. X is engaged in the importation and sale of
books and magazines. Is the importation of books and
magazines subject to the 10% VAT? Explain.
SUGGESTED ANSWER: No. Sale, importation, printing or
publication of books and any newspaper, magazine, review or
bulletin which appears at regular intervals with fixed prices for
subscription and sale and which is not devoted principally to the
publication of paid advertisements;
45. Is there any tax to be paid by persons exempt
from VAT ?
SUGGESTED ANSWER: Yes.
a. Any person, whose sales or receipts are exempt under
Sec. 109 (1) (V) of the Tax Code,
(V) Sale or lease of goods or properties or the
performance of services other than the transactions
mentioned in the preceding paragraphs, the gross annual
sales and/or receipts do not exceed the amount of One
million five hundred thousand pesos (P1,500,000):
Provided, That not later than January 31, 2009 and every
three (3) years thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer Price
Index as published by the National Statistics Office (NSO),
from the payment of VAT and
b. who is not a VAT-registered person
c. shall pay a tax equivalent to three percent (3%) of his
gross monthly sales or receipts;
Provided, that cooperatives shall be exempt from the three
(3%) gross receipts tax herein imposed. (Rev. Regs. No. 16-2005,
Sec. 4.116-1, arrangement, numbering and words in italics supplied)
RETURNS AND WITHHOLDING
1. Income tax returns being public documents, until
controverted by competent evidence, are competent evidence, are
prima facie correct with respect to the entries therein. (Ropali Trading
v. NLRC, et al., 296 SCRA 309, 317)
2. “Married individuals, whether citizens, resident or
non-resident aliens, who do not derive income purely from
compensation shall file a return for the taxable year to include
the income of both spouses, but where it is impracticable for the
spouses to file one return, each spouse may file a separate return of
income but the returns so filed shall be consolidated by the Bureau
for purposes of verification.” [Section 51 (D) of the NIRC of 1997]
3. Individuals required to file an income tax return.
a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines on
his income from sources within the Philippines;
c. Every alien residing in the Philippines on income derived
from sources within the Philippines; and
d. Every nonresident alien engaged in trade or business or
in the exercise of profession in the Philippines. [Sec. 51 (A) (1), NIRC
of 1997]
4. Individuals who are not required to file an income tax
return.
a. An individual whose gross income does not exceed his
total personal and additional exemptions for dependents, Provided,
That a citizen of the Philippines and any alien individual engaged in
business or practice of profession within the Philippines shall file an
income tax return regardless of the amount of gross income;
b. An individual with respect to pure compensation income
for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items, derived from sources
within the Philippines, the income tax on which has been correctly
withheld, Provided, That an individual deriving compensation
concurrently from two or more employers at any time during the
taxable year shall file an income tax return: Provided, further, That an
individual whose pure compensation income derived from sources
within the Philippines exceeds Sixty thousand pesos (P60,000.00),
shall also file an income tax return;
c. An individual whose sole income has been subject to
final withholding tax;
d. An individual who is exempt from income tax pursuant to
the provisions of the NIRC of 1997, and other laws, general or special.
[Sec. 51 (A) (2), NIRC of 1997]
NOTES AND COMMENTS: Amendments under Rep. Act No.
9504 are not incouded.
5. An individual who is not required to file an income
tax return may nevertheless be required to file an information
return. [Sec. 51 (A) (3), NIRC of 1997]
6. A corporation files its income tax return and pays its
income tax four (4) times during a single taxable year. Quarterly
returns are required to be filed for the first three quarters, then a final
adjustment return is filed covering the total taxable income for the
whole taxable year, be it calendar or fiscal.
 48
7. An individual earning from the practice of his
profession or who engages in trade or business files his income
tax return and pays his income tax four (4) times during a single
taxable year. Quarterly returns are required to be filed for the first
three quarters, then an annual income tax return is filed covering the
total taxable income for the whole of the previous calendar year.
8. The purpose of the above four (4) times a year
requirement is to make available sufficient funds to meet the
budgetary requirements, on a quarterly basis thereby increasing
government liquidity. It also eases hardships on the part of individuals
who are required to make this four time return. Thus, the taxpayer
does not have to raise large sums of money in order to pay the tax.
9. An individual earning purely compensation income
files only one annual income tax return covering the total taxable
compensation income for the whole of the previous calendar year.
10. Under the withholding tax system, taxes imposed or
prescribed by the NIRC of 1997 are to be deducted and withheld
by the payors from payments made to payees for the former to
pay directly to the Bureau of Internal Revenue. It is also known as
collection of the tax at source.
11. A withholding agent is explicitly made personally
liable under the Tax Code for the payment of the tax required to
be withheld, in order to compel the withholding agent to withhold the
tax under any and all circumstances. In effect, the responsibility for the
collection of the tax as well as the payment thereof is concentrated
upon the person over whom the Government has jurisdiction.
(Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R.
Nos. 118498 & 124377, October 12, 1999) The system facilitates tax
collection.
12. The two (2) types of withholding at source are the 1) final
withholding tax; and 2) creditable withholding tax.
13. Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as a
full and final payment of the income due from the payee on the
said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-
98]
The liability for payment of the tax rests primarily on the payor
or the withholding agent.. Thus, in case of his failure to withhold the
tax or in case of under withholding, the deficiency tax shall be
collected from the payor withholding agent. The payee is not required
to file an income tax return for the particular income.
14. Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at
least approximate the tax due from the payee on the said
income. The income recipient is still required to file an income tax
return and/or pay the difference between the tax withheld and the tax
due on the income. [1st and 2nd sentences, Sec. 257(B), Rev. Regs.
No. 2-98]
15. The two kinds of creditable withholding taxes are (a)
taxes withheld on income payments covered by the expanded
withholding tax; and (b) taxes withheld on compensation income.
16. Payments to the following are exempt from the
requirement of withholding or when no withholding taxes
required:
a. National Government and its instrumentalities including
provincial, city, or municipal governments;
b. Persons enjoying exemption from payment of income
taxes pursuant to the provisions of any law, general or special, such
as but not limited to the following:
1) Sales of real property by a corporation which is
registered with and certified by the HLURB or HUDCC as
engaged in socialized housing project where the selling price of
the house and lot or only the lot does not exceed P180,000.00
in Metro Manila and other highly urbanized areas and
P150,000.00 in other areas or such adjusted amount of selling
price for socialized housing as may later be determined and
adopted by the HLURB;
2) Corporations registered with the Board of
Investments and enjoying exemptions from income under the
Omnibus Investment Code of 1997;
3) Corporations exempt from income tax under Sec.
30, of the Tax Code, like the SSS, GSIS, the PCSO, etc.
However, income payments arising from any activity which is
conducted for profit or income derived from real or personal
property shall be subject to a withholding tax. (Sec. 57.5, Rev.
Regs. No. 2-98)
17. “A’ erroneously withheld the amount of 15% from the
selling price of books authored by “W” when the correct rate
should have been 10% only. Since “W” is out of the country,
“A” applied for a refund of the excess withholding of 5%. May
“A” properly apply for the refund ? Explain.
 49
SUGGESTED ANSWER: Yes. In applications for refund, the
withholding agent is a taxpayer because if he does not pay the tax
shall be collected from him. (Commissioner of Internal Revenue v.
Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA
377, 383-386),
NOTES AND COMMENTS:
a. For tax amnesty purposes, the withholding agent is
not a taxpayer because he is made to pay the tax where he fails to
withhold as a penalty and not that the tax is due from him.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R.
No. 108576, January 20, 1999, the Anscor case)
PENALTIES, INTERESTS AND SURCHARGES
1. What are surtaxes or surcharges ?
SUGGESTED ANSWER: Surtaxes or surcharges, also known
as the civil penalties, are the amounts imposed in addition to the tax
required.
They are in the nature of penalties and shall be collected at the
same time, in the same manner, and as part of the tax. [Sec.248 (A),
NIRC of 1997]
2. What are the two (2) kinds of civil penalties ?
SUGGESTED ANSWER:
a. the 25% surcharge for late filing or late payment [Sec.
248 (A), NIRC of 1997] (also known as the delinquency surcharge),
and
b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B),
Ibid.]
3. Define deficiency income tax.
SUGGESTED ANSWER: Deficiency income tax is the amount
by which the tax imposed under the NIRC of 1997 exceeds the
amount shown as the tax due by the taxpayer upon his return. [Sec.
56 (B) (1), NIRC of 1997]
4. Deficiency interest, defined. The interest assessed
and collected on any unpaid amount of tax at the rate of 20% per
annum or such higher rate as may be prescribed by regulations, from
the date prescribed for payment until the amount is fully paid. [Sec.
249 (A) (B), NIRC of 1997]
5. Delinquency interest, defined. The interest assessed
and collected on the unpaid amount until fully paid where there is
failure on the part of the taxpayer to pay the amount die on any return
required to be filed; or the amount of the tax due for which no return is
required; or a deficiency tax, or any surcharge or interest thereon, on
the date appearing in the notice and demand by the Commissioner of
Internal Revenue. [Sec.249 (c), NIRC of 1997]
6. After resolving the issues the BIR Commissioner
reduced the assessment. Was it proper to impose delinquency
interest despite the reduction of the assessment ? Why ?
SUGGESTED ANSWER: Yes. The intention of the law is to
discourage delay in the payment of taxes due to the State and in this
sense the surcharge and interest charged are not penal but
compensatory in nature – they are compensation to the State for the
delay in payment, or for the concomitant tuse of the funds by the
taxpayer beyond the date he is supposed to have paid them to the
State. (Bank of the Philippine Islands v. Commissioner of Internal
Revenue, G. R. No. 137002, July 27, 2006)
7. Compromise penalty, defined. The amount agreed
upon between the taxpayer and the Government to be paid as a
penalty in cases of a compromise.
8. As a result of divergent rulings on whether it is
subject to tax or not, the taxpayer was not able to pay his taxes
on time. Imposed surcharges and interests for such delay, the
taxpayer not invokes good faith with the BIR countering by
saying that good faith is not a valid defense for violation of a
special law. Furthermore, the BIR further raises the defense that
the government is not bound by the errors of its agents. Who is
correct ?
ANSWER: The taxpayer is correct. The settled rule is that
good faith and honest belief that one is not subject to tax on the basis
of previous interpretation of government agencies tasked to implement
the tax, are sufficient justification to delete the imposition of
surcharges. (Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of
Internal Revenue, G. R. No. 166786, September 11, 2006)
REPUBLIC ACT NO. 1125, CREATING THE
COURT OF TAX APPEALS INCLUDING
JURISDICTION OF THE CTA, AS AMENDED
1. The Court of Tax Appeals is the special tax court
created under Republic Act No. 1125, as amended, and is
composed of a Presiding Justice and eight (8) Associate Justices,
organized into three (3) divisions.
2. Why was the Court of Tax Appeals created ?
 50
SUGGESTED ANSWER:
a. To prevent delay in the disposition of tax cases by the
then Courts of First Instance (now RTCs), in view of the backlog of
civil, criminal, and cadastral cases accumulating in the dockets of
such courts; and
b. To have a body with special knowledge which ordinary
Judges of the then Courts of First Instance (now RTCs), are not likely
to possess, thus providing for an adequate remedy for a speedy
determination of tax cases. (Ursal v. Court of Tax Appeals, et al., 101
Phil. 209; Lacsamana, et al., etc., v. CTA, et al., 102 Phil. 931)
3. The legal remedies under the NIRC of 1997 and other
laws available to an aggrieved taxpayer may be classified into the tax
remedies with respect to:
a. assessment;
b. collection, and
c. refund of internal revenue taxes.
The remedies may also be classified into the administrative or
the judicial remedies.
 4. The legal remedies under the NIRC of 1997 available
to an aggrieved taxpayer at the administrative level with respect to
assessment of internal revenue taxes are the following:
a. Upon receipt of a pre-assessment notice, the taxpayer
shall respond to the same within fifteen (15) days from receipt which is
the period provided for by implementing rules and regulations. [3rd
par., Sec. 228 (e), NIRC of 1997]
b. Upon the issuance of an assessment notice, the
taxpayer shall protest administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of
the assessment in such form and manner as may be prescribed by
implementing rules and regulations.
c. Within sixty (60) days from the filing of the protest, all
relevant supporting documents shall be submitted; otherwise the
assessment shall become final. (4th par., Ibid.)
 5. The legal remedies under the NIRC of 1997 available
to an aggrieved taxpayer at the judicial level with respect to
assessment of internal revenue taxes:
a. If the protest is denied in whole or in part, or
b. is not acted upon within one hundred eighty (180) days
from submission of documents,
c. the taxpayer adversely affected by the decision or inaction
may appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the said decision, or from the lapse of the one hundred
eighty (180) – day period; otherwise, the decision shall become final,
executory and demandable. [last par., Sec. 228 (e), NIRC of 1997]
d. On appeal, the taxpayer should apply for the issuance of a
writ of preliminary injunction to enjoin the BIR from collecting the tax
subject of the appeal.
e. A decision of a division of the Court of Tax Appeals
adverse to the taxpayer or the government may be the subject of a
motion for reconsideration or new trial, a denial of which is appealable
to the Court of Tax Appeals en banc by means of a petition for
review.
f. A decision of the Court of Tax Appeals en banc adverse to
the taxpayer or the government may be appealed to the Supreme
Court through a petition for review on certiorari filed with fifteen (15)
days from notice, and extendible for justifiable reasons for thirty (30)
days only.
6. The legal remedy under the NIRC of 1997 available to an
aggrieved taxpayer at the administrative level with respect to
refund or recovery of tax erroneously or illegally collected, is to file a
claim for refund or credit with the Commissioner of Internal Revenue.
(1st par., Sec. 229, NIRC of 1997)
 7. What is the legal remedy under the NIRC of 1997 at
the judicial level with respect to refund or recovery of tax
erroneously or illegally collected ?
SUGGESTED ANSWER. The legal remedy under the NIRC of
1997 at the judicial level with respect to refund or recovery of tax
erroneously or illegally collected, is the filing of a suit or proceeding
with the Court of Tax Appeals
a. before the expiration of two (2) years from the date of
payment of the tax regardless of any supervening cause that may
arise after payment (2nd par., Sec. 229, NIRC of 1997), or
b. within thirty (30) days from receipt of the denial by the
Commissioner of the application for refund or credit. (Sec. 11, R.A.
No. 1125)
 8. The two (2) year period and the thirty (30) day period
should be applied on a whichever comes first basis. Thus, if the 30
days is within the 2 years, the 30 days applies, if the 2 year period is
about to lapse but there is no decision yet by the Commissioner which
would trigger the 30-day period, the taxpayer should file an appeal,
despite the absence of a decision. (Commissioners, etc. v. Court of
Tax Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.)
 51

9. Where the taxpayer is a corporation the two year The notice of assessment must be issued by the
prescriptive period from “date of payment” for refund of income taxes Commissioner to the taxpayer within a period of three (3) years from
should be the date when the corporation filed its final adjustment the time the tax return was filed or should have been filed whichever is
return not on the date when the taxes were paid on a quarterly basis. the later of the two events. Where the taxpayer did not file a tax
(Philippine Bank of Communications v. Commissioner of Internal return or where the tax return filed is false or fraudulent, then the
Revenue, et al., G.R. No. 112024, January 28, 1999) Commissioner has a period of ten (10) years from discovery of the
Generally speaking it is the Final Adjustment Return, in which failure to file a tax return or from discovery of the fraud within which to
amounts of the gross receipts and deductions have been audited and issue an assessment notice. The running of the above prescriptive
adjusted, which is reflective of the results of the operations of a periods may however be suspended under certain instances.
business enterprise. It is only when the return, covering the whole The notice of assessment must be issued within the
year, is filed that the taxpayer will be able to ascertain whether a tax is prescriptive period and must contain the facts, law and jurisprudence
still due or refund can be claimed based on the adjusted and audited relied upon by the Commissioner. Otherwise it would not be valid.
figures. (Bank of the Philippine Islands v. Commissioner of Internal f. The taxpayer should then file an administrative protest by
Revenue, G.R. No. 144653, August 28, 2001) filing a request for reconsideration or reinvestigation within thirty (30)
days from receipt of the assessment notice.
10. Outline of tax remedies of a taxpayer and the The taxpayer could not immediately interpose an appeal to
the Court of Tax Appeals because there is no decision yet of the
government relative to ASSESSMENT of internal revenue taxes.
Commissioner that could be the subject of a review.
a. The taxpayer files his tax return.
To be valid the administrative protest must be filed within the
b. A Letter of Authority is issued authorizing BIR examiner to
prescriptive period, must show the error of the Bureau of Internal
audit or examine the tax return and determines whether the full and
Revenue and the correct computations supported by a statement of
complete taxes have been paid.
facts, and the law and jurisprudence relied upon by the taxpayer.
c. If the examiner is satisfied that the tax return is truly
There is no need to pay under protest. If the protest was not
reflective of the taxable transaction and all taxes have been paid, the
seasonably filed the assessment becomes final and collectible and the
process ends. However, if the examiner is not satisfied that the tax
Bureau of Internal Revenue could use its administrative and judicial
return is truly reflective of the taxable transaction and that the taxes
remedies in collecting the tax.
have not been fully paid, a Notice of Informal Conference is issued
g. Within sixty (60) days from filing of the protest, all relevant
inviting the taxpayer to explain why he should not be subject to
supporting documents shall be submitted, otherwise the assessment
additional taxes.
shall become final and collectible and the BIR could use its
d. If the taxpayer attends the informal conference and the
administrative and judicial remedies to collect the tax.
examiner is satisfied with the explanation of the taxpayer, the process
Once an assessment has become final and collectible, not
is again ended.
even the BIR Commissioner could change the same. Thus, the
If the taxpayer ignores the invitation to the informal
taxpayer could not pay the tax, then apply for a refund, and if denied
conference, or if the examiner is not satisfied with taxpayer’s
appeal the same to the Court of Tax Appeals.
explanation,, and he believes that proper taxes should be assessed,
h. If the protest is denied in whole or in part, or is not acted
the Commissioner of Internal Revenue or his duly authorized
upon within one hundred eighty (180) days from the submission of
representative shall then notify the taxpayer of the findings in the form
documents, the taxpayer adversely affected by the decision or inaction
of a pre-assessment notice. The pre-assessment notice requires the
may appeal to the Court of Tax Appeals within thirty (30) days from
taxpayer to explain within fifteen (15) days from receipt why no notice
receipt of the adverse decision, or from the lapse of the one hundred
of assessment and letter of demand for additional taxes should be
eighty (180-) day period, with an application for the issuance of a writ
directed to him.
of preliminary injunction to enjoin the BIR from collecting the tax
e. If the Commissioner is satisfied with the explanation of the
subject of the appeal.
taxpayer, then the process is again ended.
