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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
Page 1 of 45
BAR OPERATIONS 2015
Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
destructive power which interferes with the 3. The BIR is authorized to collect
personal and property rights of the people and estate tax deficiency through the
takes from them a portion of their property summary remedy of levying upon
for the support of the government. the sale of real properties of a
decedent, without the cognition
The power to tax includes the power and authority of the court sitting in
to destroy if it is used validly as an implement probate over the supposed will of
of the police power in discouraging and in the decedent, because the
effect, ultimately prohibiting certain things or collection of the estate tax is
enterprises inimical to the public welfare xxx executive in character. As such, the
(Cruz, Constitutional Law, 2000 Ed., p. 87). estate tax is exempted from the
application of the statute of non-
Q. Describe the Scope of the Power to claims, and this is justified by the
Tax necessity of government funding,
immortalized in the maxim ―Taxes
The power of taxation is the most are the lifeblood of the
absolute of all powers of the government government and should be
(Sison v. Ancheta, 130 SCRA 654).It has the collected without unnecessary
broadest scope of all the powers of hindrance.‖ However, such
government because in the absence of collection should be made in
limitations, it is considered as unlimited, accordance with law as any
plenary, comprehensive and supreme. arbitrariness will negate the very
reason for government itself
However, the power of taxation (MARCOS II v. CA, 273 SCRA 47).
should be exercised with caution to minimize
injury to the proprietary rights of the taxpayer. 4. Taxes are the lifeblood of the
It must be exercised fairly, equally and government and so should be
uniformly, lest the tax collector kill ―the hen collected without unnecessary
that lays the golden egg‖ (Roxas v. CTA, 23 hindrance. Philex‘s claim that it
SCRA 276). had no obligation to pay the excise
tax liabilities within the prescribed
Q. Discuss the meaning an implication of period since it still has pending
the LIFEBLOOD DOCTRINE. claims for VAT input credit/refund
with the BIR is UNTENABLE
1. By enforcing the tax lien, the BIR (Philex Mining Corporation v. CIR,
availed itself of the most 294 SCRA 687).
expeditious way to collect the tax.
Taxes are the lifeblood of the Q. It has been said that the State can
government and their prompt and never be in estoppel, and this is
certain availability is an imperious particularly true in matters involving
need (CIR v. Pineda, 21 SCRA 105). taxation. Explain the philosophy
behind the government‘s exception, as
2. The government is not bound by a general rule, from the operation of
the errors committed by its agents. the principle of estoppel
In the performance of its
government functions, the State Taxes are the lifeblood of the
cannot be estopped by the neglect Government and their prompt and certain
of its agents and officers. Taxes are availability are imperious need. Upon taxation
the lifeblood of the nation through depends the Government's ability to serve the
which the government agencies people for whose benefit taxes are collected.
continue to operate and with To safeguard such interest, neglect or omission
which the state effects its functions of government officials entrusted with the
for the welfare of its constituents. collection of taxes should not be allowed to
The errors of certain administrative bring harm or detriment to the people, in the
officers should never be allowed to same manner as private persons may be made
jeopardize the government‘s to suffer individually on account of his own
financial position (CIR v. CTA, 234 negligence, the presumption being that they
SCRA 348). take good care of their personal affair. This
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Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
should not hold true to government officials said decree is the movie industry,
with respect to matters not of their own the citizens are held to be its
personal concern. indirect beneficiaries.
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Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
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Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
they reach the consumer, and are paid by Exemption from Taxation of Government
those upon whom they ultimately fall, not as Agencies
taxes, but as part of the market price of the
commodity (Cooley, Tax. 61). The Constitution is silent on whether
Congress is prohibited from taxing the
INHERENT LIMITATIONS ON THE POWER properties of the agencies of the government.
TO TAX In MCIAA v. Marcos, 261 SCRA 667, the
Supreme Court held that nothing can prevent
Q. What is meant by ―public purpose‖ as Congress from decreeing that even
an inherent limitation on the power of instrumentalities or agencies of the
taxation? government performing governmental
functions may be subject to tax.
The term ―public purpose‖ is not
defined. It is an elastic concept that can be Tax exemption of property owned by
hammered to fit modern standards. the Republic of the Philippines refers to
Jurisprudence states that ―public purpose‖ property owned by the government and its
should be given a broad interpretation. It does agencies which to do not have separate and
not only pertain to those purposes which are distinct personalities. ―The government does
traditionally viewed as essentially government not part with its title by reserving them, but
functions, such as building roads and delivery simply gives notice to the world that it desires
of basic services, but also includes those them for a certain purpose.‖ As its title
purposes designed to promote social justice. remains with the Republic, the reserved land is
Thus, public money may now be used for the clearly covered by tax exemption.
relocation of illegal settlers, low-cost housing
and urban or agrarian reform (Planters However, the exemption does not
Products, Inc. v. Fertiphil Corporation, 548 extend to improvements on the public land.
SCRA 485 [2008]). Consequently, the warehouse constructed on
the reserved land by NDC should properly be
Public v. Private interest assessed real estate tax as such improvement
does not appear to belong to the public (NDC
In the case of Pascual v. Secretary of v. Cebu City, 215 SCRA 382).
Public Works, 110 PHIL 331, the SC held that
the appropriation for construction of feeder Q. Is Manila International Airport
roads on land belonging to a private person is Authority considered an
not valid, and donation to the government of instrumentality of the National
the said land 5 months after the approval and Government exempt from local
effectivity of the Act for the purpose of giving taxation?
a semblance of legality to the appropriation
does not cure the basic defect. Incidental YES. In Manila International Airport
advantage to the public or to the State, which Authority v. Court of Appeals (495 SCRA 591,
results from the promotion of private 615), the Supreme Court held that the real
enterprises, does not justify the use of public properties of MIAA are owned by the Republic
funds. of the Philippines and thus exempt from real
estate tax. A government instrumentality like
Tax Situs of Shares of Stock MIAA falls under Section 133(o) of the Local
Government Code,
The SC held that the actual situs of the exercise of the taxing powers of provinces,
shares of stock left by non-resident alien cities, municipalities, and barangays shall not
decedent is in the Philippines. The owner extend to the levy of the following: xxx (o)
residing in California has extended activities Taxes, fees or charges of any kind on the
here with respect to her intangibles so as to National Government, its agencies and
avail herself of the protection and benefit of instrumentalities and local government units.
the Philippine laws. Accordingly, the
Philippine government had the jurisdiction to This has been echoed in the recent case
tax the same (Wells Fargo Bank v. Collector, of Philippine Fisheries Development Authority
70 Phil. 235). v. The Municipality of Navotas, 534 SCRA
490, wherein the Supreme Court ruled that
PFDA, being an instrumentality of the national
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Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
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Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
Thus, the records of the Constitutional SCRA 578). It takes place when a person is a
Commission reveal that what is exempted is resident of a contracting state and derives
not the institution itself; those exempted from income from, or owns capital in, the other
real estate taxes are lands, buildings and contracting state, and both states impose tax
improvements actually, directly and exclusively on that income or capital.
used for religious, charitable or educational
purposes. Tax conventions such as the RP-US Tax
Treaty are drafted with a view towards the
Citing the case of St. Louis Young elimination of international juridical double
Men‘s Christian Association v. Gehner, 47 taxation. In CIR v. S.C. Johnson and Sons, Inc.,
S.W.2d 776 which held that if real property is 309 SCRA 87, however, it was held that since
used for one or more commercial purposes, it the RP-US Tax treaty does not give a matching
is not exclusively used for the exempted credit of 20% for the taxes paid to the
purposes but is subject to taxation, the Philippines on royalties as allowed under the
Supreme Court explained that ―What is meant RP-West Germany Tax Treaty, S.C. Johnson
by actual, direct and exclusive use of the (Phils.) is not entitled to the 10% rate granted
property for charitable institutions is the direct under the latter treaty for the reason that there
and immediate and actual application of the is no payment of taxes on royalties under
property itself to the purposes for which the similar circumstances.
charitable institution is organized. It is not the
use of the income from the real property that Moreover, double taxation, in general,
is determinative of whether the property is is not forbidden by our fundamental law, so
used for tax-exempt purposes.‖ that double taxation becomes obnoxious only
where the taxpayer is taxed twice for the
In sum, the Court ruled that the benefit of the same governmental entity or by
portions of the land leased to private entities the same jurisdiction for the same purpose, but
as well as those parts of the hospital leased to not in a case where one tax is imposed by the
private individuals are not exempt from taxes. State and the other by the city or municipality
(Pepsi-Cola Bottling Company of
In the most recent case of CIR v. St. the Philippines v. Municipality of Tanauan,
Luke's Medical Center, Inc., 682 SCRA 66, the Leyte, 69 SCRA 460).
Supreme Court held that St. Luke's is not
automatically exempt from real property tax Q. Define international juridical double
even if it meets the test of charity. To be taxation.
exempt, Section 28(3), Article VI of the
Constitution requires that a charitable It is the imposition of comparable
institutions use the property ―actually, directly taxes in two or more states on the same
and exclusively‖ for charitable purposes. taxpayer in respect of the same subject matter
and for identical periods. (P. Baker, Double
Q. What is the requisite proof for Taxation Conventions and International Law
exemption from realty taxation? [1994], p. 11, citing the Committee on Fiscal
Affairs of the Organization for Economic
To be exempt from realty taxation, Cooperation and Development [OECD]).
there must be proof of actual and direct and
exclusive use of the lands, buildings and Q. What are the modes of eliminating
improvements for religious or charitable double taxation?
purposes (Province of Abra v. Hernando, 107
SCRA 104). The usual methods of avoiding the
occurrence of double taxation are:
DOUBLE TAXATION
5. Allowing reciprocal exemption
Q. What is double taxation? When does it either by law or by treaty
arise? How is it prevented? Is it 6. Allowance of tax credit for foreign
unconstitutional? taxes paid
7. Allowance of deduction for foreign
Double taxation means taxing the taxes paid; and
same thing or activity twice during the same 8. Reduction of the Philippine tax rate
tax period (Villanueva v. City of Iloilo, 26
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
Q: What is meant by ―shifting the tax Code (Ungab v. Cusi, 97 SCRA 877; CIR v.
burden‖? PASCOR Realty and Development Corp.,
supra).
Shifting of tax burden is the process by
which the burden of a tax is transferred from Q. How are statutory provisions granting
the statutory taxpayer or the one whom the tax exemptions or deductions
tax was assessed or imposed to another construed? State the basis for the rule.
without violating the law.
It is an elementary rule in taxation that
Q: Enumerate the ways of shifting the tax exemptions are strictly construed against the
burden and define each. taxpayer and liberally in favor of the taxing
authority. It is the taxpayers duty to justify the
1. Forward shifting—When the burden of exemption by words too plain to be mistaken
the tax is transferred from a factor of and too categorical to be misinterpreted
production through the factors of (Radio Communications of the Phil. vs
distribution until it finally settles on the Provincial Assessor of South Cotabato, 456
ultimate purchaser or consumer. SCRA 1).
2. Backward shifting—When the burden The basis for the rule on strict
of the tax is transferred from the construction to statutory provisions granting
consumer or purchaser through the tax exemptions or deductions is to minimize
factors of distribution to the factors of differential treatment and foster impartiality,
production. fairness and equality of treatment among
taxpayers (Quezon City vs. ABS-CBN
3. Onward shifting—When the tax is Broadcasting Corporation).
shifted two or more times either
forward or backward. TAX EVASION AND TAX AVOIDANCE
DISTINGUISHED
TAX EVASION
Tax evasion connotes fraud through
Q. Does an affidavit executed by revenue the use of pretenses and forbidden devices to
officers constitute a tax assessment? lessen or defeat taxes. On the other hand, tax
avoidance is a legal means used by the
An affidavit executed by revenue taxpayer to reduce taxes (Benny v. Commr.,
officers stating the tax liabilities of a taxpayer 25 T.Cl.78).
and attached to a criminal complaint for tax
evasion, is not an assessment that can be The intention to minimize taxes, when
questioned before the CTA. An assessment used in the context of fraud, must be proven
contains not only a computation of tax by clear and convincing evidence amounting
liabilities, but also a demand for payment to more than mere preponderance. Mere
within a prescribed period (CIR v. PASCOR understatement of tax in itself does not prove
Realty and Development Corp., 309 SCRA fraud (Yutivo Sons Hardware Co. v. CTA, 1
402). SCRA 160).
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Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
payment of tax when it is shown that a tax is that there is a wastage of public funds through
due; (2) an accompanying state of mind which the enforcement of an invalid or unconditional
is described as being ―evil‖, in ―bad faith‖, law. Significantly, a taxpayer need not be a
―willful‖, or ―deliberate and not accidental‖; party to the contract to challenge its validity.
and (3) a course of action or failure of action
which is unlawful (Commissioner of Internal Q. How is the plaintiff in a taxpayer‘s suit
Revenue v. The Estate of Benigno P. Toda, Jr., differentiated from the plaintiff in a
G.R. No. 147188, September 14, 2004, 438 citizen‘s suit?
SCRA 290).
The plaintiff in a taxpayer‘s suit is in a
TAXPAYER‘S SUIT different category from the plaintiff in a
citizen‘s suit—in the former, the plaintiff is
Q. What is a taxpayer‘s suit? When is it affected by the expenditure of public funds,
proper? while in the latter, he is but the mere
instrument of the public concern (David vs.
A taxpayer‘s suit requires illegal Macapagal-Arroyo, 489 SCRA 160).
expenditure of taxpayers‘ money.
Jurisprudence dictates that a taxpayer may be DECISIONAL RULINGS ON REFORMED EVAT
allowed to sue where there is a claim that LAW (RA 9337)
public funds are illegally disbursed or that
public money is being deflected to any No undue delegation of legislative
improper purpose, or that public funds are power
wasted through the enforcement of an invalid
or unconstitutional law or ordinance. (Remulla The case before the Court is not a
v. Maliksi, 706 SCRA 35, 18 September 2013) delegation of legislative power. It is simply
a delegation of ascertainment of facts upon
In Maceda v. Macaraig, 197 SCRA 771, which enforcement and administration of
the SC sustained the right of Sen. Maceda as the increase rate under the law is
taxpayer to file a petition questioning the contingent. The legislature has made the
legality of the tax refund to NPC by way of operation of the 12% rate effective
tax credit certificates, and the use of tax January 1, 2006, contingent upon a
certificates by oil companies to pay for their specified fact or condition. It leaves the
tax and duty liabilities to the BIR and Bureau entire operation or non-operation of the
of Customs. 12% rate upon factual maters outside of
the control of the executive. No discretion
However, in Gonzales v. Marcos, 65 would be exercised by the President.
SCRA 624, the SC held that the taxpayer had Highlighting the absence of discretion is
no legal personality to assail the validity of the fact that the word shall is used in the
E.O. 30 creating the Cultural Center of the common proviso. The use of the word
Philippines as the assailed order does not shall connote a mandatory order. Its use in
involve the use of public funds. The funds a statute denotes an imperative obligation
came by way of donations and contributions, and is inconsistent with the idea of
not by taxation. discretion. Where the law is clear and
unambiguous, it must be taken to mean
Q. Are government contracts covered by exactly what it says, and courts have no
the taxpayer‘s suit? choice but to see to it that the mandate is
obeyed. Thus, it is the ministerial duty of
YES. In the recent case of Abaya v. the President to immediately impose the
Ebdane, Jr. (515 SCRA 720, 757-758), the 12% rate upon the existence of any of the
Supreme Court stressed that the prevailing conditions specified by Congress. This is a
doctrine in the taxpayer‘s suits is to allow duty which cannot be evaded by the
taxpayers to question contracts entered into by President. Inasmuch as the law specifically
the national government or government- uses the word shall, the exercise of
owned and controlled corporations allegedly discretion by the President does not come
in contravention of law. A taxpayer is allowed into play. It is a clear directive to impose
to sue where there is a claim that public funds the 12% VAT rate when the specified
are illegally disbursed, or that public money is conditions are present. The time of taking
being deflected to any improper purpose, or into effect of the 12% VAT rate is based on
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
will fend off foreign investments, saying Imposition of regressive tax like VAT is
that foreign investors have other tax not constitutionally prohibited
incentives provided by law, and citing the The Constitution does not really prohibit
case of China, where despite a 17.5% non- the imposition of indirect taxes, like the
creditable VAT, foreign investments were VAT. What it simply provides is that
not deterred. Again, for whatever is the Congress shall ―evolve a progressive
purpose of the 60-month amortization, system of taxation.‖ The Court stated in
this involves executive economic policy the Tolentino case, thus: The Constitution
and legislative wisdom in which the Court does not really prohibit the imposition of
cannot intervene. indirect taxes which, like the VAT, are
regressive. What it simply provides is that
5% creditable withholding tax is a Congress shall ‗evolve a progressive system
method of collection of taxation.‘ The constitutional provision
has been interpreted to mean simply that
With regard to the 5% creditable ‗direct taxes are … to be preferred [and] as
withholding tax imposed on payments much as possible, indirect taxes should be
made by the government for taxable minimized.‘ (E. FERNANDO, THE
transactions, Section 12 of R.A. No. 9337, CONSTITUTION OF THE PHILIPPINES
which amended Section 114 of the NIRC, 221 [Second ed. 1977]) Indeed, the
reads: ***Section 114(C) merely provides a mandate to Congress is not to prescribe,
method of collection, or as stated by but to evolve, a progressive tax system.