If the taxpayer fails to so appeal, the denial of the
If the taxpayer ignores the pre-assessment notice by not
Commissioner or the inaction of the Commissioner would result to the
responding or his explanations are not accepted by the Commissioner,
notice of assessment becoming final and collectible and the BIR could
then a notice of assessment and a letter of demand is issued.
then utilize its administrative and judicial remedies to collect the tax.
 52
i. A decision of a division of the Court of Tax Appeals
adverse to the taxpayer or the government may be the subject of a
motion for reconsideration or new trial, a denial of which is appealable
to the Court of Tax Appeals en banc by means of a petition for
review. .
The Court of Tax Appeals, has a period of twelve (12) months
from submission of the case for decision within which to decide.
j. If the decision of the Court of Tax Appeals en banc affirms
the denial of the protest by the Commissioner or the assessment in
case of failure by the Commissioner to decide the taxpayer must file a
petition for review on certiorari with the Supreme Court within fifteen
(15) days from notice of the judgment on questions of law. An
extension of thirty (30) days may for justifiable reasons be granted. If
the taxpayer does not so appeal, the decision of the Court of Tax
Appeals would become final and this has the effect of making the
assessment also final and collectible. The BIR could then use its
administrative and judicial remedies to collect the tax.
11. Requisites for Formal Letter of Demand and
Assessment Notice. The formal letter of demand and assessment
notice shall be issued by the Commissioner or his duly authorized
representative. The letter of demand calling for payment of the
taxpayer’s deficiency tax or taxes shall state the facts, the law, rules
and regulations, or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment notice shall
be void. The same shall be sent to the taxpayer only by registered
mail or by personal delivery.
11-A.. What is the burden of taxpayers seeking tax refunds
or credits ?
SUGGESTED ANSWER: It has always been the rule that
those seeking tax refunds or credits bear the burden of proving the
factual basis of their claims and of showing, by words too plain to be
mistaken, that the legislature intended to entitle them to such claims.
(Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, G. R. No. 145526, March 16,
2007, See Commissioner of Internal Revenue v. Seagate Technology
(Philippines) G. R. No. 153866, 11 February 2005, 451 SCRA 132)
12. What is the nature of proceedings before the Court
of Tax Appeals ?
SUGGESTED ANSWER:
First, a judicial claim for refund or tax credit in the CTA is by no
means an original action, but rather an appeal by way of petition for
review of a previous, unsuccessful administrative claim.
Therefore, as in every appeal or petition for review, a petitioner
has to convince the appellate court that the quasi-judicial agency a
quo did not have any reason to deny its claims.
Second, cases filed in the CTA are litigated de novo. Thus, a
petitioner should prove every minute aspect of its case by presenting,
formally offering and submitting its evidence to the CTA.
Since it is crucial for a petitioner in a judicial claim for refund or
tax credit to show that its administrative claim should have been
granted in the first place, part of the evidence to be submitted to the
CTA must necessarily include whatever is required for the successful
prosecution of an administrative claim. (Atlas Consolidated Mining
and Development Corporation v. Commissioner of Internal Revenue,
G. R. No. 145526, March 116, 2007)
 13. What is the jurisdiction of the Court of Tax
Appeals ?
SUGGESTED ANSWER:
“a. Exclusive appellate jurisdiction to review by appeal,
as herein provided:
1. Decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties, in
relation thereto, or other matters arising under the National
Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue’; (DIVISION)
2. Inaction by the Commissioner of Internal Revenue
in cases involving disputed assessments, refunds or internal
revenue taxes, fees or other charges, penalties in relation
thereto, or other matter arising under the National Internal
Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code
provides a specific period of action, in which case the inaction
shall be deemed a denial; (The inaction on refunds in two years
from the time tax was paid. Thus, if the prescriptive period of
two years is about to expire, the taxpayer should interpose a
petition for review with the CTA – DIVISION)
3. Decisions, orders or resolutions of the Regional
Trial Courts in local tax cases originally decided or resolved by
them in the exercise of their original or appellate jurisdiction; (If
original DIVISION; if appellate EN BANC)
4. Decisions of the Commissioner of Customs in
cases involving liability for customs duties, fees or other money
charges, seizure, detention or release of property affected, fines,
forfeitures or other penalties in relation thereto, or other matters
 53
arising under the Customs Law or other laws administered by the
Bureau of Customs; (DIVISION)
5. Decisions of the Central Board of Assessment
Appeals in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property originally
decided by the provincial or city board of assessment appeals;
(EN BANC)
6. Decisions of the Secretary of Finance on customs
cases elevated to him automatically for review from decisions of
the Commissioner of Customs which are adverse to the
Government under Section 2315 of the Tariff and Customs Code;
(This has reference to forfeiture cases where the decision is to
release the seized articles – DIVISION)
7. Decisions of the Secretary of Trade and Industry,
in case of nonagricultural product, commodity or article, and the
Secretary of Agriculture in the case of agricultural product,
commodity or article, involving dumping and countervailing duties
under Section 301 and 302, respectively, of the Tariff and
Customs Code, and safeguard measures under Republic Act No.
8800, where either party may appeal the decision to impose or
not to impose said duties. (DIVISION)
b. Jurisdiction over cases involving criminal offenses as
herein provided:
1. Exclusive original jurisdiction over all criminal
cases arising from violations of the National Internal Revenue
Code or Tariff and Customs Code and other laws administered
by the Bureau of Internal Revenue or the Bureau of Customs:
Provided, however, That offenses or felonies mentioned in this
paragraph where the principal amount of taxes and fees,
exclusive of charges and penalties claimed, is less than One
million pesos (P1,000,000.00) or where there is no specified
amount claimed shall be tried by the regular Courts and the
jurisdiction of the CTA shall be appellate. Any provision of law or
the Rules of Court to the contrary notwithstanding, the criminal
action and the corresponding civil action for the recovery of civil
liability for taxes and penalties shall at all times be simultaneously
instituted with, and jointly determined in the same proceeding by
the CTA, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no right to
reserve the filing of such civil action separately from the civil
action will be recognized.
2. Exclusive appellate jurisdiction in criminal
offenses:
a) Over appeals from the judgments,
resolutions or orders of the Regional Trial Courts in tax
cases originally decided by them, in their respective
territorial jurisdiction.
b) Over petitions for review of the judgments,
resolutions or orders of the Regional Trial Courts in the
exercise of their appellate jurisdiction over tax cases
originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts
in their respective jurisdiction.
c. Jurisdiction over tax collection cases:
1. Exclusive original jurisdiction in tax collection
cases involving final and executory assessments for taxes,
fees, charges and penalties: Provided, however, That collection
cases where the principal amount of taxes and fees, exclusive
of charges and penalties, claimed is less than One million
pesos (P1,000,000) shall be tried by the proper Municipal Trial
Court, Metropolitan Trial Court and Regional Trial Court.
2. Exclusive appellate jurisdiction in tax collection
cases:
a. Over appeals from judgments, resolutions,
or orders of the Regional Trial Courts in tax collection
cases originally decided by them, in their respective
territorial jurisdiction.
b. Over petitions for review of the judgments,
resolutions or orders of the Regional Trial Courts in the
exercise of their appellate jurisdiction over tax collection
cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts,
in their respective jurisdiction.” (Sec. 7, R. A. No. 1125,
as amended by R. A. No. 9282, emphasis and words in
parentheses supplied)
The petition for review to be filed with the
CTA en banc as the mode for appealing a
decision, resolution, or order of the CTA
Division, under Section 18 of Republic Act No.
1125, as amended, is not a totally new remedy,
unique to the CTA, with a special application
or use therein. To the contrary, the CTA merely
adopts the procedure for petitions for review and
appeals long established and practiced in other
Philippine courts. Accordingly, doctrines, principles,
rules, and precedents laid down in jurisprudence by this
Court as regards petitions for review and appeals in
courts of general jurisdiction should likewise bind the
CTA, and it cannot depart therefrom. (Santos v. People,
et al, G. R. No. 173176, August 26, 2008)
 54
13-A. General rule: The denial of a motion to
quash is an interlocutory order which is not the
proper subject of an appeal or a petition for certiorari.
According to Section 1, Rule 41 of the Revised Rules of Court,
governing appeals from the Regional Trial Courts (RTCs) to the
Court of Appeals, an appeal may be taken only from a judgment
or final order that completely disposes of the case or of a matter
therein when declared by the Rules to be appealable. Said
provision, thus, explicitly states that no appeal may be taken
from an interlocutory order. (Santos v. People, et al, G. R. No.
173176, August 26, 2008)
14. Applicability of Proton Pilipinas Corporation vs.
Republic, etc., G. R. No. 165027, October 16, 2006. The case was
decided on factual antecedents before R. A. No. 9282 which grants
criminal jurisdiction to the Court of Tax Appeals if the value of the tax
is P1 million or more.
Interpreting the provisions of Republic Act No. 8249, which
provides that the civil action for recovery of civil liability should be
jointly determined in the criminal proceeding by the Sandiganbayan or
appropriate courts, the prohibition of reservation of the criminal aspect,
the Supreme Court said that tax collection cases may be tried
separately, and not before the Sandiganbayan in Rep. Act No. 3019
cases. This is so because, Rep. Act No. 3019 is silent on the
definition of civil liability and the application of Art. 104 of the Revised
Penal Code does not cover taxes. Consequently, the Supreme Court
ruled that on the tax collection case the RTC would have jurisdiction.
Interpretation by the author in the light of Rep. Act. 9282. If
it is a criminal case cognizable by the Sandiganbayan, then this court
retains jurisdiction, with the civil jurisdiction being cognizable by the
CTA or the lower courts depending on the amount.
If the issue is a purely tax case, even if it involves cases
cognizable by the Sandiganbayan, then jurisdiction vests upon the
CTA or the lower courts depending on the amount of the tax.
15. On January 24, 1995, the then Secretary of
Finance, through the recommendation of the then
Commissioner of Internal Revenue issued Revenue
Regulations [Rev. Reg.] No. 1-95, providing the “Rules and
Regulations to Implement the Tax Incentives Provisions Under
Paragraphs (b) and (c) of Section 12, [R.A.] No. 7227,
[o]therwise known as the Bases Conversion and Development
Act of 1992.” Subsequently, Rev. Reg. No. 12-97 was issued
providing for the “Regulations Implementing Sections 12(c)
and 15 of [R.A.] No. 7227 and Sections 24(b) and (c) of [R.A.]
No. 7916 Allocating Two Percent (2%) of the Gross Income
Earned by All Businesses and Enterprises Within the Subic,
Clark, John Hay, Poro Point Special Economic Zones and other
Special Economic Zones under PEZA.” On September 27, 1999,
Rev. Reg. No. 16-99 was issued “Amending [RR] No. 1-95, as
amended, and other related Rules and Regulations to
Implement the Provisions of paragraphs (b) and (c) of Section
12 of [R.A.] No. 7227, otherwise known as the ‘Bases
Conversion and Development Act of 1992’ Relative to the Tax
Incentives Granted to Enterprises Registered in the Subic
Special Economic and Freeport Zone.”
On June 3, 2003, the Commissioner of Internal Revenue
issued Revenue Memorandum Circular (RMC) No. 31-2003
setting the “Uniform Guidelines on the Taxation of Imported
Motor Vehicles through the Subic Free Port Zone and Other
Freeport Zones that are Sold at Public Auction,” which
provided for the tax treatments on the transactions involved in
the importation of motor vehicles through the SSEFZ and other
legislated Freeport zones and subsequent sale thereof through
public auction. This was later amended by RMC No. 32-2003.
Asia International Auctioneers and others filed a
complaint before the RTC of Olongapo City, to declare Void,
Ultra Vires, and Unconstitutional [RMC] No. 31-2003 dated June
3, 2003 and [RMC] No. 32-2003 dated June 5, 2003, Rev. Reg.
Nos. 1-95, 12-97 and 16-99 dated January 24, 1995, August 7,
1997 and September 27, 1999, respectively,
They contended that jurisdiction over the case at bar
properly pertains to the regular courts as this is “an action to
declare as unconstitutional, void and against the provisions of
[R.A. No.] 7227” the RMCs issued by the CIR. They do “do not
challenge the rate, structure or figures of the imposed taxes,
rather they challenge the authority of the respondent
Commissioner to impose and collect the said taxes.” They also
claim that the challenge on the authority of the CIR to issue the
RMCs does not fall within the jurisdiction of the Court of Tax
Appeals (CTA).
Does the RTC have jurisdiction ?
SUGGESTED ANSWER: No. It is the Court of Tax
Appeals that has exclusive jurisdiction.
In the case at bar, the assailed revenue regulations and
revenue memorandum circulars are actually rulings or opinions of
the CIR on the tax treatment of motor vehicles sold at public auction
within the SSEZ to implement Section 12 of R.A. No. 7227 which
provides that “exportation or removal of goods from the territory of
the [SSEZ] to the other parts of the Philippine territory shall be
 55
subject to customs duties and taxes under the Customs and Tariff
Code and other relevant tax laws of the Philippines.” They were
issued pursuant to the power of the CIR under Section 4 of the
National Internal Revenue Code, viz:
Section 4. Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases.-- The power to interpret the
provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under this Code or other laws or
portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals. (as amended by the NIRC of
1997, emphases supplied, Asia International Auctioneers, Inc., etc et
al., .v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18,
2007)
NOTES AND COMMENTS: The author disputes this doctrine.
The decisions of the Commission under “other matter” refers to the
quasi-judicial decisions and not to the quasi-legislative powers of the
Commissioner.
16. What is the characteristic of a BIR denial
of a protest such as would enable the taxpayer to appeal
the same to the Court of Tax Appeals ?
SUGGESTED ANSWER: The Commissioner of Internal
Revenue should always indicate to the taxpayer in clear and
unequivocal language whenever his action on an assessment
questioned by a taxpayer constitutes his final determination on the
disputed assessment.
On the basis of his statement indubitably showing that the
Commissioner’s communicated action is his final decision on the
contested assessment, the aggrieved taxpayer would then be able to
take recourse to the tax court at the opportune time. Without
needless difficulty, the taxpayer would be able to determine when his
right to appeal to the tax court accrues. (Commissioner of Internal
Revenue v. Bank of the Philippines Islands, G. R. No. 134062, April
17, 2007 citing Oceanic Wireless Network, Inc. v. Commissioner of
Internal Revenue, G. R. No. 148380, 9 December 2005, 477 SCRA
205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax
Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523)
NOTES AND COMMENTS:
a. Reasons for the rule requiring CIR’s unequivocal
language on his action on the protest.
1) It would obviate all desire and opportunity on the
part of the taxpayer to continually delay the finality of the
assessment – and, consequently, the collection of the amount
demanded as taxes – by repeated requests for recomputation
and reconsideration.
2) On the part of the Commissioner of Internal
Revenue, this would encourage his office to conduct a careful
and thorough study of every questioned assessment and
render a correct and define decision thereon in the first
instance.
3) This would also deter the Commissioner of
Internal Revenue from unfairly making the taxpayer grope in the
dark and speculate as to which action constitutes the decision
appealable to the tax court.
4) Of greater import, this rule of conduct would meet
a pressing need for fair play, regularity, and orderliness in
administrative action. . (Commissioner of Internal Revenue v.
Bank of the Philippines Islands, G. R. No. 134062, April 17,
2007 citing Oceanic Wireless Network, Inc. v. Commissioner of
Internal Revenue, G. R. No. 148380, 9 December 2005, 477
SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of
Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA
523)
17. Cite acts of BIR Commissioner that may be
considered as denial of a protest which serve as basis for
appeal to the Court of Tax Appeals.
SUGGESTED ANSWER:
a. Filing by the BIR of a civil suit for collection of the
deficiency tax is considered a denial of the request for reconsideration.
(Commissioner of Internal Revenue v. Union Shipping Corporation,
185 SCRA 547)
b. An indication to the taxpayer by the Commissioner “in
clear and unequivocal language” of his final denial not the issuance of
the warrant of distraint and levy. What is the subject of the appeal is
the final decision not the warrant of distraint. (Commissioner of
Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)
c. A BIR demand letter sent to the taxpayer after his protest
of the assessment notice is considered as the final decision of the
Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of
Tax Appeals, et al., 57 SCRA 523)
d. A letter of the BIR Commissioner reiterating to a
taxpayer his previous demand to pay an assessment is considered a
denial of the request for reconsideration or protest and is appealable
 56
to the Court of Tax Appeals. (Commissioner v. Ayala Securities
Corporation, 70 SCRA 204)
e. Final notice before seizure considered as
commissioner’s decision of taxpayer’s request for reconsideration who
received no other response. Commissioner of Internal Revenue v.
Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001 held that
not only is the Notice the only response received: its content and tenor
supports the theory that it was the CIR’s final act regarding the
request for reconsideration. The very title expressly indicated that it
was a final notice prior to seizure of property. The letter itself clearly
stated that the taxpayer was being given “this LAST OPPORTUNITY”
to pay; otherwise, its properties would be subjected to distraint and
levy.
18. The taxpayer seasonably protested the
assessment issued by the Commissioner of Internal
Revenue. During the pendency of the protest the CIR
issued a warrant of distraint and levy to collect the taxes
subject of the protest.
As counsel what advice shall you give the taxpayer.
Explain briefly your answer.
SUGGESTED ANSWER: The taxpayer should appeal, by way
of a petition for review, to the Court of Tax Appeals not on the ground
of the denial of the protest but on other matter arising under the
provisions of the National Internal Revenue Code. The actual
issuance of a warrant of distraint and levy in certain cases cannot be
considered a final decision on a disputed assessment.
To be a valid decision on a disputed assessment, the decision
of the Commissioner or his duly authorized representative shall (a)
state the facts, the applicable law, rules and regulations, or
jurisprudence on which such decision is based, otherwise, the decision
shall be void, in which case the same shall not be considered a
decision on the disputed assessment; and (b) that the same is his final
decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions are not
complied with by the mere issuance of a warrant of distraint and levy.
(Commissioner of Internal Revenue v. Union Shipping Corp., 185
SCRA 547)
Furthermore, a motion for the suspension of the collection of
the tax may be filed together with the petition for review (Sec. 3, Rule
10, RRCTA effective December 15, 2005) because the collection of
the tax may jeopardize the interest of the taxpayer.
18-A. As a general rule, there must always be a decision
of the Commissioner of Internal Revenue or Commissioner of
Customs before the Court of Tax Appeals, would have
jurisdiction. If there is no such decision, the petition would be
dismissed for lack of jurisdiction unless the case falls under any of the
following exceptions.

19. Instances where the Court of Tax Appeals
would have jurisdiction even if there is no decision yet by
the Commissioner of Internal Revenue:
a. Where the Commissioner has not acted on the disputed
assessment after a period of 180 days from submission of complete
supporting documents, the taxpayer has a period of 30 days from the
expiration of the 180 day period within which to appeal to the Court of
Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of
Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210,
July 11, 2001)
b. Where the Commissioner has not acted on an application
for refund or credit and the two year period from the time of payment
is about to expire, the taxpayer has to file his appeal with the Court of
Tax Appeals before the expiration of two years from the time the tax
was paid.
It is disheartening enough to a taxpayer to be kept waiting for
an indefinite period for the ruling,. It would make matters more
exasperating for the taxpayer if the doors of justice would be closed
for such a relief until after the Commissioner, would have, at his
personal convenience, given his go signal. (Commissioner of
Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, March
16, 1989, unrep.)
20. Instances where the Court of Tax Appeals
would have jurisdiction even if there is no decision of the
Commissioner of Customs:
a. Decisions of the Secretary of Trade and Industry or the
Secretary of Agriculture in anti-dumping and countervailing duty cases
are appealable to the Court of Tax Appeals within thirty (30) days from
receipt of such decisions.
b. In case of automatic review by the Secretary of Finance in
seizure or forfeiture cases where the value of the importation exceeds
P5 million or where the decision of the Collector of Customs which
fully or partially releases the shipment seized is affirmed by the
Commissioner of Customs.
c. In case of automatic review by the Secretary of Finance of a
decision of a Collector of Customs acting favorably upon a customs
protest.
 57
21. As a general rule, “No court shall have the arrived at arbitrarily and capriciously.” [Commissioner of Internal
authority to grant an injunction to restrain the collection of Revenue v. Hantex Trading Co., Inc., citing United States v.
any national internal revenue tax, fee or charge.” (Sec. 218, Rindskopf, 105 U.S.418 (1881)]
NIRC)
23. Meaning of "best evidence obtainable" under Sec. 6
“No appeal taken to the CTA from the decision of the
(B), NIRC of 1997. This means that the original documents must
Commissioner of Internal Revenue or the Commissioner of Customs
be produced. If it could not be produced, secondary evidence must be
or the Regional Trial Court, provincial, city or municipal treasurer or
adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal
the Secretary of Finance, the Secretary of Trade and Industry and
Revenue, CA - G.R. SP No. 47172, September 30, 1998)
Secretary of Agriculture, as the case may be shall suspend the
NOTES AND COMMENTS:
payment, levy, distraint, and/or sale of any property of the taxpayer for
a. The secondary evidence referred to are those that
the satisfaction of his tax liability as provided by existing law: Provided,
may be adduced using the general methods for reconstructing a
however, That when in the opinion of the Court the collection by the
taxpayer’s income or the indirect approach to tax investigation.
aforementioned government agencies may jeopardize the interest of
The “best evidence” envisaged in Section 16 of the 1977 NIRC
the Government and/or the taxpayer the Court at any stage of the
[now Sec. 6 (B),NIRC of 1997] “includes the corporate and accounting
proceeding may suspend the said collection and require the taxpayer
records of the taxpayer who is the subject of the assessment process,
either to deposit the amount claimed or to file a surety bond for not
the accounting records of other taxpayers engaged in the same line of
more than double the amount with the Court.” (Sec. 11, Rep. Act No.
business, including their gross profit and net profit sales.”
1125, as amended by Sec.9, Rep. Act No. 9282 )
(Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R.
The Supreme Court may enjoin the collection of taxes under its
No. 136975, March 31, 2005 citing De Leon, The National Internal
general judicial power but it should be apparent that the source of the
Revenue Code Annotated, p. 37)
power is not statutory but constitutional.
“Such evidence also includes data, record, paper, document or
The Supreme Court did not grant the provisional remedy
any evidence gathered by internal revenue officers from other
prayed for in Southern Cross Cement Corporation v. The Philippine
taxpayers who had personal transactions or from whom the subject
Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004
taxpayer received any income; and record, data, document and
for it would be tantamount to enjoining the collection of taxes, a
information secured from government offices or agencies, such as the
peremptory judicial act which is traditionally frowned upon unless there
SEC, the Central Bank of the Philippines, the Bureau of Customs, and
is a clear statutory basis for it. Evident is the clear legislative intent
the “Tariff and Customs Commission.” (sic, Commissioner v. Hantex
that the imposition of safeguard measures, despite the availability of
Trading Co., Inc., supra)
judicial review, should not be enjoined notwithstanding any timely
“The law allows the BIR access to all relevant or material
appeal of the imposition. This so because the Safeguard Measures
records or data in the person of the taxpayer. It places no limit or
Act states that the filing of a petition for review before the CTA does
condition on the type or form of the medium by which the record
not stop, suspend, or otherwise toll the imposition or collection of the
subject of the order of the BIR is kept.” (Ibid.)
appropriate tariff duties or the adoption of other appropriate safeguard
Purpose of the “best evidence obtainable” rule under Sec, 6
measures.
(B), NIRC of 1997. “The purpose of the law is to enable the BIR to get
at the taxpayer’s records in whatever form they may be kept.”
22. General rule: “The rule is that in the absence of
(Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R.
accounting records of a taxpayer, his tax liability may be determined
No. 136975, March 31, 2005)
by estimation. The petitioner (Commissioner of Internal Revenue) is
not required to compute such tax liabilities with mathematical 24. Sec. 6 (B) of the NIRC of 1997 allows the BIR to
exactness. Approximation in the calculation of taxes due is justified. make or amend a tax return from his own knowledge or obtained
To hold otherwise would be tantamount to holding that skillful through testimony or otherwise. Thus, the Commissioner of
concealment is an invincible barrier to proof.” [Commissioner of Internal Revenue investigates ”any circumstance which led him to
Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, believe that the taxpayer had taxable income larger than that reported.
March 31, 2005 citing United States v. Johnson, 319 U.S. 1233 Necessarily, this inquiry would have to be outside of the books
(1943)] “However, the rule does not apply where the estimation is because they supported the return as filed. He may take the sworn
 58
testimony of the taxpayer, he may take the testimony of third parties;
he may examine and subpoena, if necessary, traders’ and brokers’
accounts and books and the taxpayer’s books of accounts. The
Commissioner is not bound to follow any set of patterns. The
existence of unreported income may be shown by any particular proof
that is available in the circumstances of the particular situation.
[Commissioner of Internal Revenue v. Hantex Trading Co., Inc. citing
Campbell, Jr., v. Guetersloh, 287 F.2d 878 (1961)]
Citing its ruling in a previous case, a “U.S. appellate court
declared that where the records of the taxpayer are manifestly
inaccurate and incomplete, the Commissioner may look to other
sources of information to establish income made by the taxpayer
during the years in question. (Ibid., in turn citing Kenney v.
Commissioner, 111 F.2d 374)
25. The following are the general methods developed by the
Bureau of Internal Revenue for reconstructing a taxpayer’s
income where the records do not show the true income or where no
return was filed or what was filed was a false and fraudulent return
(a) Percentage method;
(b) Net worth method.;
(c) Bank deposit method;
(d) Cash expenditure method;
(e) Unit and value method;
(f) Third party information or access to records method;
(g) Surveillance and assessment method. (Chapter XIII.
Indirect Approach to Investigation, Handbook on Audit Procedures
and Techniques – Volume I, pp. 68-74)
26. Third party information or access to records method.
The BIR may require third parties, public or private to supply
information to the BIR, and thus, “obtain on a regular basis from any
person other than the person whose internal revenue tax liability is
subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and
instrumentalities including the Bangko Sentral ng Pilipinas and
government-owned or –controlled corporations, any information such
as, but not limited to, costs and volume of production, receipts or
sales and gross incomes of taxpayers, and the names , addresses,
and financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters or multinational
companies, joint accounts, associations, joint ventures or consortia
and registered partnerships, and their members; xxx” [Sec. 5 (B),
NIRC of 1997)
27. A pre-assessment notice is a letter sent by the Bureau
of Internal Revenue to a taxpayer asking him to explain within a period
of fifteen (15) days from receipt why he should not be the subject of
an assessment notice. It is part of the due process rights of a
taxpayer.
As a general rule, the BIR could not issue an assessment
notice without first issuing a pre-assessment notice because it is part
of the due process rights of a taxpayer to be given notice in the form
of a pre-assessment notice, and for him to explain why he should not
be the subject of an assessment notice.
28. Instances where a pre-assessment notice is
not required before a notice of assessment is sent to the
taxpayer.
a. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the
face of the return; or
b. When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding agent; or
c. When a taxpayer opted to claim a refund or tax credit of
excess creditable withholding tax for a taxable period was determined
to have carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding table year; or
d. When the excess tax due on excisable articles has not been
paid; or
e. When an article locally purchased or imported by an exempt
person, such as, but not limited to vehicles, capital equipment,
machineries and spare parts, has been sold, trade or transferred to
non-exempt persons. (Sec. 228, NIRC of 1997)
29. The word assessment when used in connection with
taxation, may have more than one meaning. More commonly the
word “assessment” means the official valuation of a taxpayer’s
property for purpose of taxation. The above definition of
assessment finds application under tariff and customs taxation
as well as local government taxation.
For real property taxation, there may be a special meaning
to the burdens that are imposed upon real properties that have
been benefited by a public works expenditure of a local
government. It is sometimes called a special assessment or a
special levy. (Commissioner of Internal Revenue v. Pascor Realty and
Development Corporation, et al., G.R. No. 128315, June 29, 1999)
For internal revenue taxation assessment as laying a tax.
The ultimate purpose of an assessment to such a connection is to
 59
ascertain the amount that each taxpayer is to pay. (Commissioner of or protest the assessment.” The taxpayer bank insists that the
Internal Revenue v. Pascor Realty and Development Corporation, et assessment was not valid. Of course, BIR took the opposite
al., G.R. No. 128315, June 29, 1999) view contending further that there was no seasonable protest,
hence the tax is sue and collectible. Who is correct ?
30. An assessment is a notice duly sent to the SUGGESTED ANSWER: The BIR is correct. Under the old
taxpayer which is deemed made only when the BIR law Sec. 270, it is enough merely that the BIR Commissioner shall
releases, mails or sends such notice to the taxpayer . “notify the taxpayer of his findings
The taxpayer bank counsel’s December 10, 1988 letter is not a
(Commissioner of Internal Revenue v. Pascor Realty and
seasonable protest because it was filed thirty (30) days after receipt of
Development Corporation, et al., G.R. No. 128315, June 29, 1999)
the assessment on October 28, 1988. (Commissioner of Internal
Revenue v. Bank of Philippine Islands, G. R. No. 134062, April 17,
31. What is a self-assessed tax ?
2007)
SUGGESTED ANSWER: A tax that the taxpayer himself
NOTES AND COMMENTS: The statement, “The taxpayer shall
assesses or computes and pays to the taxing authority. It is a tax that
be informed in writing of the law and the facts on which the
self-assessed by the taxpayer without the intervention of an
assessment is made; otherwise the assessment shall be void” is an
assessment by the tax authority to create the tax liability.
amendment to Sec. 270 (now renumbered to Sec. 228) which took
The Tax Code follows the pay-as-you-file system of taxation
effect only on January 1, 1998 upon the effectivity of the Tax Reform
under which the taxpayer computes his own tax liability, prepares the
Act of 1997.
return, and pays the tax as he files the return. The pay-as-you-file
system is a self-assessing tax return.
33. What are the prescriptive periods for making
Internal revenue taxes are self-assessing. [Dissent of J. Carpio
assessments of internal revenue taxes ?
in Philippine National Oil Company v. Court of Appeals, et al., G. R.
SUGGESTED ANSWER:
No. 109976, April 26, 2005 and companion case citing Tupaz v. Ulep,
a. Three (3) years from the last day within which to file a
316 SCRA 118 (1999) in turn citing Vitug and Acosta, Tax Law and
return or when the return was actually filed, whichever is later (Sec.
Jurisprudence, 1st edition, 1997, p. 267]
203, NIRC of 1997). The CIR has three (3) years from the date of
A clear example of a self-assessed tax is the annual income
actual filing of the tax return to assess a national internal revenue tax
tax, which the taxpayer himself computes and pays without the
or to commence court proceedings for the collection thereof without
intervention of any assessment by the BIR. The annual income tax
an assessment. [Bank of Philippine Islands (Formerly Far East
becomes due and payable without need of any prior assessment by
Bank and Trust Company) v. Commissioner of Internal Revenue, G.
the BIR. The BIR may or may not investigate or audit the annual
R. No. 174942, March 7, 2008]
income tax return filed by the taxpayer. The taxpayer’s liability for the
b. ten years from discovery of the failure to file the tax return
income tax does not depend on whether or not the BIR conducts such
or discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of
subsequent investigation or audit.
1997) ; or
However, if the taxing authority is first required to investigate,
c. within the period agreed upon between the government
and after such investigation to issue the tax assessment that creates
and the taxpayer where there is a waiver of the prescriptive period for
the tax liability, then the tax is no longer self-assessed. (Dissent of J.
assessment (Sec. 222 (b), NIRC of 1997).
Carpio in Philippine National Oil Company v. Court of Appeals, et al.,
G. R. No. 109976, April 26, 2005 and companion case)
34. Purpose of period of limitations in taxation.
32. On October 28, 1988 taxpayer bank received a notice For the purpose of safeguarding taxpayers from any unreasonable
of assessment from the BIR informing it that deficiency taxes examination, investigation or assessment, our tax law provides a
are due from the said taxpayer bank without any findings of law statute of limitations in the collection of taxes. [Commissioner of
or fact but supported only with a computation. On December 10, Internal Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby
1988, the taxpayer bank counsel filed a letter that “as soon as International Tire Co., Inc.), et al., G.R. No. 104171, February 24,
this is explained and clarified in a proper notice of assessment, 1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of
we shall inform you of the taxpayer’s decision on whether to pay
 60
Internal Revenue, G. R. No. 162852, December 16, 2004;], as well as
their assessments.
The law prescribing a limitation of actions for the collection of
the income tax is beneficial both to the Government and to its
citizens; to the Government because tax officers would be obliged to
act promptly in the making of assessment, and to citizens because
after the lapse of the period of prescription citizens would have a
feeling of security against unscrupulous tax agents who will always
find an excuse to inspect the books of taxpayers, not to determine the
latter’s real liability, but to take advantage of every opportunity to
molest peaceful, law-abiding citizens. Without such a legal defense
taxpayers would furthermore be under obligation to always keep their
books and keep them open for inspection subject to harassment by
unscrupulous tax agents. The law on prescription being a remedial
measure should be interpreted in a way conducive to bringing about
the beneficent purpose of affording protection to the taxpayer within
the contemplation of the Commission which recommend the approval
of the law. [Republic of the Philippines v. Ablaza, 108 Phil. 1105,
1108, cited in Bank of Philippine Islands (Formerly Far East Bank and
Trust Company) v. Commissioner of Internal Revenue, G. R. No.
174942, March 7, 2008]
35. Unreasonable investigation contemplates cases
where the period for assessment extends indefinitely because
this deprives the taxpayer of the assurance that it will not longer be
subjected to further investigation for taxes after the expiration of a
reasonable period of time. (Philippine Journalists, Inc. v.
Commissioner of Internal Revenue, G. R. No. 162852, December 16,
2004 with note to see Republic v. Ablaza, 108 Phil. 1105. 1108)
Laws on prescription should be liberally construed in favor of
the taxpayer. Reason: for the purpose of safeguarding taxpayers
from an unreasonable examination, investigation or assessment, our
tax laws provide a statute of limitation on the collection of taxes. Thus,
the law on prescription, being a remedial measure, should be liberally
construed in order to afford such protection, As a corollary, the
exceptions to the law on prescription should perforce be strictly
construed. [Philippine Journalists, Inc. v. Commissioner of Internal
Revenue, G. R. No. 162852, December 16, 2004 citing Commissioner
of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby
International Tire Co., Inc.),., et al., G.R. No. 104171, February 24,
1999, 303 SCRA 546]
The prescriptive period was precisely intended to give the
taxpayers peace of mind. (Commissioner of Internal Revenue v. B.F.
Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999)
36. A “jeopardy assessment” is a delinquency tax
assessment which was assessed without the benefit of complete or
partial audit by an authorized revenue officer, who has reason to
believe that the assessment and collection of a deficiency tax will be
jeopardized by delay because of the taxpayer’s failure to comply with
the audit and investigation requirements to present his books of
accounts and/or pertinent records, or to substantiate all or any of the
deductions, exemptions, or credits claimed in his return. [Sec. 3.1 (a),
Rev. Regs. No. 6-2000)
Jeopardy assessment is an indication of the doubtful validity of
the assessment, hence it may be subject to a compromise. [Sec. 3.1
(a), Rev. Regs. No. 6-2000]
37. During Juliana’s lifetime, her business affairs were
managed by the Philippine Trust Company (Philtrust). She died
on April 3, 2001.Two days after her death, Philtrust, through its
Trust Officer, filed her Income Tax Return for 2000, without
indicating that Juliana died.
On May 22, 2001, Philtrust filed a verified petition with the
RTC for appointment as Special Administrator. This was denied
by the court who appointed one of the heirs as Special
Administrator. Philtrust’s motion for reconsideration was
denied.
After an investigation by the BIR of the decedent’s income
tax liability, it sent, on November 18, 2003, a demand letter and a
Notice of Assessment to Juliana c/o Philtrust at the latter’s
address which was stated in the 1998 Income Tax Return. No
response was made neither was the BIR advised that Juliana
already died.
On June 18, 2005, the BIR Commissioner issued warrants
of distraint and levy to enforce collection of the deficiency
income tax liability which was served on Juliana’s heir. On
November 22, 2005, the BIR filed with the estate court a motion
for allowance of claim. The heir claimed that there was no
proper service of the notice of assessment and that the filing of
the motion was time-barred. On the other hand the BIR made
the submission that both the issuance of the assessment notice
and the motion were all properly made on Philtrust.
Furthermore the lapse of the 30-day period within which to
protest made the assessment final, executory and uncontestable
and not time barred.
Rule on the conflicting claims of the parties.
SUGGESTED ANSWER: I would rule in favor of the heir.
There was no proper service of the notice of assessment
because the death of Juliana automatically severed the legal
relationship of principal and agent between her and Philtrust. The
 61
severed relationship could not be revived on the mere fact that
Philtrust filed her Tax Return two days after her death.
Philtrust’s failure to file a notice of death subjects it to penal
sanctions which do not include the indefinite tolling of the prescriptive
period for making deficiency tax assessments, or the waiver of the
notice requirement for such assessments. (Estate of the late Juliana
Diez Vda. de Gabriel v. Commissioner of Internal Revenue, G.R. No.
155541, January 27, 2004)
38. What are the requirements for the validity of
a formal letter of demand and assessment notice ?