respondents, a more simplified VAT Otherwise, sales taxes, which perhaps are
withholding system. The government in the oldest form of indirect taxes, would
this case is constituted as a withholding have been prohibited with the
agent with respect to their payments for proclamation of Art. VII, §17 (1) of the
goods and services. x x x The Court 1973 Constitution from which the present
observes, however, that the law used the Art. VI, §28 (1) was taken. Sales taxes are
word final. In tax usage, final, as opposed also regressive. Resort to indirect taxes
to creditable, means full. Thus, it is should be minimized but not avoided
provided in Section 114(C): ―final value- entirely because it is difficult, if not
added tax at the rate of five percent impossible, to avoid them by imposing
(5%)‖. such taxes according to the taxpayers‘
ability to pay. In the case of the VAT, the
VAT is by its nature, regressive law minimizes the regressive effects of this
imposition by providing for zero rating of
The VAT is an antithesis of progressive certain transactions (R.A. No. 7716, §3,
taxation. By its very nature, it is regressive. amending §102 (b) of the NIRC), while
The principle of progressive taxation has granting exemptions to other transactions.
no relation with the VAT system inasmuch
as the VAT paid by the consumer or II. INCOME TAXATION
business for every goods bought or services
enjoyed is the same regardless of income. Q. Distinguish Global Tax Treatment from
In other words, the VAT paid eats the Schedular System of Income Taxation.
same portion of an income, whether big or
small. The disparity lies in the income What system of taxation was adopted
earned by a person or profit margin under the NIRC on income taxation?
marked by a business, such that the higher
the income or profit margin, the smaller A global system of taxation is one
the portion of the income or profit that is where the taxpayer is required to report all
eaten by VAT. A converso, the lower the income earned during a taxable period in one
income or profit margin, the bigger the income tax return, which income shall be
part that the VAT eats away. At the end taxed under the same rule of income taxation.
of the day, it is really the lower income The schedular system requires a separate return
group or businesses with low-profit for each type of income and the tax is
margins that is always hardest hit. computed on a per return or per schedule
basis. Schedular system provides for different
tax treatment of different types of income.
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Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
The NIRC adopted a semi-global and Q. What are the types of Philippine
semi-schedular tax system. Income Tax?
Q. What are the features of the Philippine The types of Income tax under Title II
Income Tax Law? of the NIRC are:
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Green Notes 2015
Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
In CIR vs. BOAC (1987), an off-line There is no dispute that St. Luke‘s is
international carrier maintained a sales agent organized as a non-stock and non-profit
in the Philippines who sold tickets for flights charitable institution. However, this does not
flown outside the Philippines. The Supreme automatically exempt St. Luke‘s from paying
Court considered the sale of tickets in the taxes. This only refers to the organization of
Philippines as the activity that produced the St. Luke‘s. Even if St. Luke‘s meets the test of
income. The test of taxability is the ―source‖; charity, a charitable institution is not ipso facto
and the source of an income is that activity tax exempt. To be exempt from income taxes,
which produced the income. Even if the BOAC Section 30(E) of the NIRC requires that a
tickets sold covered the ―transport of charitable institution must be ―organized and
passengers and cargo to and from foreign operated exclusively‖ for charitable purposes.
cities‖‘ it cannot alter the fact that income Likewise, to be exempt from income taxes,
from the sale of tickets was derived from the Section 30(G) of the NIRC requires that the
Philippines. Thus, BOAC was made liable for institution be ―operated exclusively‖ for social
revenue derived from the sale of tickets. welfare. [Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc., 682 SCRA 66
Q. What are incomes considered derived (26 September 2012)]
from sources within the Philippines?
Q. State the rule on construction of tax
Sec. 42(A) of the Tax Code enumerates exemptions.
the items of gross income from sources within
the Philippines, namely: Laws granting exemption from tax are
construed strictissimi juris against the taxpayer
and liberally in favor of the taxing power.
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
Taxation is the rule and exemption is the Q. May a withholding agent file a written
exception. The burden of proof rests upon the claim for refund?
party claiming exemption to prove that it is in
fact covered by the exemption so claimed YES. In CIR v. Procter and Gamble
(Commissioner v. Mitsubishi Metal Corp., 181 PMC , 204 SCRA 377, the SC held that a
SCRA 215). withholding agent is subject to and liable for
deficiency assessments, surcharges and
Q. Is terminal leave pay taxable? penalties should the amount of the tax
withheld be finally found to be less than the
No. In the case of Re: Request of Atty. amount that should have been withheld under
Bernardo Zialcita (Adm. Matter No. 90-6-015- the law. A ―person liable for tax‖ has been
SC, October 18, 1990; 190 SCRA 851), the SC held to be a ―person subject to tax‖ and
held that terminal leave pay is the cash value properly considered a ―taxpayer‖ x x x By any
of an employee‘s accumulated leave credits, reasonable standard, such a person should be
hence, it cannot be considered compensation regarded as a party in interest, or as a person
for services rendered; it cannot be viewed as having sufficient legal interest, to bring a suit
salary. It falls within the enumerated for refund of taxes.
exclusions from gross income, and is therefore
not subject to tax. Q. The BIR disallowed PRC‘s claim for
deduction for failure to prove the
Q. What are taxable unregistered worthlessness of the debts. Is the
partnerships? disallowance correct?
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
No. 2, cited in the case of PICOP v. CA, 250 additional exemption. This tax is referred to as
SCRA 434). ordinary income tax or regular income tax.
(Sec. 24A and 25A in relation to Sec. 31 and
Q. How are assets classified for income Sec. 32A, NIRC).
taxpayers?
By way of exception, final tax, instead
The assets of a taxpayer are classified of ordinary tax, shall be imposed on certain
for income tax purposes into ordinary and kinds of passive income. Subject to certain
capital assets. However, there is no rigid rule requisites, these are:
or formula by which it can be determined with
finality whether property sold by a taxpayer a. Interests, royalties, prizes and
was held primarily for sale to costumers in the winnings;
ordinary course of his trade or business or b. Cash or property dividends;
whether it was sold as a capital asset. A c. Capital gains derived from the sale
property initially classified as a capital asset of shares of stocks; and
may thereafter be treated as an ordinary asset d. Capital gains derived from the sale
if a combination of factors indubitably tend to of realty. (Sec. 24B1,
show that the activity was in furtherance of or 24B2,24C,24D1,25A2 and 25A3,
in the course of the taxpayer‘s trade or NIRC)
business. Thus, a sale of inherited property Other incomes subject to final tax are:
usually gives capital gain or loss even though a. Fringe benefits (Sec. 33, NIRC)
the property has to be subdivided or improved b. Informer‘s reward (Sec. 282, NIRC)
or both to make it saleable. However, if the
inherited property is substantially improved or Q. Distinguish ordinary tax from final tax
very actively sold or both, it may be treated as
held primarily for sale to customers in the Ordinary tax and final tax are
ordinary course of the heir‘s business (Calasanz distinguished as follows:
v. CIR, 144 SCRA 664).
(a) In the former, the tax base is
Q. Is an equity investment a capital or taxable income; in the latter, the
ordinary asset? tax base is the gross income;
EXCLUDE non-resident alien NOT (e) In the former, liability for payment
engaged in trade/business or exercise of rests on the payee; in the latter,
profession in the Philippines (Sec. 25A). liability for payment rests on the
Q. How are the incomes of individuals payor;
taxed?
(f) In the former, the payee is
In general, individuals are taxed on the required to file an income tax
basis of their taxable income, that is, gross return; in the latter, the payee is
income less deduction and personal and no longer required to file the
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
return since it is to be made by the income by stating what it is not: ―if the income
payor; is generated in the active pursuit and
performance of the corporation‘s primary
(g) Creditable withholding tax is, in purposes, the same is not passive income.‖
certain cases, imposed on incomes (CREBA vs. Romulo, 9 March 2010)
subject to ordinary tax; final
withholding tax is usually imposed Q. Are all passive incomes subject to
on incomes subject to final tax. withholding tax?
Q. Distinguish final withholding tax from No. There are only certain kinds of
creditable withholding tax passive income that are subject to final tax
and, consequently, to final withholding tax.
FWT CWT These are specifically enumerated in various
The amount of Taxes withheld provisions of the NIRC (see Sec. 57A, NIRC).
income tax on certain All others are generally considered part of
withheld by the income gross income, and consequently, subject to
withholding payments are ordinary tax wherein creditable withholding
agent is intended to tax is, in particular cases, applicable. Under
constituted as a equal or at least present regulations, creditable withholding tax
full and final approximate the is usually applied to income payments not
payment of the tax due of the involving passive income.
income tax due payee on said
from the payee income. NOTE: From the above, it is clear that not
on the said only passive incomes may be subject to
income. withholding tax. Sec. 57 (A) of the NIRC
The liability for Payee of income expressly states that final tax can be imposed
payment of the is required to on certain kinds of income and enumerates
tax restsreport the these as passive income. On the other hand,
primarily on the income and/or Section 57 (B) provides that the Secretary (of
payor as a pay the Finance) can require a CWT on ―income
withholding difference payable to natural or juridical persons, residing
agent. between the tax in the Philippines.‖ There is no requirement
withheld and that this income be passive income. If that
the tax due on were the intent of Congress, it could have
the income. The easily said so. (see CREBA vs. Romulo, supra)
payee also has
the right to ask Q. Give some example of ordinary
for a refund if incomes subject to CWT
the tax withheld
is more than the Some notable income payments that are
tax due. subject to CWT are (1) wages; (2) professional
The payee is The income fees; (3) rentals of realty; (4) income payments
not required to recipient is still to partners of GPPs and (5) income payment
file an income required to file to realtors for the sale of realty. (Sec. 78, NIRC
tax return for an income tax and Sec. 2.57.2 of RR No. 2-98, as amended)
the particular return, as
income. prescribed in Q. What is the proper tax treatment of
Sec. 51 and Sec. interest incomes earned by individual?
52 of the NIRC,
as amended. As a rule, the interests earned by
individuals shall be included in gross income
(Revenue Regulation 2-98, Sec. 2.57A; CREBA and, thus, subject to regular income tax. This
vs. Romulo, 9 March 2010) includes interest earned by a resident citizen
from sources abroad.
Q. What is passive income?
By way of exception, interest from
It is income generated by the bank deposit (or monetary benefits from
taxpayer‘s assets. The BIR defines passive deposit substitutes or similar arrangements)
Page 17 of 45
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
DERIVED FROM SOURCES WITHIN shall be Q. What is capital asset? What is capital
subject to final tax and, correspondingly, final gain?
withholding tax. The rate of tax is 20% for
Peso currency deposit account and 7.5% for The law defines capital asset in the
any foreign currency deposit account. negative, such that, any property not falling
under the following enumeration (referred to
Q. Instances when the tax on interests as ordinary assets) is capital asset:
from bank deposits is not applicable
(a) stock in trade or inventoriable asset;
(a) When derived from sources abroad (b) property primarily held for sale to
(the bank is a non-resident), except customers in the ordinary course of
those earned by resident citizens; trade or business;
(b) When earned by non-residents from (c) depreciable asset; and
foreign country deposit accounts; and (d) real property used in trade or business.
(c) When earned from long-term deposit (Sec. 39A, NIRC)
or investment.
On the other hand, a capital gain is the
Q. Instances when final tax on prize is not gain, profit or income realized from a sale or
applicable disposition of capital asset.
(a) When earned from sources abroad, Q. What is the proper tax treatment on
that is, when the competition or capital gain derived from dealings in
contest was held abroad; however, the property?
prize or award received by a resident
citizen form sources abroad is still Generally, a capital gain is included in
included in gross income subject of gross income subject of ordinary income
ordinary income taxation; taxation (Sec. 32A, NIRC). By way of
exceptions, the capital gains derived from the
(b) When the amount does not exceed sale of shares of stock issued by a domestic
Php10,000.00, in which case, the corporation a sale of real property located in
amount is included in gross income the Philippines are subject to final tax. (Sec.
and thus subject to ordinary tax (Sec. 24C, 24D1, 25A3, NIRC)
24B1, Sec. 32A, NIRC);
(c) When the prize or award is received Q. In dealings in capital assets, are gains
primarily in recognition of religious, to be presumed?
charitable, educational, artistic,
literary, or civic achievement No. Gains are not to be presumed
PROVIDED (1) the recipient was from sale or disposition of capital assets.
selected without any action on his part However, in case of sale or other disposition
to enter the contest; and (2) he is not of real property located in the Philippines and
required to render substantial future held as capital asset, the gain is presumed and
services; This is considered an such gain is equivalent to the amount of the
EXCLUSION, and hence, exempt from zonal value or gross selling price, whichever is
tax (Sec. 32B7c, NIRC) higher. (Sec. 24D1, Sec. 25A3, NIRC)
(d) When the prize or award is won by an Q. What are the tax base and the tax rate
athlete in a local or international of the applicable tax imposable on
sports competition (i.e., the capital gains?
OLYMPICS) sanctioned by a
recognized national sports association; In general, the tax base of the income
This is considered an EXCLUSION and, tax on capital gain is the net capital gain or net
hence exempt from tax (Sec. 32B7d, income, whereas, the tax rate is the graduated
NIRC). rate of 5%-32%.
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
rate is 5% for the first Php100,000.00 and d. The sale is both exempt from the stock
10% on any amount in excess thereof. (NOTE: transaction tax and income tax.
If sale is through the local stock exchange, the
applicable tax is the percentage tax, also Explanation:
referred to as the stock transaction tax, under Under Section 127 (D) of the NIRC,
Sec. 127 of the NIRC. The basis is the GSP and any gain derived from the sale, barter,
the rate is ½ of 1%. The payment of this tax is exchange or other disposition of shares of
in lieu of income tax.) stock subject to the percentage tax of ½ of 1%
shall be exempt from the final tax and from
For capital gain presumed to have the regular individual or corporate income tax.
been realized from the sale of realty, the tax
base is FMV or GSP, whichever is higher, and Q. May the liability for the 6% capital
the tax rate is 6%. gains tax be legally avoided? If in the
affirmative, what are the requirements?
Q. A dealer in securities sold unlisted
shares of stocks of a domestic Yes. The 6% capital gains tax may be
corporation in 2010 and derived a legally avoided if the subject matter of the sale
gain of P1 Million therefrom. Is the is the PRINCIPAL residence and the proceeds
gain taxable at 5%/10% capital gains are to be used in acquiring or establishing a
tax based on net capital gain OR at ½ new principal residence within eighteen (18)
of 1% stock transaction tax based on calendar months from the date of sale. The
the gross selling price or fair market seller must inform the Commissioner of his
value, whichever is higher? intention to avail of the exemption within 30
days from the date of sale. (Sec. 24D2, NIRC).
Neither. The 5%/10% capital gains tax
is not applicable because he shares are NOT Additionally, the revenue regulations
capital assets. Shares of stock, like other require the 6% capital gains tax o be
securities, would be ordinary assets to a dealer deposited in an escrow account with an
in securities or a person engaged in the authorized agent bank and shall only be
purchase and sale of, or an active trader (for released to the transferor if the proceeds of the
his own account) in, securities. (China Banking sale/disposition have, in fact, been utilized in
Corp. vs. CA, G.R. No. 125508, July 19, the acquisition or construction of a new
2000). principal residence. (RR No. 17-2003)
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
rules are relevant only to dealings in capital Q. Who are the corporate taxpayers?
assets.
They are classified into domestic
Q. State the rules on holding period, loss corporation (DC), resident foreign corporation
limitation and carry-over of net capital (RFC) and non-resident foreign corporation
loss (NRFC).
Under the loss limitation rule, the In general, domestic corporations and
capital loss shall be deductible only to the resident foreign corporations are taxed on
extent of the capital gains derived within the their taxable income, i.e. gross income less
taxable year. This rule applies to both deductions; or in lieu thereof, the Minimum
individuals and corporations. (Sec. 39C in Corporate Income Tax (MCIT).
relation to Sec.34D4, NIRC).
By way of exceptions, final tax shall be
If during the taxable year, there is imposed on certain kinds of passive income
excess of capital losses over capital gains, the such as interest on bank deposits, royalties,
excess (net capital loss) may be carried over to capital gains form sale or disposition of land or
and deducted from capital gains in the building located in the Philippines. (Sec. 27D1,
succeeding taxable year. The privilege of carry- 27D2,27D5; Sec. 28A7a,28A7c)
over of net capital loss is available only to
individuals. (Sec. 39D, NIRC) For non-resident corporations, their
income from all sources within the Philippines
Q. Are the rules on holding period, loss are taxed via the final withholding tax. The
limitation and carry-over of net capital rate applied is 30%, except interest on foreign
loss applicable in a sale or disposition loan (20%), dividend from domestic
of real property located in the corporations (15%, subject to condition) and
Philippines capital gain from sale of shares of stock in a
domestic corporation (5% and 10%).
No. By express provision under the
law, the holding period is inapplicable to a EXCLUDE Non-resident cinematographic film
sale of real property where the 6% capital owner, lessor or distributor (Sec. 28B2, Non-
gains tax applies. In this case, the gain is resident owner or lessor of vessels chartered by
presumed by law. The loss that may have been Philippine nationals (Sec. 28B3), and Non-
actually incurred, if there be any, is not resident owner or lessor of aircraft machineries
recognized. Consequently, the rules on loss and other equipment (Sec. 28B4)
limitation and carry-over of net capital loss
also find no application. (see the exception Q. Under the NIRC, who are the exempt
clause in Sec. 24D1, NIRC) corporations?