SUGGESTED ANSWER:
a. There must have been previously issued a pre-
assessment notice until excepted;
b. It must have been issued prior to the prescriptive period;
and
c. The letter of demand calling for payment of the taxpayer’s
deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment notice shall be
void. (Sec. 3.1.4, Rev. Regs. No. 12-99)
39. What is the presumption that flows from a taxpayer’s
failure to protest an assessment ?
SUGGESTED ANSWER: “Tax assessments by tax examiners
are presumed correct and made in good faith. The taxpayer has the
duty to prove otherwise. In the absence of proof of any irregularities in
the performance of duties, an assessment duly made by a Bureau of
Internal Revenue examiner and approved by his superior officers will
not be disturbed. All presumptions are in favor of the correctness of
tax assessments.” (Commissioner of Internal Revenue v. Bank of
Philippine Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v.
Court of Appeals, G. R. No. L-81446, 18 August 1988, 164 SCRA
524, 530, citations omitted)
40. What are the reasons for presumption of correctness
of assessments ?
SUGGESTED ANSWER:
a. Lifeblood theory
b. Presumption of regularity (Commissioner of Internal
Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31,
2005) in the performance of public functions. (Commissioner of
Internal Revenue v. Tuazon, Inc., 173 SCRA 397)
c. The likelihood that the taxpayer will have access to the
relevant information [Commissioner of Internal Revenue, supra citing
United States v. Rexach, 482 F.2d 10 (1973). The certiorari was
denied by the United States Supreme Court on November 19, 1973)
d. The desirability of bolstering the record-keeping
requirements of the NIRC. (Ibid.)
41. Give instances where prima facie correctness
of a tax assessment does not apply.
SUGGESTED ANSWER: The “prima facie correctness of a tax
assessment does not apply upon proof that an assessment is utterly
without foundation, meaning it is arbitrary and capricious. Where the
BIR has come out with a “naked assessment” i.e., without any
foundation character, the determination of the tax due is without
rational basis.” [Commissioner of Internal Revenue v. Hantex Trading
Co., Inc., G, R. No. 136975, March 31, 2005 citing United States v.
Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such a
situation, “the determination of the Commissioner contained in a
deficiency notice disappears.” [Commissioner of Internal Revenue,
supra citing a U.S. Court of Appeals ruling, in Clark and Clark v.
Commissioner of Internal Revenue, 266 F. 2d 698 (1959)] “Hence,
the determination by the CTA must rest on all the evidence introduced
and its ultimate determination must find support in credible evidence.”
[Commissioner of Internal Revenue, supra]
42. What are the instances that suspends the
running of the prescriptive periods (Statute of Limitations)
within which to make an assessment and the beginning of
distraint or levy or of a proceeding in court for the
collection, in respect of any tax deficiencies?
SUGGESTED ANSWER:
a. When the Commissioner is prohibited from making the
assessment, or beginning distraint, or levy or proceeding in court and
for sixty (60) days thereafter;
b. When the taxpayer requests for and is granted a
reinvestigation by the commissioner;
c. When the taxpayer could not be located in the address given
by him in the return filed upon which the tax is being assessed or
collected;
d. When the warrant of distraint and levy is duly served upon
the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located;
and
e. When the taxpayer is out of the Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case)
 62
that the waiver of the period for assessment must be in writing and liability of P111 million was arrived at and requested for an
have the written consent of the BIR Commissioner is still doctrinal extension of 30 days from receipt of the clarification within
because of the provisions of Sec. 223, NIRC of 1997 which provides which to reply. PJI, through a follow-up letter, asserted it never
for the suspension of the prescriptive period: received Assessment/Demand No. 33-1-000757-94. On March 28,
2000 PJI received a Warrant of Distraint and/or Levy. PJI then
43. The signatures of both the Commissioner appealed to the CTA.
and the taxpayer, are required for a waiver of the The following issues are for resolution in the appeal:
prescriptive period, thus a unilateral waiver on the part of the a. Does the CTA have jurisdiction over the appeal ?
b. Was the Waiver of the Statute of Limitations valid ?
taxpayer does not suspend the prescriptive period. [Commissioner of
c. Were the Assessment/Demand and the Warrant of
Internal Revenue v. Court of Appeals, et al., G.R. No. 115712,
Distraint and/or Levy valid ?
February 25, 1999 (Carnation case)]
Will the appeal prosper? Explain briefly your answer.
SUGGESTED ANSWER: Yes, it will prosper.
44. The act of requesting a reinvestigation alone does
a. The CTA has jurisdiction to determine if the warrant of
not suspend the running of the prescriptive period. The request
distraint and levy issued by the BIR is valid and to rule if the Waiver of
for reinvestigation must be granted by the CIR. The Supreme
the Statute of Limitations was validly effected. This is so because the
Court declared that the burden of proof that the request for
CTA has exclusive appellate jurisdiction to review by appeal decisions
reinvestigation had been actually granted shall be on the
of the Commissioner of Internal Revenue in cases involving “other
Commissioner of Internal Revenue. Such grant may be expressed
matters arising under the National Internal Revenue Code or other
in its communications with the taxpayer or implied from the action of
laws administered by the Bureau of Internal Revenue.” [Sec. 7 (a) (1).
the Commissioner or his authorized representative in response to
R. A. No. 1125, as amended by R. A. No. 9282) Thus it was
the request for reinvestigation. [Bank of Philippine Islands (Formerly
previously ruled that the CTA had jurisdiction to act on a petition to
Far East Bank and Trust Company) v. Commissioner of Internal
invalidate and annul the distraint orders of the Commissioner. [Ynares-
Revenue, G. R. No. 174942, March 7, 2008]
Santiago, J. Philippine Journalists, Inc. v. Commissioner of Internal
Revenue, G. R. No. 162852, December 16, 2004 citing Panrtoja v.
45. Philippine Journalists, Inc. (PJI) filed its Annual
David, 111 Phil. 197; 1 SCRA 608 (1961)] Likewise upheld by the
Income Tax Return for the calendar year ended December 31,
Supreme Court was the decision of the CTA declaring several waivers
1994 which showed a net income of P30 million and the tax due
executed by the taxpayer as null and void, thus invalidating the
as P10 million. An examination of PJI’s books of account and
assessments issued by the BIR. (Ibid., citing Commissioner of Internal
other accounting records for the period January 1, 1994 to
Revenue v. Court of Appeals, G. R. No. 115712, 25 February 1999,
December 31, 1994 showed deficiency VAT, Income Tax and
303 SCRA 614)
Withholding Tax in the total amount of P1`27 million. During the
b. The Waiver of the Statute of Limitations is not valid
September 22, 1997 informal conference with the Revenue
because it did not specify a definite agreed date between the BIR and
District Officer, PJI’s Comptroller executed a waiver of statute of
PJI, within which the former may assess and collect revenue taxes.
limitations provided for under sections 223 and 224 of the NIRC.
Furthermore, the waiver is also defective from the government
On October 5, 1998, the BIR issued a Pre-Assessment Notice
side because it was signed only by a revenue district officer, and not
which was followed by Assessment/Demand No.33-1-000757-94
the Commissioner, as so required. Finally, PJI was not furnished a
stating a total deficiency taxes in the amount of P111 million for
copy of the waiver.
income tax, VAT and expanded withholding taxes, inclusive of
c. The waiver document is incomplete and defective and
interest and compromise penalty.
thus the three-year prescriptive period within which to assess was not
On March 16, 1999, the BIR sent to PJI a Preliminary
tolled or extended and continued to run until April 17, 1998.
Collection Letter to pay the assessment within 10 days from
Consequently, Assessment/Demand No. 33-1-000757-94 issued on
receipt. On November 10,1999, a Final Notice Before Seizure
December 9, 1998 was invalid because it was issued beyond the
was issued giving PJI 10 days from receipt within which to pay.
three (3) year period. In the same manner, the Warrant of Distraint
PJI received the final notice on November 24, 1999 and on
and/or Levy which PJI received on March 28, 2000 is also null and
November 26, 1999 PJI asked that it be clarified on how the tax
void for having been issued pursuant to an invalid assessment.
 63
(Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G.
R. No. 162852, December 16, 2004)
46. What are the two ways of protesting an
assessment notice for an internal revenue tax ?
Alternatively, what are the two types of protests ? Explain
briefly.
SUGGESTED ANSWER:
a. Request for reconsideration which refers to a plea for re-
evaluation of an assessment on the basis of existing records without
need of additional evidence. It may involve both a question of fact or
of law or both.
b. Request for reinvestigation which refers to a plea for re-
evaluation of an assessment on the basis of newly-discovered
evidence or additional evidence that a taxpayer intends to present in
the investigation. It may also involve a question of fact or law or both.
(Commissioner of Internal Revenue v. Philippine Global
Communication, Inc., G. R. No. 167146, October 31, 2006 citing Rev.
Regs. No. 12-85)
47. What is that type of protest that suspends
the running of the statute of limitations for the beginning of
distraint or levy or a proceeding in court for collection ?
Why ?
SUGGESTED ANSWER: It is that type of protest “when the
taxpayer requests for a reinvestigation which is granted by the
Commissioner” (Sec. 223, NIRC of 1997), that suspends the running
of the statute of limitations for collection of the tax. (Commissioner of
Internal Revenue v. Philippine Global Communication, Inc., G. R. No.
167146, October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of
1997) When a taxpayer demands a reinvestigation, the time
employed in reinvestigation should be deducted from the total period
of limitation. [Commissioner of Internal Revenue, supra citing
Republic v. Lopez, 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)]
Undoubtedly, a reinvestigation, which entails the reception and
evaluation of additional evidence, will take more time than a
reconsideration of a tax assessment which will be limited to the
evidence already at hand; this justifies why the former can suspend
the running of the statute of limitations on collection of the assessed
tax, while the latter cannot. (Commissioner of Internal Revenue v.
Philippine Global Communication, Inc., G. R. No. 167146, October 31,
2006 citing Bank of Philippine Islands v. Commissioner of Internal
Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230-
231)
48. What are the requirements for the validity
of a taxpayer’s protest ?
SUGGESTED ANSWER:
a. It must be filed within the reglementary period of thirty
(30) days from receipt of the notice of assessment.
b. The taxpayer must not only show the errors of the
Bureau of Internal Revenue but also the correct computation through
1) A statement of the facts, the applicable law, rules
and regulations, or jurisprudence on which the taxpayer’s
protest is based,
2) If there are several issues involved in the disputed
assessment and the taxpayer fails to state the facts, the
applicable law, rules and regulations, or jurisprudence in
support of his protest against some of the several issues on
which the assessment is based, the same shall be considered
undisputed issue or issues, in which case, the taxpayer shall be
required to pay the corresponding deficiency tax or taxes
attributable thereto. (Sec. 3.1.5, Rev. Regs. 12-99)
c. Within sixty (60) days from filing of the protest, the
taxpayer shall submit all relevant supporting documents. [4th par.,
Sec. 228 (e), NIRC of 1997]
49. What is the procedure for suspension of collection
of taxes ?
SUGGESTED ANSWER: Where the collection of the amount
of the taxpayer’s liability, sought by means of a demand for payment,
by levy, distraint or sale of property of the taxpayer, or by whatever
means, as provided under existing laws, may jeopardize the interest
of the government or the taxpayer, an interested party may file a
motion for the suspension of the collection of the tax liability (Sec. 1,
Rule 10, RRCTA effective December 15, 2005) with the Court of Tax
Appeals.
The motion for suspension of the collection of the tax may be
filed together with the petition for review or with the answer, or in a
separate motion filed by the interested party at any stage of the
proceedings. (Sec. 3, Rule 10, RRCTA effective December 15,
2005)
50. A compromise is a contract whereby the parties,
by making reciprocal concessions, avoid a litigation or put an end to
one already commenced. (Art. 2028, Civil Code)
A compromise penalty could not be imposed by the BIR, if
the taxpayer did not agree. A compromise being, by its nature, mutual
in essence requires agreement. The payment made under protest
could only signify that there was no agreement that had effectively
 64
been reached between the parties. (Vda. de San Agustin, et al., v.
Commissioner of Internal Revenue, G. R. No. 138485, September 10,
2001)
50-A. What tax cases may be the subject of a
compromise ?
SUGGESTED ANSWER: The following cases may, upon
taxpayer’s compliance with the basis for compromise, be the subject
matter of compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest after issuance of the
Final Assessment Notice to the taxpayer which are still pending in the
Regional Offices, Revenue District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service, Enforcement Service and
other offices in the National Office;
c. Civil tax cases being disputed before the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than those already filed in court,
or those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-
2002)
51. What tax cases could not be the subject of
compromise ?
SUGGESTED ANSWER:
a. Withholding tax cases unless the applicant-taxpayer
invokes provisions of law that cast doubt on the taxpayer’s obligation
to withhold.;
b. Criminal tax fraud cases, confirmed as such by the
Commissioner of Internal Revenue or his duly authorized
representative;
c. Criminal violations already filed in court;
d. Delinquent accounts with duly approved schedule of
installment payments;
e. Cases where final reports of reinvestigation or
reconsideration have been issued resulting to reduction in the original
assessment and the taxpayer is agreeable to such decision by signing
the required agreement form for the purpose. On the other hand,
other protested cases shall be handled by the Regional Evaluation
Board (REB) or the National Evaluation Board (NEB) on a case to
case basis;
f. Cases which become final and executory after final
judgment of a court where compromise is requested on the ground of
doubtful validity of the assessment; and
g. Estate tax cases where compromise is requested on the
ground of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No.
30-2002)
52. The Commissioner may compromise the
payment of any internal revenue tax when:
a. A reasonable doubt as to the validity of the claim against
the taxpayer exists provided that the minimum compromise entered
into is equivalent to forty percent (40%) of the basic tax; or
b. The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax provided that the minimum
compromise entered into is equivalent to ten percent (10%) of the
basic assessed tax
In the above instances the Commissioner is allowed to enter
into a compromise only if the basic tax involved does not exceed One
million pesos (P1,000,000.00), and the settlement offered is not less
than the prescribed percentages. [Sec. 204 (A), NIRC of 1997]
In instances where the Commissioner is not authorized, the
compromise shall be subject to the approval of the Evaluation Board
composed of the Commissioner and the four (4) Deputy
Commissioners.
53. The Commissioner of Internal Revenue is
authorized to abate or cancel a tax liability, when:
a. The tax or any portion thereof appears to be unjustly or
excessively assessed; or
b. The administration and collection costs involved do not
justify the collection of the amount due. [Sec. 204 (B), NIRC of 1997]
54. What is the prescriptive period for collecting internal
revenue taxes ?
SUGGESTED ANSWER: There are four (4) prescriptive
periods for the collection of an internal revenue tax:
a. Collection upon a false or fraudulent return or no return
without assessment. In case of a false or fraudulent return with the
intent to evade tax or of failure to file a return, “a proceeding in court
for the collection of such tax may be filed without assessment, at any
time within ten (10) years after the discovery of the falsity, fraud or
omission.” [Sec. 222 (a), NIRC of 1997)
b. Collection upon a false or fraudulent return or no return
with assessment. Any internal revenue tax which has been assessed
(because the return is false or fraudulent with intent to evade tax or of
failure to fail a return), within a period of ten (10) years from discovery
of the falsity, fraud or omission “may be collected by distraint or
levy or by a proceeding in court within five (5) years following
 65
the assessment of the tax.” [Sec. 222 (c), in relation to Sec. 222 (a)
NIRC of 1997, emphasis supplied)
c. Collection upon an extended assessment. Where a tax
has been assessed with the period agreed upon between the
Commissioner and the taxpayer in writing (which should initially be
within three (3) years from the time the return was filed or should have
been filed), or any extensions before the expiration of the period
agreed upon, the tax “may be collected by distraint or levy or by a
proceeding in court within the period agreed upon in writing
before the expiration of the five (5) year period. The period so
agreed upon may be extended by subsequent written agreements
made before the expiration of the period previously agreed upon.”
[Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997,
emphasis supplied)
d. Collection upon a return that is not false or fraudulent, or
where the assessment is not an extended assessment. “Except as
provided in Section 222, internal revenue taxes shall be assessed
within three (3) years after the last day prescribed by law for the filing
of the return, and no proceeding in court without assessment for
the collection of such taxes shall be begun after the expiration of
such period; Provided, That in case where a return is filed beyond
the period prescribed by law, the three (3) year period shall be
computed from the day the return was filed. For purposes of this
Section, a return filed before the last day prescribed by law for the
filing thereof shall be considered filed on such last day.” (Sec. 203,
NIRC of 1997, emphasis supplied)
When the BIR validly issues an assessment within the three
(3)-year period, it has another three (3) years within which to collect
the tax due by distraint, levy, or court proceeding. The assessment
of the tax is deemed made and the three (3)-year period for
collection of the assessed tax begins to run on the date the
assessment notice had been released, mailed or sent to the
taxpayer. [Bank of Philippine Islands (Formerly Far East Bank and
Trust Company) v. Commissioner of Internal Revenue, G. R. No.
174942, March 7, 2008 citing BPI v. Commissioner of Internal
Revenue, G.R. No. 139736, 17 October 2005, 473 SCRA 205, 222-
223)
NOTES AND COMMENTS:
a. Both the former Sec. 269, NIRC of 1977 and Sec.222
of NIRC of 1997 do not refer to a “regular return.” It is clear that
in enacting Sec. 222, entitled “Exceptions as to the period of limitation
of assessment and collection of taxes,” the NIRC of 1997 has
eliminated sub-paragraph c of the former Sec. 269 of the NIRC, also
entitled “Exceptions as to the period of limitation of assessment and
collection of taxes.” Said Sec. 269 (c), reads “Any internal revenue
tax which has been assessed within the period of limitation above-
prescribed may be collected by distraint or levy or by a proceeding in
court within three years following the assessment of the tax.”
A perusal of Sec. 222 of the NIRC is clear that it covers only
three scenarios only. 1) No assessment was made upon a false or
fraudulent return or omission to file a return; 2) an assessment was
made upon a false or fraudulent return or omission to file a return; and
3) an extended assessment issued within a period agreed upon by
the Commissioner and the taxpayer. The same scenarios are those
referred to in the former Sec. 269 which provided for a prescriptive
period for collection of three (3) years.
It is clear therefore that neither Sec. 222 nor the former Sec.
269 provide for an instance where the assessment was made upon a
“regular return” or one that is not false or fraudulent, or that there was
an agreement to extend the period for assessment.
Resort should therefore be made to the three (3) year period
referred to in Sec. 203 of the NIRC of 1997 which reads, “Except as
provided in Section 222, internal revenue taxes shall be assessed
within three (3) years after the last day prescribed by law for the filing
of the return, and no proceeding in court without assessment for
the collection of such taxes x x x “ (paraphrasing and emphasis
supplied)
55. What is solutio indebeti as applied to tax cases ?
SUGGESTED ANSWER: This is erroneous payment of taxes
and occurs when the taxpayer pays under a mistake of fact, as for the
instance in a case where he is not aware of an existing exemption in
his favor at the time the payment was made. Such payment is held to
be not voluntary and therefore, can be recovered or refunded.
(Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation, G. R. No. 147295, February 16, 2007)
NOTES AND COMMENTS: Technicalities and legalisms,
however exalted, should not be misused by the government to keep
money not belonging to it, thereby enriching itself at the expense of
its law-abiding citizens. State Land Investment Corporation v.
Commissioner of Internal Revenue, G. R. No. 171956, January 18,
2008 citing BPI-Family Savings Bank, Inc. v. Court of Appeals, G.R.
No. 122480, April 12, 2000, 330 SCRA 507.
Under the principle of solutio indebiti provided in Art. 2154,
Civil Code, “If something is received when there is no right to
demand it, and it was unduly delivered through mistake, the
obligation to return it arises.” The BIR received something “when
there [was] no right to demand it,” and thus, it has the obligation to
return it. State Land Investment Corporation v. Commissioner of
Internal Revenue supra citing Citibank, N. A. v. Court of Appeals and
Commissioner of Internal Revenue, G.R. No. 107434, October 10,
1997, 280 SCRA 459, in turn citing Ramie Textiles, Inc. v. Mathay,
 66
Sr., 89 SCRA 586 (1979). It is an ancient principle that no one, not
even the state, shall enrich oneself at the expense of another.
Indeed, simple justice requires the speedy refund of the wrongly held
taxes. (Ibid.)
56. What are the reasons for requiring the filing of an
administrative application for refund or credit with the
BSUGGESTED
56. The filing of an administrative claim for
refund with the BIR, before filing a case with the Court of
Tax Appeals, is necessary for the following reasons:
a. To afford the Commissioner an opportunity to correct his
errors or that of subordinate officers. (Gonzales v. Court of Tax
Appeals, et al., 14 SCRA 79)
b. To notify the Government that such taxes have been
questioned and the notice should be borne in mind in estimating the
revenue available for expenditures. (Bermejo v. Collector, G.R. No. L-
3028, July 28, 1950)
 57. As a general rule the filing of an application for
refund or credit with the Bureau of Internal Revenue is an
administrative precondition before a suit may be filed with the
Court of Tax Appeals. Is there any exception ?
SUGGESTED ANSWER: Yes. The failure to first file a written
claim for refund or credit is not fatal to a petition for review involving a
disputed assessment where an assessment was disputed but the
protest was denied by the Bureau of Internal Revenue.
To hold that the taxpayer has now lost the right to appeal from
the ruling on the disputed assessment and require him to file a claim
for a refund of the taxes paid as a condition precedent to his right to
appeal, would in effect require of him to go through a useless and
needless ceremony that would only delay the disposition of the case,
for the Commissioner would certainly disallow the claim for refund in
the same way as he disallowed the protest against the assessment.
The law, should not be interpreted as to result in absurdities. (vda. de
San Agustin., etc., v. Commissioner of Internal Revenue, G.R. No.
138485, September 10, 2001 citing Roman Catholic Archbishop of
Cebu v. Collector of Internal Revenue, 4 SCRA 279)
NOTE: Reconciliation between above two numbers (56
and 57). An application for refund or credit under Sec. 229 of the
NIRC of 1997 is required where the case filed before the CTA is a
refund case, which is not premised upon a disputed assessment.
There is no need for a prior application for refund or credit, if the
refund is merely a consequence of the resolution of the BIR’s denial of
a protested assessment.
58. What is the nature of the taxpayer’s remedy of either
to ask for a refund of excess tax payments or to apply the same
in payment of succeeding taxable periods’ taxes ?
SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (now
Sec. 76 of the NIRC of 1997) provides that any excess of the total
quarterly payments over the actual income tax computed in the
adjustment or final corporate income tax return, shall either (a) be
refunded to the corporation, or (b) may be credited against the
estimated quarterly income tax liabilities for the quarters of the
succeeding taxable year. To ease the administration of tax collection,
these remedies are in the alternative and the choice of one precludes
the other. Since the Bank has chosen the tax credit approach it
cannot anymore avail of the tax refund. (Philippine Bank of
Communications v. Commissioner of Internal Revenue, et al., G.R.
No. 112024, January 28, 1999)
NOTES AND COMMENTS:
a. The choice, is given to the taxpayer, whether to
claim for refund under Sec. 76 or have its excess taxes applied as
tax credit for the succeeding taxable year, such election is not final.
Prior verification and approval by the Commissioner of Internal
Revenue is required. The availment of the remedy of tax credit is not
absolute and mandatory. It does not confer an absolute right on the
part of the taxpayer to avail of the tax credit scheme if it so chooses.
Neither does it impose a duty on the part of the government to sit back
and allow an important facet of tax collection to be at the sole control
and discretion of the taxpayer. (Paseo Realty & Development
Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13,
2004)
 59. What is the “irrevocability rule” in claims
for refund and what is the rationale behind this ?
SUGGESTED ANSWER: A corporation entitled to a tax credit
or refund of the excess estimated quarterly income taxes paid has
two options: (1) to carry over the excess credit or (2) to apply for the
issuance of a tax credit certificate or to claim a cash refund. If the
option to carry over the excess credit is exercised, the same shall be
irrevocable for that taxable period.
 67
In exercising its option, the corporation must signify in its
annual corporate adjustment return (by marking the option box
provided in the BIR form) its intention either to carry over the excess
credit or to claim a refund. To facilitate tax collection, these remedies
are in the alternative and the choice of one precludes the other.
[Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R.
No. 176290, September 21, 2007 citing Philippine Bank of
Communications v. Commissioner of Internal Revenue, 361 Phil.
916 (1999)]
This is known as the irrevocability rule and is embodied in
the last sentence of Section 76 of the Tax Code. The phrase “such
option shall be considered irrevocable for that taxable period” means
that the option to carry over the excess tax credits of a particular
taxable year can no longer be revoked.
The rule prevents a taxpayer from claiming twice the excess
quarterly taxes paid: (1) as automatic credit against taxes for the
taxable quarters of the succeeding years for which no tax credit
certificate has been issued and (2) as a tax credit either for which a
tax credit certificate will be issued or which will be claimed for cash
refund. (Systra Philippines, Inc., supra citing De Leon, Hector, THE
NATIONAL INTERNAL REVENUE CODE, Seventh Edition, 2000, p.
430)
60. In the year 2000 Systra derived excess tax credits
and exercised the option to carry them over as tax credits for
the next taxable year. However, the tax due for the next taxable
year is lower than excess tax credits. It now applies for a
refund of the unapplied tax credits. May its refund be
granted ? If the refund is denied, does Systra lose the
unapplied tax credits ? Explain briefly your answer.
SUGGESTED ANSWER: Systra’s claim for refund should
be denied. Once the carry over option was made, actually or
constructively, it became forever irrevocable regardless of whether
the excess tax credits were actually or fully utilized Under Section 76
of the Tax Code, a claim for refund of such excess credits can no
longer be made. The excess credits will only be applied “against
income tax due for the taxable quarters of the succeeding taxable
years.”
Despite the denial of its claim for refund, Systra does not lose
the unapplied tax credits. The amount will not be forfeited in favor of
the government but will remain in the taxpayer’s account. Petitioner
may claim and carry it over in the succeeding taxable years,
creditable against future income tax liabilities until fully utilized.
(Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R.
No. 176290, September 21, 2007 citing Philam Asset Management,
Inc. v. Commissioner of Internal Revenue, G.R. Nos.
156637/162004, 14 December 2005, 477 SCRA 761)
Supposing in the above problem that Systra permanent
ceased operations, what happens to the unapplied credits ?
SUGGESTED ANSWER: Where, the corporation
permanently ceases its operations before full utilization of the tax
credits it opted to carry over, it may then be allowed to claim the
refund of the remaining tax credits. In such a case, the remaining tax
credits can no longer be carried over and the irrevocability rule
ceases to apply. Cessante ratione legis, cessat ipse lex. (Footnote
no. 23, Systra Philippines, Inc., v. Commissioner of Internal
Revenue, G. R. No. 176290, September 21, 2007)
NOTES AND COMMENTS: The holding in State Land
Investment Corporation v. Commissioner of Internal Revenue, G. R.
No. 171956, January 18, 2008 that the taxpayer is entitled to a
refund because during the succeeding year there was no tax due
against which the excess tax credits may be applied is not doctrinal.
This is so because it interpreted the provisions of then Sec. 69 of the
NIRC, which did not provide for the “irrevocability rule” now
contained in Sec. 76 of the NIRC of 1997.
60-A. In early April 1999 XYZ Bank advanced the amount
of P180 million to the BIR its income tax payment for the bank’s
1999 operations in response for the government’s call to
generate more revenues for national development. In separate
letters dated April 19 and 29, 1999 and May 14, 1999 XYZ
requested for the issuance of a Tax Credit Certificate (TCC) to be
utilized against future tax obligations of the bank.
By the end of 1999, a credit balance in the amount of P73
million remain which was carried over for the years 2000 to 2004
but was not availed of because XYZ incurred losses during the
period. On July 28, 2005 PNB reiterated its request for the
issuance of a TCC for the P73 million balance. The BIR rejected
the request on the ground of among others prescription having
been applied for beyond the two-year reglementary period for
filing claims for refund as set forth in Sec. 229 of the NIRC of
1997.
Has the claim prescribed ? Explain briefly your answer.
SUGGESTED ANSWER: The claim has not prescribed. Sec.
229 of the Tax Code, as couched, particularly its statute of limitations
component, is in context intended to apply to suits for any national
internal revenue tax “alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have excessively
or in any manner wrongfully collected.”
 68
Analyzing the underlying reason behind the advance payment
(to help the government) made by XYZ it would be improper to treat
the same as erroneous, wrongful or illegal payment of tax within the
meaning of Sec. 229 of the NIRC of 1997.
An availment of tax credit due for reasons other than the
erroneous or wrongful collection of taxes may have a different
prescriptive period. (Commissioner of Internal Revenue v. Philippine
National Bank, G.R. No. 161997, October 25, 2005 citing
Commissioner of Internal Revenue v. The Philippine Life Insurance
Co., et al. G.R. No. 105208, May 29, 1995) Absent any specific
provision in the Tax Code or special laws, that period would be ten
(10) years under Article 1144 of the Civil Code. (Commissioner of
Internal Revenue v. Philippine National Bank, supra)
61. ABC Bank filed with the BIR an application for a tax
credit/refund for alleged excess payments of its gross receipts
tax (GRT) for the 3rd and 4th quarters of 2003 and the entire 2004
amounting to P14 million. Since no action was taken by the
Commissioner on its claim, ABC filed a case with the CTA on
October 18, 2005 to comply with the two-year reglementary
period and avoid the prescription of its action. Only July 30,
2007, the CTA rendered a decision denying the claim for ABC’s
failure to file its formal offer of evidence in the CTA.
ABC Bank now seeks refuge in Onate v. Court of Appeals,
320 Phil. 344; 250 SCRA 283 (1995) where the Supreme Court
allowed evidence, not formally offered, to be considered on
condition that: (1) evidence must have been identified by
testimony duly recorded and (2) it must have been incorporated
in the records of the case.
Is ABC correct ?
SUGGESTED ANSWER: No. A tax refund s in the nature of a
tax exemption which must be construed strictissimi juris against the
taxpayer. The taxpayer must present convincing evidence to
substantiate a claim for refund. Without any documentary evidenced
on record, ABC failed to discharge the burden of proving its right to a
tax credit/tax refund. (Far East Bank & Trust Company v.
Commissioner of Internal Revenue, G. R. No. 149589, September 15,
2006)
62. A simultaneous filing of the application with the BIR
for refund/credit and the institution of the court suit with the
CTA is allowed. There is no need to wait for a BIR denial.
REASONS:
a. The positive requirement of Section 230 NIRC (now Sec.
229, NIRC of 1997);
b. The doctrine that delay of the Commissioner in rendering
decision does not extend the peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim
for refund with the Commissioner under Sec. 204, par. 3, NIRC (now
Sec. 204 [C], NIRC of 1997), and for filing suit in court under Sec.
230, NIRC (now Sec. 229, NIRC of 1997), unlike in protests of
assessments under Sec. 229 (now Sec. 228, NIRC of 1997), which
fixed the period (thirty days from receipt of decision) for appealing to
the court, thus clearly implying that the prior decision of the
Commissioner is necessary to take cognizance of the case.
(Commissioner of Internal Revenue v. Bank of Philippine Islands, etc.
et al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector
of Internal Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v.
CTA, 101 Phil. 151)
63. The grant of a refund is founded on the assumption
that the tax return is valid, i.e. that the facts stated therein are true
and correct. (Commissioner of Internal Revenue v. Court of Tax
Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA 348) Without
the tax return it would be virtually impossible to determine whether the
proper taxes have been assessed and paid. After all, it is axiomatic
that a claimant has the burden of proof to establish the factual basis of
his or her claim for tax credit or refund. Tax refunds, like tax
exemptions, are construed strictly against the taxpayer. (Paseo Realty
& Development Corporation v. Court of Appeals, et al., G. R. No.
119286, October 13, 2004)
However, in BPI-Family Savings Bank v. Court of Appeals, 386
Phil. 719; 326 SCRA 641 (2000), refund was granted, despite the
failure to present the tax return, because other evidence was
presented to prove that the overpaid taxes were not applied. (Ibid.)
 64. Discuss the difference between tax refund and tax
credit.
SUGGESTED ANSWER: There are unmistakable formal and
practical differences between the two modes. Formally, a tax refund
requires a physical return of the sum erroneously paid by the
taxpayer, while a tax credit involves the application of the
reimbursable amount against any sum that may be due and collectible
from the taxpayer.
On the practical side, the taxpayer to whom the tax is refunded
would have the option, among others, to invest for profit the returned
sum, an option not proximately available if the taxpayer chooses
instead to receive a tax credit. (Commissioner of Customs v.
Philippine Phosphate Fertilizer Corporation, G. R. No. 144440,
September 1, 2004)
 69
NOTES AND COMMENTS: It may be that there is no essential
difference between a tax refund and a tax credit since both are moves
of recovering taxes erroneously or illegally paid to the government.
(Commissioner of Customs v. Philippine Phosphate Fertilizer
Corporation, G. R. No. 144440, September 1, 2004)
65. What are the three (3) conditions for the
grant of a claim for refund of creditable withholding tax ?
SUGGESTED ANSWER:
a. The claim is filed with the Commissioner of Internal
Revenue within the two-year period from the date of the payment of
the tax.
b. It is shown on the return of the recipient that the income
payment received was declared as part of the gross income; and
c. The fact of withholding is established by a copy of a
statement duly issued by the payee showing the amount paid and the
amount of tax withheld therefrom. (Banco Filipino Savings and
Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March
27, 2007)
NOTES AND COMMENTS:
a. Proof of fact of withholding. “Sec. 10. Claim for tax
credit or refund. – (a) Claims for Tax Credit or Refund of Income tax
deducted and withheld on income payments shall be given due course
only when it is shown on the return that the income payment received
has been declared as part of the gross income and the fact of
withholding is established by a copy of the Withholding Tax Statement
duly issued by the payor to the payee showing the amount paid and
the amount of the tax withheld therefrom xxx” (Rev. Regs. No. 6-85,
as amended)
The document which may be accepted as evidence of the third
condition, that is, the fact of withholding, must emanate from the payor
itself, and not merely from the payee, and must indicate the name of
the payor, the income payment basis of the tax withheld, the amount
of the tax withheld and the nature of the tax paid. . (Banco Filipino
Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No.
155682, March 27, 2007)
65-A. What should be established by a taxpayer for
the grant of a tax refund ? Why ?
SUGGESTED ANSWER: A taxpayer needs to establish not
only that the refund is justified under the law, but also the correct
amount that should be refunded.
If the latter requisite cannot be ascertained with particularity,
there is cause to deny the refund, or allow it only to the extent of the
sum that is actually proven as due.
Tax refunds partake of the nature of tax exemptions and are
thus construed strictissimi juris against the person claiming the
exemption. The burden in proving the claim for refund necessarily
falls on the taxpayer. (Far East Bank Trust and Company, etc., v.
Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2,
2006)
66. What are the requisites for the refund of
illegally deducted taxes from the income of an employees’
trust fund ?
SUGGESTED ANSWER: What has to be established, as a
matter of evidence, is that the amount sought to be refunded to the
bank-trustee corresponds to the tax withheld on the interest income
earned from the exempt employees’ trust. The need to be
determinate is important, specially if the bank trustee, in the ordinary
course of its banking business, earns interest income not only from its
investments of employees’ trusts, but on a whole range of accounts
which do not enjoy the same broad exemption as employees’ trusts.
(Far East Bank Trust and Company, etc., v. Commissioner of Internal
Revenue, et al., G. R. No. 138919, May 2, 2006)
NOTES AND COMMENTS:
a. Employees’ trust fund, defined. An employees’ trust
fund is a trust established by an employer to provide retirement,
pension, or other benefits to employees - it is a separate taxable
entity established for the exclusive benefit of the employees.
(Development Bank of the Philippines v. Commission on Audit, 422
SCRA 459)
b. Income of employees’ trust is tax exempt. “Any
provision of law to the contrary notwithstanding, the retirement
benefits received by official and employees of private firms, whether
individual or corporate, in accordance with a reasonable private benefit
plan maintained by the employer shall be exempt from all taxes and
shall not be liable to amendment, levy or seizure by or under any legal
or equitable process whatsoever except to pay a debt of the official or
employee concerned to the private benefit plan or that arising from
liability imposed in a criminal action’ x x x “ (Sec. 1, Rep. Act 4917)
A tax-exempt employees’ trust fund is referred to under the
NIRC of 1997 as a “reasonable private retirement plan, which means
“a pension, gratuity, stock bonus or profit-sharing plan maintained by
an employer for the benefit of some or all of his officials or employees,
wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated,
and wherein it is provided in said plan that at no time shall any part of
the corpus or income of the fund be used for, or be diverted to, any
 70
purpose other than for the exclusive benefit of the said officials or
employees.” [Sec. 32 (B) (6 ) (a), NIRC of 1997]
c. Extent of exemption. The tax exemption enjoyed by
employees’ trust is absolute irrespective of the nature of the tax. It
does not apply only to the tax on interest income from money market
placements, bank deposits, other deposit substitute instruments and
government security, because the source of the interest income does
not have any effect on the exemption enjoyed by employee’s trusts.
(Far East Bank Trust and Company, etc., v. Commissioner of Internal
Revenue, et al., G. R. No. 138919, May 2, 2006)
67. A bank-trustee of employee trusts filed an
application for the refund of taxes withheld on the interest
incomes of the investments made of the funds of the
employees’ trusts. Instead of presenting separate accounts for
interest incomes made of these investments, the bank-trustee
instead presented witness to establish that it would next to
impossible to single out the specific transactions involving the
employees’ trust funds from the totality of all interest income
from its total investments. On the above basis will the
application for refund prosper ?