NOTE: The holding period is also not Under, Sec. 27 (C) of the NIRC, the
applicable to a sale of shares of stock in a following are absolutely exempted from
domestic corporation not traded through the income tax:
local stock exchange. This is also by express
exclusion under the law. (Sec. 24C and allied (a) SSS
provisions, NIRC) (b) GSIS
(c) PHIC
(d) PCSO
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
(e) Local water districts (R.A. No. 10026) Q. Instances when the MCIT will not
apply
Under Sec. 30 of the NIRC, certain
kinds of non-stock and non-profit (a) during the infant stages of the
organizations are exempt from income tax in corporation; the tax shall apply only
respect to income derived by them as such beginning the fourth taxable year
organizations. However, their income from immediately following the taxable
property, real or personal, or from any of year in which such corporation
their activities conducted for profit regardless commenced its business operations;
of the disposition made of such income, are
still taxable. (b) when by authority of the Secretary of
Finance, the imposition of the MCIT
But a non-stock and non-profit is suspended upon submission of
educational institution may be exempt from proof by the applicant corporation
tax provided that its income, regardless of that the corporation sustained
source, is used actually, directly, and substantial losses
exclusively for educational purposes. (see par.
3, Sec. 4, Art.XIV, 1987 Constitution) (1) on account of a prolonged labor
dispute; or
A proprietary educational institution (2) because of ―force majeure‖; or
or hospital is not exempted but it enjoys a (3) because of legitimate business
preferential rate of tax at 10% based on reverses;
taxable income PROVIDED not more than fifty
(50%) of its income from unrelated trade, (c) when the corporation is not subject
business or other activity exceeds its gross to normal income tax (tax based on
income. (Sec. 27B, NIRC) taxable income at the normal rate of
30%), such as
Q. What is the rationale behind the
MCIT? (1) a proprietary educational institution
or hospital enjoying 10% tax on thir
The MCIT came about as a result o the taxable income;
perceived inadequacy of the self-assessment (2) an FCDU;
system in capturing the true income of (3) an OBU;
corporations. It was devised as a relatively (4) regional operating headquarter of a
simple and effective revenue-raising instrument multinational company (ROH);
compared to the normal income tax which is (5) a firm that is taxed under a special
more difficult to control and enforce. It is a tax regime like an enterprise registered
means to ensure that everyone will make some with the PEZA Law (RA No. 7916) or
minimum contribution to the support of the Bases Conversion Development Act
public sector. (CREBA vs. Romulo, 9 March (RA No. 7227).
2010)
Q. Explain the concept and rationale of
Q. What are the perceived advantages of the Improperly Accumulated Earnings
pegging the tax base of the MCIT to a Tax (IAET)
corporation‘s gross income?
The IAET equal to 10% of the
As a tax on gross income, the MCIT improperly accumulated taxable income is
prevents tax evasion and minimizes tax imposed on corporations formed or availed of
avoidance schemes achieved through for the purpose of avoiding the income tax
sophisticated and artful manipulations of with respect to its shareholders or the
deductions and other stratagems. It is also shareholders of any other corporation, by
simple and effective in addressing liquidity permitting the earnings and profits of the
problems of the government. (see CREBA vs. corporation to accumulate instead of dividing
Romulo, supra) them among or distributing them to the
shareholders. The rationale is that if the
earnings and profits were distributed, the
shareholders would then be liable to income
tax thereon, whereas if the distribution were
Page 21 of 45
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
not made to them, they would incur no tax in profession. However, only individuals may
respect to the undistributed earnings and claim personal and additional exemptions.
profits of the corporation. (see Sec. 29, NIRC
and Sec. 2, RR No. 2-2001) Q. May pure compensation income
earners claim deductions?
Q. Who are exempt from IAET?
Yes, but only premium payments on
The IAET shall not apply to the following health and/or hospitalization insurance not to
corporations: exceed Php2,400.00 per annum (or
Php200.00 per month) may be claimed as
a. Banks and other non-bank financial deduction. All other items of deduction and
intermediaries; the optional standard deduction are not
b. Insurance companies; available to pure compensation income
c. Publicly-held corporations; earners. In addition, however, they may claim
d. Taxable partnerships; personal and additional exemptions under Sec.
e. General professional partnerships; 35 of the NIRC.
f. Non- taxable joint ventures; and
g. Enterprises duly registered with the Q. What are the different items of
Philippine Economic Zone Authority (PEZA) deduction?
under R.A. 7916, and enterprises registered
pursuant to the Bases Conversion and They are:
Development Act of 1992 under R.A. 7227, as (a) Business expense;
well as other enterprises duly registered under (b) Interest expense
special economic zones declared by law which (c) Tax;
enjoy payment of special tax rate on their (d) Loss
registered operations or activities in lieu of (e) Bad debt;
other taxes, national or local. (Sec. 29, NIRC (f) Depreciation;
and Sec. 4, RR No. 2-2001) (g) Depletion of oil and gas wells and
mines;
Q. For covered corporations, how can (h) Charitable contribution;
liability for IAET be avoided? (i) Research and development; and
(j) Pension trust
It may be avoided if the corporation
has accumulated income for the reasonable Q. Some income payments, which
needs of the business. By ―reasonable needs of correspond to expenses of payors, are
the business‖, it means the immediate needs of subject to creditable withholding tax
the business, including reasonably anticipated under RR 2-98, as amended. On the
needs. (Sec. 3, RR No. 2-2001) part of the payor, what is the effect of
the non-withholding or under-
DEDUCTIONS withholding of the income payment?
Page 22 of 45
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
Yes, provided that the 5% expanded (d) A person who uses the completed
withholding tax is paid by the corporation method, whereby the construction
during the audit. project has been completed during the
year the contract was signed.
Q. State the rule on optional treatment of
interest expense. Q. What is the optional standard
deduction (OSD) and what are its
At the option of the taxpayer, interest advantages?
incurred to acquire property used in trade,
business or exercise of a profession may be The optional standard deduction is a
allowed as a deduction or treated as a capital privilege available to a citizen, resident alien or
expenditure. (Sec. 34B[B][3], NIRC) corporation subject to the normal income tax
to deduct, in lieu of itemized deduction, forty
Q. Amounts of income accrue where the percent (40%) of taxpayer‘s gross sales or
right to receive them become fixed, receipts (in the case of individual) or gross
where there is created an enforceable income (in the case of corporation) in the
liability. Similarly, liabilities are accrued computation of taxable income.
when fixed and determinable in
amount, without regard to The OSD has its advantages. As an
indeterminacy merely of time of alternative to itemized deduction, it provides
payment. For a taxpayer using the taxpayers with low itemizable expenses a
accrual method, when do the facts higher amount of deduction and, thus, more
present themselves in such a manner tax savings. Also, its computation is relatively
that the taxpayer must recognize simple and, unlike itemized deduction, the
income or expense? OSD dispenses with the substantiation
requirement. This relieves taxpayers of the
The accrual of income and expense is difficulty of computation usually attendant to
permitted when the ALL-EVENTS TEST has itemized deduction as well as the added
been met. This test requires: (1) fixing of a right burden of record-keeping.
to income or liability to pay; and (2) the
availability of the reasonable accurate Q. Important concepts relating to the
determination of such income or liability. The OSD
all-events test requires the right to income or
liability be fixed, and the amount of such (a) The OSD is available only to citizens,
income or liability be determined with resident aliens, and corporations
reasonable accuracy. (CIR vs. Isabela Culutral subject to the regular income tax (DC
Corp., G.R. No. 172231, February 12, 2007) and RFC). Before the amendment in
RA 9504, corporations were not
Q. The ―all events test‖ refers to: entitled to OSD.
(a) A person who uses the cash method (b) The standard deduction is optional. If
where vall sales have been fully paid the taxpayer does not elect OSD, he is
by the buyers thereof; considered as having availed of the
itemized deduction.
(b) A person who uses the instalment sales
method, where the full amount of (c) The election for OSD shall be
consideration is paid in full by the irrevocable for the year in which it is
buyer thereof within the year of sale; made.
(c) A person who uses the accrual method, (d) Proof is not required.
whereby an expense is deductible for
the taxable year in which all the events (e) The rate has been increased from 10%
had occurred which determined the to 40% under the amendment in RA
fact of the liability and the amount 9504.
thereof could be determined with
reasonable accuracy;
Page 23 of 45
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
Page 24 of 45
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
legatees are not deductible. (CIR vs. CA et al., predetermined by our lawmakers as provided
G.R. No. 123206, March 22, 2000) under Section 35 (A) and (B). Unless and until
our lawmakers make new adjustments on
DE MINIMIS BENEFITS these personal exemptions, the amounts
allowed to be deducted by a taxpayer are
Revenue Regulations No. 5-2011 fixed as predetermined by Congress (Pansacola
further amended Revenue Regulation Nos. 5- v. Commissioner of Internal Revenue, 507
2008, 5-2010, 10-2000 and 3-98, with respect SCRA 81).
to ―De Minimis Benefits‖.