SUGGESTED ANSWER: No. The application for refund will
not prosper.
The bank-trustee needs to establish not only that the refund is
justified under the law (which is so because incomes of employees’
trusts are tax exempt), but also the correct amount that should be
refunded.
Tax refunds partake of the nature of tax exemptions and are
thus construed strictissimi juris against the person or entity claiming
the exemption. The burden in proving the amount to be refunded
necessarily falls on the bank-trustee, and there is an apparent failure
to do so.
A necessary consequence of the special exemption enjoyed
alone by employees’ trusts would be a necessary segregation in the
accounting of such income, interest or otherwise, earned from those
trusts from that earned by the other clients of the bank-trustee. (Far
East Bank and Trust Company, etc., v. Commissioner, etc., et al.,
G.R. No. 138919, May 2, 2006) The amounts that are the exempt
earnings of the employee’s trust has not been shown as they have
been commingled with the interest income of the other clients of the
bank-trustee.
68. CTA Circular No. 1-95 clearly requires that
photocopies of the receipts or invoices must be pre-marked
and submitted to the CTA to verify the correctness of the
summary listing and the CPA certification. CTA Circular No. 1-
95, issued on 25 January 1995, reads:
“1. The party who desires to introduce as evidence such
voluminous documents must present: (a) Summary containing the
total amount/s of the tax account or tax paid for the period involved
and a chronological or numerical list of the numbers, dates and
amounts covered by the invoices or receipts; and (b) a Certification
of an independent Certified Public Accountant attesting to the
correctness of the contents of the summary after making an
examination and evaluation of the voluminous receipts and invoices.
Such summary and certification must properly be identified by a
competent witness from the accounting firm.
2. The method of individual presentation of each and every
receipt or invoice or other documents for marking, identification and
comparison with the originals thereof need not be done before the
Court or the Commissioner anymore after the introduction of the
summary and CPA certification. It is enough that the receipts,
invoices and other documents covering the said accounts or
payments must be pre-marked by the party concerned and
submitted to the Court in order to be made accessible to the
adverse party whenever he/she desires to check and verify the
correctness of the summary and CPA certification. However, the
originals of the said receipts, invoices or documents should be ready
for verification and comparison in case doubt on the authenticity of
the particular documents presented is raised during the hearing of
the case.” (Emphasis supplied)
69. Manila Electric Company a grantee of a legislative
franchise under Act No. 484, as amended by Republic Act No.
4159 and Presidential Decree No. 551,2[3] had been paying a 2%
franchise tax based on its gross receipts, in lieu of all other
taxes and assessments of whatever nature. Upon the
effectivity of Executive Order No. 72 on February 10, 1987,
however, respondent became subject to the payment of regular
corporate income tax.
For the last quarter ending December 31, 1987,
respondent filed on April 15, 1988 its tentative income tax
reflecting a refundable amount of P101,897,741, but only
P77,931,812 was applied as tax credit for the succeeding
taxable year 1988.
Acting on a yearly routinary Letter of Authority No.
0018064 NA dated June 27, 1988 issued by petitioner, directing
the investigation of tax liabilities of respondent for taxable year
1987, an investigation was conducted by Revenue Officer
2 [3]
Id. at 11.
 71
Frederick Capitan which showed that respondent was liable for
“1. deficiency income tax in the amount of P2,340,902.52; and
2. deficiency franchise tax in the amount of P2,838,335.84.”
On April 17, 1989, respondent filed an amended final
corporate Income Tax Return ending December 31, 1988
reflecting a refundable amount of P107,649,729.
Respondent thus filed on March 30, 1990 a letter-claim for
refund or credit in the amount of P107,649,729 representing
overpaid income taxes for the years 1987 and 1988.
Petitioner not having acted on its request, respondent
filed on April 6, 1990 a judicial claim for refund or credit with
the Court of Tax Appeals.
It is gathered that respondent paid the deficiency
franchise tax in the amount of P2,838,335.84. It protested the
payment of the alleged deficiency income tax and claimed as
an alternative remedy the deduction thereof from its claim for
refund or credit.
The Court of Tax Appeals granted the P107,649,729 claim
for refund, or in the alternative for the BIR to issue a tax credit.
Is the Court of Tax Appeals correct ?
SUGGESTED ANSWER: Yes. Section 69 of the National
Internal Revenue Code of 1986, now Sec. 76 provides, if the sum of
the quarterly tax payments made during a taxable year is not equal
to the total tax due on the entire taxable income of that year as
shown in its final adjustment return, the corporation has the option to
either: (a) pay the excess tax still due, or (b) be refunded the excess
amount paid. The returns submitted are “merely pre-audited which
consist mainly of checking mathematical accuracy of the figures in
the return.” After such checking, the purpose of which being to
“insure prompt action on corporate annual income tax returns
showing refundable amounts arising from overpaid quarterly income
taxes,” (Revenue Memorandum Order No. 32-76 dated June 11,
1976) the refund or tax credit is granted. (Commissioner of Internal
Revenue v. Manila Electric Company, G. R. No. 121666, October
10, 2007)
TARIFF AND CUSTOMS LAWS
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
INTERNAL REVENUE
TARIFF AND CUSTOMS CODE
1. When does importation begin, and why is it
important to know whether importation has already begun
or not ?
SUGGESTED ANSWER: Importation begins when the
conveying vessel or aircraft enters the jurisdiction of the Philippines
with intention to unlade therein. (Sec. 1202, TCCP)
The jurisdiction of the Bureau of Customs to enforce the
provisions of the TCCP including seizure and forfeiture also begins
from the beginning of importation. Thus, the Bureau of Customs
obtains jurisdiction over imported articles only after importation has
begun.
2. When is importation deemed terminated
and why is it important to know whether importation has
already ended?
SUGGESTED ANSWER: Importation is deemed terminated
upon payment of the duties, taxes and other charges due upon the
agencies, or secured to be paid, at the port of entry and the legal
permit for withdrawal shall have been granted.
In case the articles are free of duties, taxes and other charges,
until they have legally left the jurisdiction of the customs. (Sec. 1202,
TCCP) The Bureau of Customs loses jurisdiction to enforce the
TCCP and to make seizures and forfeitures after importation is
deemed terminated.
3. The flexible tariff clause is a provision in the
Tariff and Customs Code, which implements the constitutionally
delegated power to the Congress to further delegate to the President
of the Philippines, in the interest of national economy, general welfare
and/or national security upon recommendation of the NEDA (a) to
increase, reduce or remove existing protective rates of import duty,
provided that, the increase should not be higher than 100% ad
valorem; (b) to establish import quota or to ban imports of any
commodity, and (c) to impose additional duty on all imports not
exceeding 10% ad valorem, among others.
4. Customs duties defined. Customs duties is the name
given to taxes on the importation and exportation of commodities, the
tariff or tax assessed upon merchandise imported from, or exported
to, a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R.
No. 134114, July 6, 2001)
5. Special customs duties are additional import duties
imposed on specific kinds of imported articles under certain
 72
conditions. The special customs duties under the Tariff and
Customs Code (TCCP) are the anti-dumping duty, the countervailing
duty, the discriminatory duty, and the marking duty, and under the
Safeguard Measures Act (SMA) additional tariffs as safeguard
measures.
6. The special customs duties are imposed for the
protection of consumers and manufacturers, as well as
Philippine products.
7. Dumping duty is an additional special duty
amounting to the difference between the export price and
the normal value of such product, commodity or article
(Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-
Dumping Act of 1999.”) imposed on the importation of a product,
commodity or article of commerce into the Philippines at less than its
normal value when destined for domestic consumption in the exporting
country which is causing or is threatening to cause material injury to a
domestic industry, or materially retarding the establishment of a
domestic industry producing the like product. [Sec. 301 (s) (5), TCC,
as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]
8. When is the anti-dumping duty imposed ?
SUGGESTED ANSWER: The anti-dumping duty is imposed
a. Where a product, commodity or article of commerce is
exported into the Philippines at a price less than its normal value when
destined for domestic consumption in the exporting country,
b. and such exportation is causing or is threatening to cause
material injury to a domestic industry, or materially retards the
establishment of a domestic industry producing the like product. [Sec.
301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act
of 1999”]
9. Normal value for purposes of imposing the anti-
dumping duty is the comparable price at the date of sale of like
product, commodity, or article in the ordinary course of trade when
destined for consumption in the country of export. [Sec. 301 (s) (3 ),
TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]
10. The imposing authority for the anti-dumping duty is
the Secretary of Trade and Industry in the case of non-
agricultural product, commodity, or article or the Secretary of
Agriculture, in the case of agricultural product, commodity or
article, after formal investigation and affirmative finding of the Tariff
Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752,
“Anti-Dumping Act of 1999”]
11. Even when all the requirements for the imposition
have been fulfilled, the decision on whether or not to impose a
definitive anti-dumping duty remains the prerogative of the Tariff
Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No.
8752, “Anti-Dumping Act of 1999”] Thus, the cabinet secretaries could
not contravene the recommendation of the Tariff Commission. They
could not impose the anti-dumping duty or any special customs duty
without the favorable recommendation of the Tariff Commission.
12. In the determination of whether to impose the anti-
dumping duty, the Tariff Commission, may consider among
others, the effect of imposing an anti-dumping duty on the
welfare of the consumers and/or the general public, and other
related local industries. (Sec. 301 (a), TCC, as amended by Rep.
Act No. 8752, “Anti-Dumping Act of 1999”)
13. The amount of anti-dumping duty that may be
imposed is the difference between the export price and the
normal value of such product, commodity or article. (Sec. 301
(s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of
1999”)
The anti-dumping duty shall be equal to the margin of dumping
on such product, commodity or article thereafter imported to the
Philippines under similar circumstances, in addition to ordinary duties,
taxes and charges imposed by law on the imported product,
commodity or article.
14. What are countervailing duties and when are
they imposed ?
SUGGESTED ANSWER: Countervailing duties are additional
customs duties imposed on any product, commodity or article of
commerce which is granted directly or indirectly by the government in
the country of origin or exportation, any kind or form of specific
subsidy upon the production, manufacture or exportation of such
product commodity or article, and the importation of such subsidized
product, commodity, or article has caused or threatens to cause
material injury to a domestic industry or has materially retarded the
growth or prevents the establishment of a domestic industry. (Sec.
302, TCCP as amended by Section 1, R.A. No. 8751)
15. The imposing authority for the countervailing duties is
the Secretary of Trade and Industry in the case of non-
 73
agricultural product, commodity, or article or the Secretary of
Agriculture, in the case of agricultural product, commodity or
article, after formal investigation and affirmative finding of the Tariff
Commission.
Even when all the requirements for the imposition have been
fulfilled, the decision on whether or not to impose a definitive anti-
dumping duty remains the prerogative of the Tariff Commission. (Sec.
301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act
of 1999”)
16. The countervailing duty is equivalent to the value of
the specific subsidy.
17. Marking duties are the additional customs duties
imposed on foreign articles (or its containers if the article itself cannot
be marked), not marked in any official language in the Philippines, in a
conspicuous place as legibly, indelibly and permanently in such
manner as to indicate to an ultimate purchaser in the Philippines the
name of the country of origin.
18. The Commissioner of Customs imposes the marking
duty.
19. The marking duty is equivalent to five percent (5%) ad
valorem.
20. A discriminatory duty is a new and additional
customs duty imposed upon articles wholly or in part the growth or
product of, or imported in a vessel, of any foreign country which
imposes, directly or indirectly, upon the disposition or transportation in
transit through or re-exportation from such country of any article
wholly or in part the growth or product of the Philippines, any
unreasonable charge, exaction, regulation or limitation which is not
equally enforced upon like articles of every foreign country, or
discriminates against the commerce of the Philippines, directly or
indirectly, by law or administrative regulation or practice, by or in
respect to any customs, tonnage, or port duty, fee, charge, exaction,
classification, regulation, condition, restriction or prohibition, in such
manner as to place the commerce of the Philippines at a disadvantage
compared with the commerce of any foreign country.
21. The President of the Philippines imposes the
discriminatory duties.
22. Safeguard measures are emergency measures,
including tariffs, to protect domestic industries and producers from
increased imports which inflict or could inflict serious injury on them.
The CTA is vested with jurisdiction to review decisions of the
Secretary of Trade and Industry imposing safeguard measures as
provided under Rep. Act No. 8800 the Safeguard Measures Act
(SMA). (Southern Cross Cement Corporation v. The Philippine
Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004)
The DTI Secretary cannot impose the safeguard measures if
the Tariff Commission does not favorably recommend its imposition.
23. Imposing authority for safeguard measures. The
imposing authority for the countervailing duties is the Secretary
of Trade and Industry in the case of non-agricultural product,
commodity, or article or the Secretary of Agriculture, in the case
of agricultural product, commodity or article, after formal
investigation and affirmative finding of the Tariff Commission.
24. Safeguards measures that may be imposed.
Additional tariffs, import quotas or banning of imports.
25. The basis of dutiable value of merchandise that is
subject to ad valorem customs duties the transaction value,
which shall be the price actually paid or payable for the goods when
sold for export to the Philippines, adjusted by adding certain cost
elements to the extent that they are incurred by the buyer but are not
included in the price actually paid or payable for the imported goods,
and may include the following:
a. Cost of containers and packing,
b. Insurance, and
c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep.
Act No. 9135)
26. The above transaction value is the primary method
of determining dutiable value. If the transaction value of the
imported article could not be determined using the above, the
following alternative methods should be used one after the
other:
a. Transaction value of identical goods
b. Transaction value of similar goods
c. Deductive method
d. Computed method
e. Fallback method
 74
27. How and to whom should claims for refund of
customs duties be made ?
SUGGESTED ANSWER: All claims for refund of duties shall
be made in writing and forwarded to the Collector of Customs to whom
such duties are paid, who upon receipt of such claim, shall verify the
same by the records of his Office, and if found to be correct and in
accordance with law, shall certify the same to the Commissioner of
Customs with his recommendation together with all necessary papers
and documents. Upon receipt by the Commissioner of such certified
claim he shall cause the same to be paid if found correct. (Sec. 1708,
TCC)
28. What is mean by the term “entry” in Customs
Law ?
SUGGESTED ANSWER: It has a triple meaning.
a. the documents filed at the Customs house;
b. the submission and acceptance of the documents; and
c. Customs declaration forms or customs entry forms
required to be accomplished by passengers of incoming vessels or
passenger planes as envisaged under Sec. 2505 of the TCCP
(Failure to declare baggage). (Jardeleza v. People, G.R. No.
165265, February 6, 2006)
29. A flight stewardess arrived from Singapore. Upon her
arrival she was asked whether she has anything to declare. She
answered none, and she submitted her “Customs Baggage
Declaration Form” which she accomplished and signed with
nothing or written on the space for items to be declared. When
her hanger bag was examined some pieces of jewelry were
found concealed within the lining of said bag.
She was then convicted of violating of Sec. 3601 of the
Tariff and Customs Code for unlawful importation which
penalizes any person who shall fraudulently import or bring into
the Philippines any article contrary to law.
She now appeals claiming that lower court erred n
convicting her under Sec. 3601 when the facts alleged both in
the information and those shown by the prosecution constitute
the offense under Sec. 2505 “Failure to Declare Baggage,” of
which she was acquitted. Is she correct ?
SUGGESTED ANSWER: No. Sec. 3601 does not define a
crime. It merely provides, inter alia, the administrative remedies which
can be resorted to by the Bureau of Customs when seizing dutiable
articles found the baggage of any person arriving in the Philippines
which is not included in the accomplished baggage declaration
submitted to the customs authorities, and the administrative penalties
that such person must pay for the release of such goods if not
imported contrary to law.
Such administrative penalties are independent of the criminal
liability for smuggling that may be imposed under Sec. 3601, and other
provisions of the TCC which can only be determined after the
appropriate criminal proceedings, prescinding from the outcome in any
administrative case that may have been filed and disposed of by the
customs authorities.
Indeed the second paragraph of Sec. 2505 provides that
nothing shall prevent the bringing of a criminal action against the
offender for smuggling under Section 3601. (Jardeleza v. People, G.
R. No. 165265, February 6, 2006)
29-A. Payment is not a defense in smuggling. “When upon
trial for violation of this section, the defendant is shown to have
possession of the article in question, possession shall be deemed
sufficient evidence to authorize conviction, unless the defendant shall
explain the possession to the satisfaction of the court: Provided,
however, That payment of the tax due after apprehension shall not
constitute a valid defense in any prosecution under this section.” (last
par., Sec. 3601, TCC)
30. How is smuggling committed ?
SUGGESTED ANSWER: Smuggling is committed by any
person who:
a. fraudulently imports or brings into the country any
article contrary to law;
b. assists in so doing any article contrary to law; or
c. receives, conceals, buys, sells or in any manner
facilitates the transportation, concealment or sale of such goods
after importation, knowing the same to have been imported contrary
to law. (Jardeleza v. People, G.R. No. 165265, February 6, 2006
citing Rodriguez v. Court of Appeals, G. R. No. 115218, September
18, 1995, 248 SCRA 288, 296)
NOTES AND COMMENTS:
a. Importation consists of bringing an article into the
country from the outside. Importation begins when the conveying
vessel or aircraft enters the jurisdiction of the Philippines with
intention to unload therein.
b. When unlawful importation is complete. In the
absence of a bona fide intent to make entry and pay duties when the
prohibited article enters the Philippine territory. Importation is
complete when the taxable, dutiable commodity is brought within the
limits of the port of entry. Entry through a custom house is not the
essence of the act. (Jardeleza v. People, G.R. No. 165265,
February 6, 2006)
 75

31. The Collector of Customs sitting in seizure
and forfeiture proceedings has exclusive jurisdiction to
hear and determine all questions touching on the seizure
and forfeiture of dutiable goods. RTCs are precluded from
assuming cognizance over such matters even through
petitions of certiorari, prohibition or mandamus. (The
Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081,
March 20, 2000)
What is the rationale for this doctrine ?
SUGGESTED ANSWER:
a. Regional Trial Courts have no jurisdiction to replevin a
property which is subject to seizure and forfeiture proceedings for
violation of the Tariff and Customs Code otherwise, actions for
forfeiture of property for violation of the Customs laws could easily be
undermined by the simple device of replevin. (De la Fuente v. De
Veyra, et al., 120 SCRA 455)
b. The doctrine of exclusive customs jurisdiction over
customs cases to the exclusion of the RTCs is anchored upon the
policy of placing no unnecessary hindrance on the government’s drive,
not only to prevent smuggling and other frauds upon Customs,
c. but more importantly, to render effective and efficient the
collection of import and export duties due the State, which enables the
government to carry out the functions it has been instituted to perform.