ALLOWANCE OF PERSONAL EXEMPTION
Rice subsidy of P1,500 or one sack of FOR INDIVIDUAL TAXPAYERS
50 kg. rice per month amounting to not more
than P1,500 and uniform and clothing There shall be allowed a basic personal
allowance not exceeding P5,000 per annum exemption amounting to Fifty Thousand Pesos
(RR 8-2012) are considered as ―de minimis‖ (P50,000) for each individual taxpayer. In the
benefits, which are not subject to the fringe case of married individual where only one of
benefits tax (per Section 2.33(c) of Revenue the spouses is deriving gross income, only such
Regulations No. 3-98) and Income Tax as well spouse shall be allowed the personal
as withholding tax on corporation income of exemption (Sec. 4(A), R.A. No. 9504).
both managerial and rank and file employees
(per Section 2.78.1 (A)(3)(c) and (d) of ADDITIONAL EXEMPTION FOR
Revenue Regulations No. 298). DEPENDENTS
Page 25 of 45
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
form of goodwill for the taxpayer's trade or DEFICIENCY TAX ASSESSMENT, THE
business or for the industry or profession of ABSENCE OF WHICH RENDERS
which the taxpayer is a member. If the NUGATORY ANY ASSESSMENT MADE BY
expenditures are for the advertising of the first THE TAX AUTHORITIES
kind, then, except as to the question of the
reasonableness of amount, there is no doubt The use of the word ―shall‖ in
such expenditures are deductible as business subsection 3.1.2 of Revenue
expenses. If, however, the expenditures are for Regulations 12-99 describes the
advertising of the second kind, then normally mandatory nature of the service of a
they should be spread out over a reasonable PAN. The persuasiveness of the right to
period of time. due process reaches both substantial
and procedural rights and the failure of
The protection of branch franchise is the CIR to strictly comply with the
analogous to the maintenance of goodwill or requirements laid down by law and its
title to one's property. This is a capital own rules is a denial of Metro Star's
expenditure which should be spread out over right to due process. Thus, for its
a reasonable period of time. failure to send the PAN stating the
facts and the law on which the
Respondent corporation's venture to assessment was made as required by
protect its brand franchise was tantamount to Section 228 of R.A. No. 8424, the
efforts to establish a reputation. This was akin assessment made by the CIR is void.
to the acquisition of capital assets and [Commissioner of Internal Revenue v.
therefore expenses related thereto were not to Metro Star Superama, Inc., 637 SCRA
be considered as business expenses but as 633, (2010)]
capital expenditures. [Commissioner of
International Revenue v. General Foods ASSESSMENT IS A WRITTEN NOTICE AND
(Phils.), Inc., 401 SCRA 545, (2003)] DEMAND
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
A MOTION FOR RECONSIDERATION OF THE due, to be adjusted at the end of the calendar
DENIAL or fiscal year (CIR v. TMX Sales, Inc., supra).
OF THE ADMINISTRATIVE PROTEST DOES NOT
TOLL In the case of a corporate dissolution,
THE 30-DAY PERIOD TO APPEAL TO THE the two year prescriptive period should be
COURT OF TAX APPEALS counted 30 days after the approval by the SEC
of its plan for dissolution (BPI v. CIR, supra)
In the case at bar, petitioner's
administrative protest was denied by Final Decision Q. Does taxpayer's deficiency income tax
on Disputed Assessment dated August 2, 2005 constitute a bar to his claim for refund
issued by respondent and which petitioner received of income tax?
on August 4, 2005. Under the above-quoted
Section 228 of the 1997 Tax Code, petitioner had No. In the case of CIR v. Citytrust
30 days to appeal respondent's denial of its protest Banking Corporation, 499 SCRA 477, 482, the
to the CTA. Since petitioner received the denial of Supreme Court accorded judicial imprimatur to
its administrative protest on August 4, 2005, it had the following ratiocination of the CTA:
until September 3, 2005 to file a petition for
review before the CTA Division. It filed one, ―[W]e refuse to take
however, on October 20, 2005, hence, it was filed cognizance of petitioner's
out of time. For a motion for reconsideration of deficiency tax assessment
the denial of the administrative protest does not because to do so would create
toll the 30-day period to appeal to the utter confusion among
CTA.[Fishwealth Canning Corporation v. taxpayers. It is of common
Commissioner of Internal Revenue, 610 SCRA 524 knowledge that the laws or rules
(2010)] governing claims for refund are
separate and distinct from those
Q. When may tax refund be claimed? applicable to assessment appeals.
For example, the period of time
The taxpayer may file a claim for to appeal a refund case is within
refund or credit with the BIR within 2 years (2) years from the date of
after payment of the tax, before any suit in the payment, while the filing of an
CTA is commenced. The 2-year prescriptive assessment appeal requires the
period should be computed from the time of observance of thirty (30) days
filing of the Adjustment Return (or Annual from the date of receipt of
Income Tax Return) and final payment of the denial of protest. Using this
tax for the year (PBCom v. CIR, 301 SCRA example for illustration, let us
241; BPI v. CIR, 363 SCRA 840; CIR v. TMX take a taxpayer who has an
Sales, 205 SCRA 184). erroneously paid capital gains
tax in August 1992. Sometime in
The ―date of payment‖ in ACCRAIN‘s August 1994, an assessment was
case was when its tax liability, if any, fell due issued against him for deficiency
upon its filing of its final adjustment return income tax for the same taxable
(ACCRA Investments Corporation v. CA, 204 year. Supposing, he immediately
SCRA 957). protested the said assessment but
the BIR did not immediately act
The prescriptive period of two years on his protest, will he still wait
should commence to run only from the time for the [BIR's] decision before he
that the refund is ascertained, which can only can go to [the CTA] to file his
be determined after a final adjustment return is claim for refund? What about if
accomplished (CIR v. PHILAMLIFE Insurance the two-year period to appeal
Co., 244 SCRA 446). his refund is [nearing expiration],
will he still wait indefinitely for
Therefore, the filing of quarterly the decision on his protest, so he
income tax returns and payment of quarterly can file both suits simultaneously
income tax should only be considered mere with this Court? Of course, the
installments of the annual tax due. These answer will be No.
quarterly tax payments should be treated as
advances or portions of the annual income tax Now, let us reverse the
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
(1) file a written claim for Both Article 13 of the Civil Code and
refund with the CIR Section 31, Chapter VIII, Book I of the
within 2 years from the Administrative Code of 1987 deal with the
date of his payment of the same subject matter—the computation of legal
tax, and periods. Under the Civil Code, a year is
equivalent to 365 days whether it be a regular
(2) appeal to the CTA within year or a leap year. Under the Administrative
30 days from receipt of Code of 1987, however, a year is composed of
the CIR‘s decision or 12 calendar months. Needless to state, under
ruling denying his claim the Administrative Code of 1987, the number
for refund (Sec. 11, RA of days is irrelevant. There obviously exists a
1125). The 30-day period manifest incompatibility in the manner of
to appeal should be computing legal periods under the Civil Code
within the 2-year period. and the Administrative Code of 1987. For this
reason, we hold that Section 31, Chapter VIII,
If, however, the CIR takes time in Book I of the Administrative Code of 1987,
deciding the claim, and the period of being the more recent law, governs the
two years is about to end, the suit or computation of legal periods. Lex posteriori
proceeding must be started in the CTA derogat priori (CIR v. Primetown Property
BEFORE the end of the two-year Group, Inc., 531 SCRA 436 [2007]).
period without awaiting the decision
of the CIR‖ (Gibbs v. CTA, 107 Phil THE PROPER PARTY TO SEEK A REFUND OF
232). INDIRECT
TAX IS THE STATUTORY TAXPAYER
Page 28 of 45
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Taxation Law
From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
domestic sale or consumption or for any other requirement is only for the purpose of easing
disposition and to things imported into the tax administration particularly the self-
Philippines, is basically an indirect tax. While the assessment and collection aspects.
tax is directly levied upon the
manufacturer/importer upon removal of the Commencement of 30-day within which to
taxable goods from its place of production or from appeal to the CTA
the customs custody, the tax, in reality, is actually
passed on to the end consumer as part of the A. Where the Commissioner has
transfer value or selling price of the goods, sold, not acted on the taxpayer‘s
bartered or exchanged. In early cases, we have protest within a period of 180
ruled that for indirect taxes (such as valued-added days from submission of all
tax or VAT), the proper party to question or seek a relevant documents, then the
refund of the tax is the statutory taxpayer, the taxpayer has a period of 30
person on whom the tax is imposed by law and days from the lapse of said 180
who paid the same even when he shifts the burden days within which to file a
thereof to another. Thus, in Contex Corporation v. petition for review with the
Commissioner of Internal Revenue, we held that CTA.
while it is true that petitioner corporation should
not have been liable for the VAT inadvertently B. Should the Commissioner deny
passed on to it by its supplier since their transaction the taxpayer‘s protest, then he
is a zero-rated sale on the part of the supplier, the has a period of 30 days from
petitioner is not the proper party to claim such receipt of said denial within
VAT refund. Rather, it is the petitioner‘s suppliers which to file a petition for
who are the proper parties to claim the tax credit review with the CTA.
and accordingly refund the petitioner of the VAT The subject of a JUDICIAL REVIEW is
erroneously passed on to the latter.[Silkair the decision of the CIR on the protest
(Singapore) Pte. Ltd. v. Commissioner of against assessment, not the assessment
Internal Revenue, 664 SCRA 33 (2012)] itself (CIR v. Villa, 22 SCRA 3).