(Jao, et al., v. Court of Appeals, et al., and companion case, 249
SCRA 35, 43)
d. The issuance by regular courts of writs of preliminary
injunction in seizure and forfeiture proceedings before the Bureau of
Customs may arouse suspicion that the issuance or grant was for
consideration other than the strict merits of the case. (Zuno v.
Cabredo, 402 SCRA 75 [2003])
e. Under the doctrine of primary jurisdiction, the Bureau of
Customs has exclusive administrative jurisdiction to conduct searches,
seizures and forfeitures of contraband without interference from the
courts. It could conduct searches and seizures without need of a
judicial warrant except if the search is to be conducted in a dwelling
place.
Where an administrative office has obtained a technical
expertise in a specific subject, even the courts must defer to this
expertise.
32. “A” claiming to be the owner of a vessel which is
the subject of customs warrant of seizure and detention sought
the intercession of the RTC to restrain the Bureau of Customs
from interfering with his property rights over the vessel. Would
the suit prosper?
SUGGESTED ANSWER: No. His remedy was not with the
RTC but with the CTA, as issues of ownership of goods in the
custody of customs officials are within the power of the CTA to
determine.
The Collector of Customs has exclusive jurisdiction over
seizure and forfeiture proceedings and trial courts are precluded
from assuming cognizance over such matters even through petitions
for certiorari, prohibition or mandamus. (Commissioner of Customs
v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)
33. The customs authorities do not have to prove to the
satisfaction of the court that the articles on board a vessel were
imported from abroad or are intended to be shipped abroad
before they may exercise the power to effect customs searches,
seizures, or arrests provided by law and continue with the
administrative hearings. (The Bureau of Customs, et al., v. Ogario,
et al., G.R. No. 138081, March 20, 2000)
34. The Tariff and Customs Code allows the Bureau of
Customs to resort to the administrative remedy of seizure, such as
by enforcing the tax lien on the imported article when the
imported articles could be found and be subject to seizure and
forfeiture.
35. The Tariff and Customs Code allows the Bureau of
Customs to resort to the judicial remedy of filing an action in court
when the imported articles could not anymore be found.
36. Instances where there is no right of redemption of
seized and forfeited articles:
a. There is fraud;
b. The importation is absolutely prohibited, or
c. The release of the property would be contrary to law.
(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No.
126634, January 25, 1999)
37. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated
in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the
Supreme Court clarified that the fraud contemplated by law must
be actual and not constructive. It must be intentional, consisting of
deception, willfully and deliberately done or resorted to in order to
induce another to give up some right.
 76
38. Requisites for forfeiture of imported
goods:
a. Wrongful making by the owner, importer, exporter or
consignee of any declaration or affidavit, or the wrongful making or
delivery by the same person of any invoice, letter or paper – all
touching on the importation or exportation of merchandise.
b. the falsity of such declaration, affidavit, invoice, letter or
paper; and
c. an intention on the part of the importer/consignee to
evade the payment of the duties due. (Republic, etc., v. The Court of
Appeals, et al., G.R. No. 139050, October 2, 2001)
39. On January 7, 1989, the vessel M/V ”Star Ace,
”coming from Singapore laden with cargo, entered the Port of
San Fernando, La Union for needed repairs. When the Bureau of
Customs later became suspicious that the vessel’s real purpose
in docking was to smuggle cargo into the country, seizure
proceedings were instituted and subsequently two Warrants of
Seizure and Detention were issued for the vessel and its cargo.
Cesar does not own the vessel or any of its cargo but
claimed a preferred maritime lien. Cesar then brought several
cases in the RTC to enforce his lien. Would these suits
prosper ?
SUGGESTED ANSWER: No. The Bureau of Customs having
first obtained possession of the vessel and its goods has obtained
jurisdiction to the exclusion of the trial courts.
When Cesar has impleaded the vessel as a defendant to
enforce his alleged maritime lien, in the RTC, he brought an action in
rem under the Code of Commerce under which the vessel may be
attached and sold.
However, the basic operative fact is the actual or constructive
possession of the res by the tribunal empowered by law to conduct
the proceedings. This means that to acquire jurisdiction over the
vessel, as a defendant, the trial court must have obtained either actual
or constructive possession over it. Neither was accomplished by the
RTC as the vessel was already in the possession of the Bureau of
Customs. (Commissioner of Customs v. Court of Appeals, et al., G.
R. Nos. 111202-05, January 31, 2006)
NOTES AND COMMENTS:
a. Forfeiture of seized goods in the Bureau of Customs
is in the nature of a proceeding in rem, i.e. directed against the res
or imported goods and entails a determination of the legality of their
importation. In this proceeding, it is in legal contemplation the
property itself which commits the violation and is treated as the
offender, without reference whatsoever to the character or conduct of
the owner.
The issue is limited to whether the imported goods should be
forfeited and disposed of in accordance with law for violation of the
Tariff and Customs Code. .(Transglobe International, Inc. v. Court of
Appeals, et al., G.R. No. 126634, January 25, 1999)
Forfeiture of seized goods in the Bureau of Customs is a
proceeding against the goods and not against the owner. (Asian
Terminals, Inc. v. Bautista-Ricafort, G .R. No. 166901, October 27,
2006 citing Transglobe)
40. The Collector of Customs upon probable cause that
the articles are imported or exported, or are attempted to be
imported or exported, in violation of the tariff and customs laws
shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place,
then a search warrant should be issued by the regular courts not the
Bureau of Customs.
There may be instances where no warrants issued by the
Bureau of Customs or the regular courts is required, as in search and
seizures of motor vehicles and vessels.
41. Smuggled goods seized by virtue of a court warrant
should be surrendered to the court that issued the warrant and
not to the Bureau of Customs because the goods are in custodia
legis.
LOCAL GOVERNMENT TAXATION
LOCAL GOVERNMENT TAXATION, IN GENERAL

1. The fundamental principles of local taxation are:
a. Uniformity;
b. Taxes, fees, charges and other impositions shall be
equitable and based on ability to pay, for public purposes, not unjust,
excessive, oppressive or confiscatory, not contrary to law, public
policy, national economic policy or in restraint of trade;
c. The levy and collection shall not be let to any private
person;
d. Inures solely to the local government unit levying the tax;
e. The progressivity principle must be observed.
 2. A law which deprives local government units of
their power to tax would be unconstitutional. The constitution has
delegated to local governments the power to levy taxes, fees and
 77
other charges. This constitutional delegation may only be removed by
a constitutional amendment.
3. 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)
4. 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.
 5. Professional tax may be imposed by a province or
city but not by a municipality or barangay.
a. Transaction taxed: Exercise or practice of profession
requiring government licensure examination.
b. Tax rate: In Accordance with a taxing ordinance which
should not exceed P300.00.
c. Tax base: Reasonable classification by the sanggunian.
d. Exception: Payment to one province or city no longer
subject to any other national or local tax, license or fee for the practice
of such profession in any part of the Philippine professionals
exclusively employed in the government.
e. Date of payment: or on before January 31 or engaging
in the profession.
f. Place of payment: Province or city where the
professional practices his profession or where he maintains his
principal office in case he practices his profession in several places.
 6. Requirements: Any individual or corporation employing
a person subject to professional tax shall require payment by that
person of the tax on his profession before employment and annually
thereafter.
Any person subject to the professional tax shall write in deeds,
receipts, prescriptions, reports, books of account, plans and designs,
surveys and maps, as the case may be, the number of the official
receipt issued to him.
Exemption: Professionals exclusively employed in the
government shall be exempt from payment. (Sec. 139, LGC)
NOTE: For the purpose of collecting the tax, the provincial or city
treasurer or his duly authorized representative shall require from such
professionals their current annual registration cards issued by
competent authority before accepting payment of their professional tax
for the current year. The PRC shall likewise require the professionals
presentation of proof of payment before registration of professionals or
renewal of their licenses. (last par., Art. 228, Rules and Regulations
Implementing the Local Government Code of 1991)
 7. Who are the professionals who, if they are in
practice of their profession, are subject to professional tax ?
SUGGESTED ANSWER: The professionals subject to the
professional tax are only those who have passed the bar
examinations, or any board or other examinations conducted by the
Professional Regulation Commission (PRC). for example, a lawyer
who is also a Certified Public Accountant (CPA) must pay the
professional tax imposed on lawyers and that fixed for CPAs, if he is
to practice both professions. [Sec. 238 (f), Rule XXX, Rules and
Regulations Implementing the Local Government Code of 1991]
8. X City issued a notice of assessment against ABC
Condominium Corporation for unpaid business taxes. The
Condominium Corporation is a duly constituted condominium
corporation in accordance with the Condominium Act which
owns and holds title to the common and limited common areas
of the condominium. Its membership comprises the unit
owners and is authorized under its By-Laws to collect regular
assessments from its members for operating expenses, capital
expenditures on the common areas and other special
assessments as provided for in the Master Deed with ?
Declaration of Restrictions of the Condominium.
 78
ABC Condominium Corporation insists that the X City
Revenue Code and the Local Government Code do not contain
provisions upon which the assessment could be based.
Resolve the controversy.
SUGGESTED ANSWER: ABC is correct. Condominium
corporations are generally exempt from local business taxation under
the Local Government Code, irrespective of any local ordinance that
seeks to declare otherwise.
X City, is authorized under the Local Government Code, to
impose a tax on business, which is defined under the Code as ”trade
or commercial activity regularly engaged in as a means of livelihood or
with a view to profit.” By its very nature a condominium corporation is
not engaged in business, and any profit that it derives is merely
incidental, hence it may not be subject to business taxes. (Yamane ,
etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993,
October 25, 2005)
REAL PROPERTY TAXATION
 1. What are the fundamental principles of real
property taxation ?
SUGGESTED ANSWER: The fundamental principles of real
property taxation are:
a. Appraisal at current and fair market value;
b. Classification for assessment on the basis of actual use;
c. Assessment on the basis of uniform classification;
d. Appraisal, assessment, levy and collection shall not be
let to a private person;
e. Appraisal and assessment shall be equitable.
NOTES AND COMMENTS: Real properties shall be appraised at the
current and fair market value prevailing in the locality where the property is
situated and classified for assessment purposes on the basis of its actual
use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G.
R. No. 154126, October 11, 2005)
2. Who determines the fair market value of properties ?
SUGGESTED ANSWER: The reasonable market value is
determined by the assessor in the form of a schedule of fair market
values. The schedule is then enacted by the local sanggunian.
3. What is the fair market value of properties ?
ANSWER: Fair market value is the price at which a property
may be sold by a seller who is not compelled to sell and bought by a
buyer who is not compelled to buy, taking into consideration all uses to
which the property is adopted and might in reason be applied.
The criterion established by the statute contemplates a
hypothetical sale. Hence, the buyers need not be actual and existing
purchasers. (Allied Banking Corporation, etc., v. Quezon City
Government, et al., G. R. No. 154126, October 11, 2005 citing Army
and Navy Club, Manila v. Trinidad, 44 Phil. 383 )
NOTE: In fixing the value of real property, assessors have to
consider all the circumstances and elements of value and must
exercise prudent discretion in reaching conclusions. [Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R. No.
154126, October 11, 2005 citing Reyes v. Almanzor, 196 SCRA 322,
327 (1991)])
Preparation of fair market values:
a. The city or municipal assessor shall prepare a schedule
of fair market values for the different classes of real property situated
in their respective Local Government Units for the enactment of an
ordinance by the sanggunian concerned; and
b. The schedule of fair market values shall be published in a
newspaper of general circulation in the province, city or municipality
concerned or the posting in the provincial capitol or other places as
required by law. (Lopez v. City of Manila, et al., G.R. No. 127139,
February 19, 1999)
Proposed fair market values of real property in a local
government unit as well as the ordinance containing the
schedule must be published in full for three (3) consecutive days in
a newspaper of local circulation, where available, within ten (10) days
of its approval, and posted in at lease two (2) prominent places in the
provincial capitol, city, municipal or barangay hall for a minimum of
three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,.
G.R. No. 119172, March 25, 1999)
4. What are the approaches in estimating the fair market
value of real property for real property tax purposes ?
ANSWER:
a. Sales Analysis Approach. The sales price paid in actual
market transactions is considered by taking into account valid sales
data accumulated from among the Registrar of Deeds, notaries public,
appraisers, brokers, dealers, bank officials, and various sources
stated under the Local Government Code.
b. Income Capitalization Approach. The value of an
income-producing property is no more than the return derived from it.
An analysis of the income produced is necessary in order to estimate
the sum which might be invested in the purchase of the property.
c. Reproduction cost approach is a formal approach used
exclusively n appraising man-made improvements such as buildings
 79
and other structures, based on such data as materials and labor costs
to reproduce a new replica of the improvement.
The assessor uses any or all of these approaches in analyzing
the data gathered to arrive at the estimated fair market value to be
included in the ordinance containing the schedule of fair market
values. (Allied Banking Corporation, etc., v. Quezon City
Government, et al., G. R. No. 154126, October 11, 2005 citing Local
Assessment Regulations No. 1-92)
 5. Quezon City passed an ordinance whereby the
“parcels of land sold, ceded. Transferred and conveyed for
remuneratory consideration after the effectivity of this revision
shall be subject to real estate tax based on the actual amount
reflected in the deed of conveyance or the current approved
zonal valuation of the Bureau of Internal Revenue prevailing at
the time of sale, cession, transfer and conveyance, whichever is
higher, as evidenced by the certificate of payment of the capital
gains tax issued therefore.”
Is the proviso for the basis in determining the value for
real property tax purposes valid ?
SUGGESTED ANSWER: No. The proviso being contrary to
public policy and for restraining trade is not valid for the following
reasons:
a. It mandates an exclusive rule in determining the fair
market value and departs from the established procedures such as
the sales analysis approach, the income capitalization approach and
the reproduction approach provided under the rules implementing the
statute. It unduly interferes with the duties statutorily placed upon the
local assessor by completely dispensing with his analysis and
discretion which the Local Government Code and the regulations
require to be exercised. An ordinance that contravenes any statute is
ultra vires and void.
b. The “consideration approach” in the ordinance is illegal
since “the appraisal, assessment, levy and collection of real property
tax shall not be let to any private person”, it will also completely
destroy the fundamental principle in real property taxation – that real
property shall be classified, valued and assessed on the basis of its
actual use regardless of where located, whoever owns it, and whoever
uses it. Allowing the parties to a private sale to dictate the fair market
value of the property will dispense with the distinctions of actual use
stated in the Local Government Code and in the regulations.
c. The invalidity is not cured by the prhase “whichever is
higher” because an integral part of that system still permits valuing
real property in disregard of its “actual use.”
d. The ordinance would result to real property assessments
more than once every three (3) years and that is not the congressional
intent as shown in the provisions of the Local Government Code and
the regulations. Consequently, the real property tax burden should not
be interpreted to include those beyond what the Code or the
regulations expressly clearly state.
e. The proviso would provide a chilling effect on real
property owners or administrators to enter freely into contracts
reflecting the increasing value of real properties in accordance with
prevailing market conditions.
While the Local Government Code provides that the
assessment of real property shall not be increased once every three
(3) years, the questioned proviso subjects the property to a higher
assessment every time a sales transaction is made. Real property
owners would therefore postpone sales until after the lapse of the
three (3) year period, or if they do so within the said period they shall
be compelled to dispose of the property at a price not exceeding the
last prior conveyance in order to avoid a higher tax assessment.
In the above two scenarios real property owners are effectively
prevented from obtaining the best price possible for their properties
and unduly hampers the equitable distribution of wealth. (Allied
Banking Corporation, etc., v. Quezon City Government, et al., G. R.
No. 154126, October 11, 2005)
6. What is the nature of a tax declaration ?
SUGGESTED ANSWER: As a rule, tax declarations or realty
tax payments of property are not conclusive evidence of ownership,
nevertheless, they are good indicia of possession in the concept of
owner, for no one in his right mind would be paying taxes for a
property that is not in his actual or constructive possession. They
constitute at least proof that the holder has a claim of title over the
property.
The voluntary declaration of a piece of property for taxation
purposes manifests not only one’s sincere and honest desire to obtain
title to the property and announces his adverse claim against the State
and all other interested parties, but also the intention to contribute
needed revenues to the government. Such an act strengthens one’s
bona fide claim of acquisition of ownership. (Buenaventura, et al.,
v. Republic, G. R. No. 166865, March 2, 2007 citing Heirs of Simplicio
Santiago v. Heirs of Mariano E. Santiago, G. R. No. 151440, 17 June
2003, 404 SCRA 193, 199 – 200)
 7. Give examples of personal property under the
civil law that may be considered as real property for purposes of
taxes.
 80
SUGGESTED ANSWER: Personal property under the civil law
may be considered as real property for purposes of taxes where the
property is essential to the conduct of the business.
a. Underground tanks are essential to the conduct of the
business of a gasoline station without which it would not be
operational. (Caltex Phils., Inc. v. Central Board of Assessment
Appeals, et al., 114 SCRA 296)
b. Light Rail Transit (LRT) improvements such as buildings,
carriageways, passenger terminals stations, and similar structures do
not form part of the public roads since the former are constructed over
the latter in such a way that the flow of vehicular traffic would not be
impaired. The carriageways and terminals serve a function different
from the public roads. Furthermore, they are not open to use by the
general public hence not exempt from real property taxes. Even
granting that the national government owns the carriageways and
terminal stations, the property is not exempt because their beneficial
use has been granted to LRTA a taxable entity. (Light Rail Transit
Authority v. Central Board of Assessment Appeals, et al., G. R. No.
127316, October 12, 2000)
c. The Supreme Court of New York in Consolidated Edison
Company of New York, Inc., et al., v. The City of New York, et al., 80
Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of
Batangas, G. R. No. 168557, February 16, 2007 and companion case,
held that barges on which were mounted gas turbine power plants
designated to generate electrical power, the fuel oil barges which
supplied fuel oil to the power plant barges, and the accessory
equipment mounted on the barges were subject to real property taxes.
Moreover, Article 415(9) of the Civil Code provides that “[d]ocks
and structures which, though floating, are intended by their nature and
object to remain at a fixed place on a river, lake or coast” are
considered immovable property by destination being intended by the
owner for an industry or work which may be carried on in a building or
on a piece of land and which tend directly to meet the needs of said
industry or work.
8. The restriction upon the power of courts to impeach tax
assessment without a prior payment, under protest, of the taxes
assessed is consistent with the doctrine that taxes are the
lifeblood of the nation, and as such their collection cannot be
curtailed by injunction or any like action; otherwise, the state or, in this
case, the local government unit, shall be crippled in dispensing the
needed services to the people, and its machinery gravely disabled.
(Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001)
Thus, the trial court has no jurisdiction to entertain a petition for
prohibition absent payment under protest of the tax assessed. (Ibid.)
NOTES AND COMMENTS: While the above May 18, 2001
decision was set aside by the Supreme Court when it granted the
petitioner’s second motion for reconsideration on June 29, 2004, the
author submits that the above doctrine in the May 18, 2001 decision is
still valid, because what was reversed in the second motion for
reconsideration was the garnishment of Meralco’s assets. The
remand to the lower court was for the resolution of whether or not an
assessment was issued to Meralco.
 9. Unpaid realty taxes attach to the property and is
chargeable against the person who had actual or beneficial use
and possession of it regardless of whether or not he is the
owner. To impose the real property tax on the subsequent owner
which was neither the owner not the beneficial user of the property
during the designated periods would not only be contrary to law but
also unjust.
Consequently, MERALCO the former owner/user of the
property was required to pay the tax instead of the new owner
NAPOCOR. (Manila Electric Company v. Barlis, G.R. No. 114231,
May 18, 2001)
NOTE: The above May 18, 2001 decision was set aside by
the Supreme Court when it granted the petitioner’s second motion for
reconsideration on June 29, 2004. The author submits that the above
ruling in the May 18, 2001 decision is still valid, not on the basis of the
May 18, 2001 decision but in the light of pronouncements of the
Supreme Court in other cases. Thus, do not cite the doctrine as
emanating from the May 18, 2001 decision.
10. Secretary of Justice can take cognizance of a case
involving the constitutionality or legality of tax ordinances
where there are factual issues involved. (Figuerres v. Court of
Appeals, et al., G.R. No. 119172, March 25, 1999)
Taxpayer files appeal to the Secretary of Justice, within 30
days from effectivity thereof. In case the Secretary decides the
appeal, a period also of 30 days is allowed for an aggrieved party to
go to court. But if the Secretary does not act thereon, after the lapse
of 60 days, a party could already seek relief in court within 30 days
from the lapse of the 60 day period.
These three separate periods are clearly given for compliance
as a prerequisite before seeking redress in a competent court. Such
statutory periods are set to prevent delays as well as enhance the
orderly and speedy discharge of judicial functions. For this reason the
courts construe these provisions of statutes as mandatory. (Reyes, et
al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999)
 81
11. Public hearings are mandatory prior to approval of  58. Notice and publication, as well as the legal
tax ordinance, but this still requires the taxpayer to adduce evidence requirements for a tax delinquency sale, are mandatory, and the
to show that no public hearings ever took place. (Reyes, et al., v. failure to comply therewith can invalidate the sale. The prescribed
Court of Appeals, et al., G.R. No. 118233, December 10, 1999) notices must be sent to comply with the requirements of due process.
Public hearings are required to be conducted prior to the enactment of (De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v. Honorable
an ordinance imposing real property taxes. (Figuerres v. Court of Sayo, 290 SCRA 223,236)
Appeals, et al., G.R. No. 119172, March 25, 1999)
16. The reason behind the notice requirement is that tax
12. The concurrent and simultaneous remedies afforded sales are administrative proceedings which are in personam in
local government units in enforcing collection of real property nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C.,
taxes: 169 SCRA 314)
a. Distraint of personal property;
b. Sale of delinquent real property, and
c. Collection of real property tax through ordinary court
action. 17. FELS Energy, Inc., had a contract to supply NPC
with the electricity generated by FELS’ power barges. The
13. The remedy of levy can be pursued by putting up for
contract also stated that NPC shall be responsible for all real
sale the real property subject of tax, i.e., the delinquent property
estate taxes and assessments. FELS then received an
upon which the tax lien attaches, regardless of the present owner or
assessment of real property taxes on its power barges from the
possessor thereof. However this remedy is only one of the other
Provincial Assessor of Batangas. If filed a motion for
remedies. (Manila Electric Company v. Barlis, G.R. No. 114231, May
reconsideration with the Provincial Assessor.
18, 2001)
a. Upon denial, FELS elevated the matter to the Local
NOTE: The above May 18, 2001 decision was set aside by the
Board of Assessment Appeals (LBAA), where it raised the
Supreme Court when it granted the petitioner’s second motion for
following issues:
reconsideration on June 29, 2004. The author submits that the above
1) Since NPC is tax-exempt then FEL’s should
ruling in the May 18, 2001 decision is still valid, not on the basis of the
also be tax-exempt because of its contract with NPC.
May 18, 2001 decision, in the light of pronouncements of the Supreme
2) The power barges are not real property
Court in other cases. Thus, do not cite the doctrine as emanating
subject to real property taxes.
from the May 18, 2001 decision.
b. Upon the other hand the Local Treasurer insists that
the assessment has attained a state of finality hence the appeal
14. The LGU could also avail of the remedy of distraint
to the LBAA should be dismissed.
and levy of personal property subjecting any personal property
Rule on the conflicting contentions.
of the taxpayer to execution. thus, the issuance of the warrants of
SUGGESTED ANSWER:
garnishment over MERALCO’s bank deposits was not improper or
a. All the contentions of FELS are without merit:
irregular. (Manila Electric Company v. Barlis, et al., G.R. No. 114231,
1) NPC is not the owner of the power barges nor the
May 18, 2001)
operator of the power barges. The tax exemption privilege
NOTE: The above May 18, 2001 decision was set aside by the
granted to NPC cannot be extended to FELS. the covenant is
Supreme Court when it granted the petitioner’s second motion for
between NPC and FELs and does not bind a third person not
reconsideration on June 29, 2004. The author submits that the above
privy to the contract such as the Province of Batangas.
ruling in the May 18, 2001 decision is still valid, not on the basis of the
2) The Supreme Court of New York in Consolidated
May 18, 2001 decision, in the light of pronouncements of the Supreme
Edison Company of New York, Inc., et al., v. The City of New
Court in other cases. Thus, do not cite the doctrine as emanating
York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy,
from the May 18, 2001 decision.
Inc., v. Province of Batangas, G. R. No. 168557, February 16,
2007 and companion case, held that barges on which were
mounted gas turbine power plants designated to generate
 82
electrical power, the fuel oil barges which supplied fuel oil to the
power plant barges, and the accessory equipment mounted on
the barges were subject to real property taxes.
Moreover, Article 415(9) of the Civil Code provides that
“[d]ocks and structures which, though floating, are intended by
their nature and object to remain at a fixed place on a river, lake
or coast” are considered immovable property by destination
being intended by the owner for an industry or work which may
be carried on in a building or on a piece of land and which tend
directly to meet the needs of said industry or work.
b. The Treasurer is correct. The procedure do not allow a
motion for reconsideration to be filed with the Provincial Assessor.
To allow the procedure would indeed invite corruption in the
system of appraisal and assessment. it conveniently courts a graft-
prone situation where values of real property ay be initially set
unreasonably high, and then subsequently reduced upon the request
of a property owner. In the latter instance, allusions of possible cover,
illicit trade-off cannot be avoided, and in fact can conveniently take
place. Such occasion for mischief must be prevented and excised
from our system. (FELS Energy, Inc., v. Province of Batangas, G. R.
No. 168557, February 16, 2007 and companion case, citing Callanta
v. Office of the Ombudsman. G. R. Nos. 115253-74, January 30,
1998, 285 SCRA 648)
18. A special levy or special assessment is an imposition by a
province, a city, a municipality within the Metropolitan Manila Area, a
municipality or a barangay upon real property specially benefited by a
public works expenditure of the LGU to recover not more than 60% of
such expenditure.
19. If the ground for the protest is validity of the real
property tax ordinance and not the unreasonableness of the amount
collected the tax must be paid under protest, and the issue of legality
may be raised to the proper courts on certiorari without need of
exhausting administrative remedies.
20. If the ground for the protest is unreasonableness of
the amounts collected there is need to pay under protest and
administrative remedies must be resorted to before recourse to the
proper courts.
21. Procedure for refund of real property taxes based on
unreasonableness or excessiveness of amounts collected.
a. Payment under protest at the time of payment or within
thirty (30) days thereafter, protest being lodged to the provincial, city
or in the case of a municipality within the Metro Manila Area the
municipal treasurer.
b. The treasurer has a period of sixty (60) days from receipt
of the protest within to decide.
c. Within thirty (30) days from receipt of treasurer’s decision
or if the treasurer does not decide, within thirty (30) days from the
expiration of the sixty (60) period for the treasurer to decide, the
taxpayer should file an appeal with the Local Board of Assessment
Appeals.
d. The Local Board of Assessment Appeals has 120 days
from receipt of the appeal within which to decide.
e. The adverse decision of the Local Board of Assessment
Appeals should be appealed within thirty (30) days from receipt to the
Central Board of Assessment Appeals.
f. The adverse decision of the Central Board of
Assessment Appeals shall be appealed to the Court of Tax Appeals
(En Banc) by means of a petition for review within thirty (30) days from
receipt of the adverse decision.
g. The decision of the CTA may be the subject of a motion
for reconsideration or new trial after which an appeal may be
interposed by means of a petition for review on certiorari directed to
the Supreme Court on pure questions of law within a period of fifteen
(15) days from receipt extendible for a period of thirty (30) days.
22. A City Ordinance adopting a method of assessment
was nullified by the Supreme Court. A taxpayer who has paid
his real property taxes on the basis of the nullified ordinance
now posits that the return of the real property tax erroneously
collected and paid is a necessary consequence of the Supreme
Court’s nullification of the ordinance and there is no need to
claim for a refund. Is this correct ?
SUGGESTED ANSWER: No. The entitlement to a tax refund
does not necessarily call for the automatic payment of the sum
claimed. The amount of the claim being a factual matter, it must still
be proven in the normal course and in accordance with the
administrative procedure for obtaining a refund of real property taxes,
as provided under the Local Government Code. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R. No.
154126, September 15, 2006)
NOTE: In the above Allied Banking case, the Supreme Court
provided for the starting date of computing the two-year prescriptive
period within which to file the claim with the Treasurer, which is from
finality of the Decision. The procedure to be followed is that shown
below.
 83
23. Procedure for refund of real property taxes based on
validity of the tax measure or solutio indebeti.
a. Payment under protest not required, claim must be
directed to the local treasurer, within two (2) years from the date the
taxpayer is entitled to such reduction or readjustment, who must
decide within sixty (60) days from receipt.
b. The denial by the local treasurer of the protest would fall
within the Regional Trial Court’s original jurisdiction, the review being
the initial judicial cognizance of the matter. Despite the language of
Section 195 of the Local Government Code which states that the
remedy of the taxpayer whose protest is denied by the local treasurer
is “to appeal with the court of competent jurisdiction,” labeling the said
review as an exercise of appellate jurisdiction is inappropriate since
the denial of the protest is not the judgment or order of a lower court,
but of a local government official. (Yamane , etc. v. BA Lepanto
Condominium Corporation, G. R. No. 154993, October 25, 2005)
c. The decision of the Regional Trial Court should be
appealed by means of a petition for review directed to the Court of Tax
Appeals (Division).
d. The decision of the Court of Tax Appeals (Division) may
be the subject of a review by the Court of Tax Appeals (en banc).
e. The decision of the Court of Tax Appeals (en banc) may
be the subject of a petition for review on certiorari on pure questions of
law directed to the Supreme Court.
 24. Charitable institutions, churches and parsonages
or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and improvements that are
actually, directly and exclusively used for religious, charitable or
educational purposes are exempt from taxation. [Sec.28 (3)
Article VI, 1987 Constitution]
 25. The constitutional tax exemptions refer only to
real property that are actually, directly and exclusively used for
religious, charitable or educational purposes, and that the only
constitutionally recognized exemption from taxation of revenues are
those earned by non-profit, non-stock educational institutions which
are actually, directly and exclusively used for educational purposes.
(Commissioner of Internal Revenue v. Court of Appeals, et al., 298
SCRA 83)
The constitutional tax exemption covers property taxes only.
What is exempted is not the institution itself, those exempted from real
estate taxes are lands, buildings and improvements actually, directly
and exclusively used for religious, charitable or educational purposes.
(Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.
144104, June 29, 2004 citing Justice Davide)
 31. The 1935 Constitution stated that the lands,
buildings, and improvements are “used exclusively” but the
present Constitution requires that the lands, buildings and
improvements are “actually, directly and exclusively used.” The
change should not be ignored. Reliance on past decisions would have
sufficed were the words “actually” as well as :directly” are not added.
There must be proof therefore of the actual and direct use to be
exempt from taxation. (Lung Center of the Philippines v. Quezon City,
et al., etc., G. R. No. 144104, June 29, 2004 citing Province of Abra v.
Hernando, 107 SCRA 105)
 26. What is meant by “actual, direct and exclusive
use” of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the
purposes for which the charitable institution is organized. It is not the
use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.
If real property is used for one or more commercial purposes, it
is not exclusively used for the exempted purpose but is subject to
taxation,. The words “dominant use” or “principal use” cannot be
substituted for the words “used exclusively” without doing violence to
the Constitution and the law. Solely is synonymous with exclusively.
(Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.
144104, June 29, 2004)
27. Portions of the land of a charitable institution, such as
a hospital, leased to private entities as well as those parts of the
hospital leased to private individuals are not exempt from real
property taxes. On the other hand, the portion of the land occupied
by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes.
(Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.
144104, June 29, 2004)
28. As a general principle, a charitable institution does
not lose its character as such and its exemption from taxes
simply because it derives income from paying patients, whether
out-patient, or confined in the hospital, or receives subsidies
from the government. So long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve;
and no money inures to the private benefit of the persons managing or
 84
operating the institution. (Lung Center of the Philippines v. Quezon
City, et al., etc., G. R. No. 144104, June 29, 2004)
 29. What property are exempt from the payment of
real property tax under the Local Government Code ?
SUGGESTED ANSWER:
a. Real property owned by the Republic of the Philippines
or any of its political subdivisions except when the beneficial use
thereof has been granted to a taxable person for a consideration or
otherwise;
b. Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, non-profit or religious
cemeteries, and all lands, buildings and improvements actually,
directly and exclusively used for religious, charitable and educational
purposes;
c. Machineries and equipment, actually, directly and
exclusively used by local water districts; and government owned and
controlled corporations engaged in the supply and distribution of water
and generation and transmission of electric power;
d. Real property owned by duly registered cooperatives;
e. Machinery and equipment used for pollution control and
environmental protection.
 30. The Manila International Airport Authority
(MIAA) was subject to real property taxes by the municipality of
Paranaque on its airport lands, and buildings on the ground
that the Local Government Code has withdrawn exemptions
previously enjoyed by government-owned and controlled
corporations. MIAA contends otherwise as it claims it is not a
government owned or controlled corporation. Who is correct.
SUGGESTED ANSWER: MIAA is correct because it is not
a government owned or controlled corporation but an instrumentality
of the government that is exempt from taxation.
It is not a stock corporation because its capital is not divided
into shares, neither is it a non-stock corporation because there are
no members. It is instead an instrumentality of the government upon
which the local governments are not allowed to levy taxes, fees or
other charges.
An instrumentality “refers to any agency of the National
Government, not integrated within the department framework vested
with special functions or jurisdiction by law, endowed with some if
not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This term includes
regulatory agencies chartered institutions and government-owned or
controlled corporations.” [Sec. 2 (10), Introductory Provisions,
Administrative Code of 1987] It is an instrumentality exercising not
only governmental but also corporate powers. It exercises
governmental powers of eminent domain, police power authority,
and levying of fees and charges.
Finally, the airport lands and buildings are property owned
by the government that are devoted to public use and are properties
of the public domain. (Manila International Airport Authority v. City
of Pasay, et al., G. R. No. 163072, April 2, 2009 citing Manila
International Airport Authority v. Court of Appeals, et al., G. R. No.
155650, July 20, 2006)
31. A telecommunications company was granted by
Congress on July 20, 1992, after the effectivity of the Local
Government Code on January 1, 1992, a legislative franchise
with tax exemption privileges which partly reads, “The grantee,
its successors or assigns shall be liable to pay the same taxes
on their real estate, buildings and personal property, exclusive
of this franchise, as other persons or corporations are now or
hereafter may be required by law to pay.” This provision
existed in the company’s franchise prior to the effectivity of the
Local Government Code. A City then enacted an ordinance in
1993 imposing a real property on all real properties located
within the city limits, and withdrawing all tax exemptions
previously granted. Among properties covered are those
owned by the company from which the City is now collecting
P43 million. The properties of the company were then
scheduled by the City for sale at public auction.
The company then filed a petition for the issuance of a
writ of prohibition claiming exemption under its legislative
franchise. The City defended its position raising the following:
a. There was no exhaustion of administrative
remedies because the matter should have first been filed
before the Local Board of Assessment Appeals;
b. The company’s properties are exempt from tax
under its franchise.
Resolve the issues raised.
SUGGESTED ANSWERS:
a. There is no need to exhaust administrative remedies as
the appeal to the LBAA is not a speedy and adequate remedy within
the law. This is so because the properties are already scheduled for
auction sale.
Furthermore one of the recognized exceptions to the rule on
exhaustion is that if the issue is purely legal in character which is so
in this case.
 85
b. The properties are exempt from taxation. The grant of
taxing powers to local governments under the Constitution and the
Local Government Code does not affect the power of Congress to
grant tax exemptions.
The term “exclusive of this franchise” is interpreted to mean
properties actually, directly and exclusively used in the radio or
telecommunications business. The subsequent piece of legislation
which reiterated the phrase “exclusive of this franchise” found in the
previous tax exemption grant to the company is an express and real
intention on the part of Congress to once against remove from the
LGC’s delegated taxing power, all of the company’s properties that
are actually, directly and exclusively used in the pursuit of its
franchise. (The City Government of Quezon City, et al., v. Bayan
Telecommunications, Inc., G. R. No. 162015, March 6, 2006)
NOTES AND COMMENTS:
a. Note the confusion in the decision. It cited Mactan
Cebu which stated that the taxing power of local government units is
“no longer merely by virtue of a valid delegation as before, but
pursuant to direct authority” but in the concluding portion referred to
it as “the LGC’s delegated taxing power.” Which is which, delegated
or direct grant ? The author submits that the weight of jurisprudence
shows that it is a direct grant not a delegated power. If a question is
asked then state it is a direct grant.

32. The owner operator of a BOT and not the ultimate

owner is subject to real property taxes. Consistent with the BOT
concept and as implemented, BPPC – the owner-manager-operator
of the project – is the actual user of its machineries and equipment.
BPPC’s ownership and use of the machineries and equipment are
actual, direct, and immediate, while NAPOCOR’s is contingent and,
at this stage of the BOT Agreement, not sufficient to support its
claim for tax exemption. (National Power Corporation v. Central
Board of Assessment Appeals, et al., G, R. No. 171470, January 30,
2009)

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