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
Findings and conclusions of the CTA are in clear and unequivocal language
accorded highest respect what constitutes his final
determination of the disputed
The findings and conclusions of the assessment, thus: . . . we deem it
Court of Tax Appeals (CTA) are accorded the appropriate to state that the
highest respect and will not be lightly set aside. Commissioner of Internal Revenue
The CTA, by the very nature of its functions, is should always indicate to the taxpayer
dedicated exclusively to the resolution of tax in clear an unequivocal language
problems and has accordingly developed an whenever his action on an assessment
expertise on the subject unless there has been questioned by a taxpayer constitutes
an abusive or improvident exercise of his final determination on the disputed
authority. Consequently, its conclusions will assessment, as contemplated by
not be overturned unless there has been an Sections 7 and 11 of Republic Act No.
abuse or improvident exercise of authority. Its 1125, as amended. On the basis of his
findings can only be disturbed on appeal if statement indubitably showing that the
they are not supported by substantial evidence Commissioner‘s communicated action
or there is a showing of gross error or abuse is his final decision on the contested
on the part of the Tax Court. In the absence of assessment, the aggrieved taxpayer
any clear and convincing proof to the would then be able to take recourse to
contrary, the Court must presume that the the tax court at the opportune time.
CTA rendered a decision which is valid in Without needless difficulty, the
every respect. [Commissioner of Internal taxpayer would be able to determine
Revenue v. Team (Philippines) Operations when his right to appeal to the tax
Corporation (formerly Mirant Phils., court accrues.
Operation Corporation)]
3. The general rule is that the
Q. What may constitute Administrative Commissioner of Internal Revenue
Decision on a Disputed Assessment? may delegate any power vested upon
him by law to Division Chiefs or to
The decision of the Commissioner or officials of higher rank. He cannot,
his duly authorized representative shall: (a) however, delegate the four powers
state the facts, the applicable law, rules and granted to him under the National
regulations, or jurisprudence on which such Internal Revenue Code (NIRC)
decision is based, otherwise, the decision shall enumerated in Section 7.
be void, in which case, the same shall not be
considered a decision on a disputed 4. The authority to make tax assessments
assessment; and (b) that the same is his final may be delegated to subordinate
decision(Sec. 3, 3.1.6, Revenue Regulations 12- officers. Said assessment has the same
99). force and effect as that issued by the
Commissioner himself, if not reviewed
Oceanic Wireless Network, Inc. v. or revised by the latter such as in this
Commissioner of Internal Revenue case.
477 SCRA 205
In Commissioner of Internal Revenue
RULINGS v. Isabela Cultural Corporation, 361 SCRA 71,
the Supreme Court held that a final demand
1. A demand letter for payment of letter from the Bureau of Internal Revenue,
delinquent taxes may be considered a reiterating to the taxpayer the immediate
decision on a disputed or protested payment of a tax deficiency assessment
assessment. The determination on previously made, is tantamount to a denial of
whether or not a demand letter is final the taxpayer‘s request for reconsideration.
is conditioned upon the language used Such letter amounts to a final decision on a
or the tenor of the letter being sent to disputed assessment and is thus appealable to
the taxpayer. the Court of Tax Appeals.
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THE CTA HAS JURISDICTION OVER DISPUTE A FORMAL LETTER OF DEMAND WITH
BETWEEN PNB ASSESSMENT NOTICES
AND BIR RELATIVE TO DEFICIENCY STATING THAT IT IS BIR'S FINAL DECISION
WITHHOLDING TAX ASSESSMENT BASED ON
INVESTIGATION IS APPEALABE TO THE CTA
PNB sought the suspension of the
proceedings in CTA Case No. 4249, after it Allied Banking Corporation received
contested the deficiency withholding tax the Formal Letter of Demand with Assessment
assessment against it and the demand for Notices, which partly reads:
payment thereof before the DOJ, pursuant to
P.D. No. 242. The CTA, however, correctly ―It is requested that the above
sustained its jurisdiction and continued the deficiency tax be paid
proceedings in CTA Case No. 4249; and, in immediately upon receipt
effect, rejected DOJ‘s claim of jurisdiction to hereof, inclusive of penalties
administratively settle or adjudicate BIR‘s incident to delinquency. This is
assessment against PNB. our final decision based on
investigation. If you disagree,
Sustained herein is the contention of you may appeal the final
private respondent Savellano that P.D. No. decision within thirty (30) days
242 is a general law that deals with from receipt hereof, otherwise
administrative settlement or adjudication of said deficiency tax assessment
disputes, claims and controversies between or shall become final, executory
among government offices, agencies and and demandable.‖
instrumentalities, including government-owned
or controlled corporations. Its coverage is A careful reading of the Formal Letter
broad and sweeping, encompassing all of Demand with Assessment Notices leads us
disputes, claims and controversies. It has been to agree with Allied Banking Corporation that
incorporated as Chapter 14, Book IV of E.O. the instant case is an exception to the rule on
No. 292, otherwise known as the Revised exhaustion of administrative remedies, i.e.,
Administrative Code of the Philippines. On the estoppel on the part of the administrative
other hand, R.A. No. 1125 is a special law agency concerned. [Allied Banking
dealing with a specific subject matter the Corporation v. Commissioner of Internal
creation of the CTA, which shall exercise Revenue, 611 SCRA 692 (2010)]
exclusive appellate jurisdiction over the tax
disputes and controversies enumerated therein. TAXPAYER HAS TWO OPTIONS IN CASE
THE BIR COMMISSIONER FAILED
Following the rule on statutory TO ACT ON THE DISPUTED ASSESSMENT
construction involving a general and a special WITHIN THE 180-DAY
law previously discussed, then P.D. No. 242 PERIOD FROM THE DATE OF SUBMISSION
should not affect R.A. No. 1125, specifically OF DOCUMENTS
Section 7 thereof on the jurisdiction of the
CTA, constitutes an exception to P.D. No. 242. In RCBC v. CIR, the Court has held that in
Disputes, claims and controversies falling under case the Commissioner failed to act on the disputed
Section 7 of R.A. No. 1125, even though solely assessment within the 180-day period from date of
among government offices, agencies, and submission of documents, a taxpayer can either: (1)
instrumentalities, including government-owned file a petition for review with the Court of Tax
and controlled corporations, remain in the Appeals within 30 days after the expiration of the
exclusive appellate jurisdiction of the CTA. 180-day period; or (2) await the final decision of
Such a construction resolves the alleged the Commissioner on the disputed assessments and
inconsistency or conflict between the two appeal such final decision to the Court of Tax
statutes, and the fact that P.D. No. 242 is the Appeals within 30 days after receipt of a copy of
more recent law is no longer significant such decision.[Lascona Land Co., Inc. v.
(Philippine National Oil Company v. Court of Commissioner of Internal Revenue, 667 SCRA
Appeals, 457 SCRA 32, 76-81). 455 (2012)]
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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega
V. ESTATE AND DONOR‘S TAX the like are not deductible. Any portion of the
funeral and burial expenses borne or defrayed
The gifts referred to in Section 1540 of by relatives and friends of the deceased are not
the Revised Administrative Code are those deductible.
donations inter vivos that take effect
immediately or during the lifetime of the Q. What are the requisites for
donor but are made in consideration or in deductibility of claims against the
contemplation of death. Gifts inter vivos, the estate?
transmission of which is not made in
contemplation of the donor‘s death, should Requisites for Deductibility of Claims
not be included within the said legal provision Against the Estate:
for it would amount to imposing a direct tax (a) The liability represents a
on property and not on the transmission personal obligation of the
thereof. The law considers such transmissions deceased existing at the time of
in the form of gifts inter vivos, as advances on his death except unpaid
inheritance and nothing therein violates any obligations incurred incident to
constitutional provision, inasmuch as said his death such as unpaid
legislation is within the power of the funeral expenses (i.e., expenses
Legislature (Vidal de Roces v. Posadas, 58 Phil. incurred up to the time of
111, 113). interment) and unpaid medical
expenses which are classified
Q. What are deductible funeral expenses? under a different category of
deductions pursuant to these
The term ―FUNERAL EXPENSES‖ is not Regulations;
confined to its ordinary or usual meaning. (b) The liability was contracted in
They include: good faith and for adequate
and full consideration in
(a) The mourning apparel of the money or money‘s worth;
surviving spouse and (c) The claim must be a debt or
unmarried minor children of claim which is valid in law and
the deceased bought and used enforceable in court;
on the occasion of the burial; (d) The indebtedness must not
(b) Expenses for the deceased‘s have been condoned by the
wake, including food and creditor or the action to collect
drinks; from the decedent must not
(c) Publication charges for death have prescribed.
notices;
(d) Telecommunication expenses Q. What are the conditions for the
incurred in informing relatives allowance of family home as
of the deceased; deduction from the gross estate?
(e) Cost of burial plot,
tombstones, monument or Conditions for the allowance of
mausoleum but not their FAMILY HOME as deduction from the gross
upkeep. In case the deceased estate:
owns a family estate or several
burial lots, only the value 1. The family home must be the
corresponding to the plot actual residential home of the
where he is buried is decedent and his family at the
deductible; time of his death, as certified by
(f) Interment and/or cremation the Barangay Captain of the
fees and charges; and locality where the family home is
(g) All other expenses incurred for situated;
the performance of the rites 2. The total value of the family
and ceremonies incident to home must be included as part of
interment. the gross estate of the decedent;
and
Expenses incurred after the interment, 3. Allowable deduction must be in
such as for prayers, masses, entertainment, or an amount equivalent to the
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defined as the money that a taxpayer overpaid resolved in favor of municipal corporations
and is thus returned by the taxing authority. (PLDT v. Province of Laguna, 467 SCRA 93).
Tax credit, on the other hand, is an amount
subtracted directly from one's total tax liability. Section 193 of the Local Government
It is any amount given to a taxpayer as a Code buttresses the withdrawal of extant tax
subsidy, a refund, or an incentive to encourage exemption privileges. The general rule is that
investment.[Fort Bonifacio Development tax exemptions or incentives granted to or
Corporation v. Commissioner of Internal presently enjoyed by natural or juridical
Revenue, 689 SCRA 76 (22 January 2013)] persons are withdrawn upon the effectivity of
the LGC except with respect to those entities
REVENUE REGULATIONS 16-2011 expressly enumerated. In the same vein, the
INCREASE THE THRESHOLD AMOUNTS express withdrawal upon effectivity of the LGC
of all exemptions except only as provided
Sale of residential lot from P1,500,000 therein, can no longer be invoked by
to P1,919,500 (Selling Price) MERALCO to disclaim liability for the local tax
(Mactan Cebu International Airport Authority
Sale of house and lot from P2,500,000 v. Marcos, 261 SCRA 667; City Government of
to P3,199,200 (Selling Price) San Pablo, Laguna v. Reyes, 305 SCRA 362).
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the fair market value; and that the subject the Local Tax Code does not contain any
assessment should take effect a year after or on specific provision prohibiting courts from
January 1, 2008. To our mind, the resolution enjoining the collection of local taxes. Such
of these issues would have a direct bearing on statutory lapse or intent, however it may be
the assessment made by petitioner. Hence, it is viewed, may have allowed preliminary
necessary that the issues must first be passed injunction where local taxes are involved but
upon before the properties of respondent are cannot negate the procedural rules and
sold in public auction.(Talento v. Escalada, Jr., requirements under Rule 58. [Angeles City v.
556 SCRA 491, 500-501 [2008]). Angeles Electric Corporation, 622 SCRA 43
(2010)]
A TAX ORDINANCE MAY BE ASSAILED
BEFORE THE LOCAL BUSINESS TAX SHALL BE BASED ON
SECRETARY OF JUSTICE WITHIN THIRTY GROSS RECEIPTS
(30) DAYS
FROM EFFECTIVITY THEREOF The imposition of local business tax
based on gross revenue will inevitably result in
Clearly, the law requires that the the constitutionally proscribed double
dissatisfied taxpayer who questions the validity taxation—taxing of the same person twice by
or legality of a tax ordinance must file his the same jurisdiction for the same thing—
appeal to the Secretary of Justice, within 30 inasmuch as petitioner‘s gross revenue or
days from effectivity thereof. In case the income for a taxable year will definitely
Secretary decides the appeal, a period also of include its gross receipts already reported
30 days is allowed for an aggrieved party to during the previous year and for which local
go to court. But if the Secretary does not act business tax has already been paid.
thereon, after the lapse of 60 days, a party Gross revenue covers money or its
could already proceed to seek relief in court. equivalent actually or constructively received,
These three separate periods are clearly given including the value of services rendered or
for compliance as a prerequisite before seeking articles sold, exchanged or leased, the payment
redress in a competent court. Such statutory of which is yet to be received. This is in
periods are set to prevent delays as well as consonance with the International Financial
enhance the orderly and speedy discharge of Reporting Standards, which defines revenue as
judicial functions. For this reason, the courts the gross inflow of economic benefits (cash,
construe these provisions of statutes as receivables, and other assets) arising from the
mandatory. [Cagayan Electric Power and Light ordinary operating activities of an enterprise
Co., Inc. v. City of Cagayan De Oro, 685 (such as sales of goods, sales of services,
SCRA 609, (14 November 2012)] interest, royalties, and dividends), which is
measured at the fair value of the consideration
THERE IS NO EXPRESS PROVISION IN THE or receivable (Ericsson Telecommunications,
LGC PROHIBITING Inc. v. City of Pasig, 538 SCRA 99 [2007]).
COURTS FROM ISSUING AN INJUNCTION
TO RESTRAIN LOCAL Q. Can the National Power Corporation
GOVERNMENTS FROM COLLECTING TAXES (NPC), a government-owned and
controlled corporation, claim tax
A principle deeply embedded in our exemption under Section 234 of the
jurisprudence is that taxes being the lifeblood Local Government Code for the taxes
of the government should be collected due from Mirant Pagbilao Corporation
promptly, without unnecessary hindrance or (Mirant) whose tax liabilities the NPC
delay. In line with this principle, the National has contractually assumed?
Internal Revenue Code of 1997 (NIRC)
expressly provides that no court shall have the The stipulation between NPC and
authority to grant an injunction to restrain the Mirant does not bind third persons who are
collection of any national internal revenue tax, not privy to the contract between these
fee or charge imposed by the Code. An parties. There is no privity between the local
exception to this rule obtains only when in the government units and the NPC, even though
opinion of the Court of Tax Appeals (CTA) the both are public corporations. The tax due will
collection thereof may jeopardize the interest not come from one pocket and go to another
of the government and/or the taxpayer. pocket of the same governmental entity.
Unlike the National Internal Revenue Code,
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Only the parties to the agreement can under certain circumstances the grave
exact and demand the enforcement of the abuse of discretion conferred may oust it
rights and obligations it established—only of such jurisdiction. It does not mean
Mirant can demand compliance from the NPC however that correspondingly a CFI (now
for the payment of the real property tax the RTC) is vested with competence when
NPC assumed to pay. The local government clearly in the light of the above decisions
units cannot demand payment from the NPC. the law has not seen fit to do so. The
proceeding before the Collector of
The government-owned or controlled Customs is not final. An appeal lies to the
corporation claiming exemption must be the Commissioner of Customs and thereafter
entity actually, directly, and exclusively using to the Court of Tax Appeals. It may even
the real properties, and the use must be reach (the Supreme Court) through the
devoted to the generation and transmission of appropriate petition for review. The
electric power. Although the plant's proper ventilation of the legal issues raised
machineries are devoted to the generation of is thus indicated. Certainly a CFI (now
electric power, by the NPC's own admission RTC) is not therein included. It is devoid
and as previously pointed out, Mirant—a of jurisdiction‖ (Rallos v. Gako, 344 SCRA
private corporation—uses and operates them. 175).
That Mirant operates the machineries solely in
compliance with the will of the NPC only Classification of Customs Duties
underscores the fact that NPC does not
actually, directly, and exclusively use them. 1. Regular Duties — those imposed and
collected merely as a source of
The test of exemption is the use, not revenue.
the ownership of the machineries devoted to
the generation and transmission of electric a. Ad valorem Duty — Based
power. [National Power Corporation v. on the value of imported
Province of Quezon and Municipality of article.
Pagbilao, 593 SCRA 47 (2009)] b. Specific Duty — Based on
dutiable weight of goods.
VII. TARIFF AND CUSTOMS CODE c. Alternating Duties —
Which alternates ad
Seizure and forfeiture proceedings are valorem and specific.
within the exclusive jurisdiction of the d. Compound Duty —
Collector of Customs to the exclusion of Consisting of ad valorem
regular courts. Regional Trial Courts are and specific.
devoid of competence to pass upon the
validity or regularity of seizure and 2. Special Duties — those imposed in
forfeiture proceedings conducted by the additional to the ordinary customs
Bureau of Customs and to enjoin or duties usually to protect local industries
otherwise interfere with these proceedings against foreign competition.
(Jao v. CA, 249 SCRA 36).
a. Anti-Dumping Duty —
The customs authorities do not have to Imposed upon foreign
prove to the satisfaction of the court that products with value lower
the articles on board a vessel were than their fair market value
imported from abroad or are intended to to the detriment of local
be shipped abroad before they may products; it is the difference
exercise the power to effect customs‘ between the export price
searches, seizures or arrests provided by and the normal value of
law and continue with the administrative such product, commodity
hearings. As held in Ponce v. Vinuya: ―The or article.
governmental agency concerned, the
Bureau of Customs, is vested with exclusive Imposing authority —
authority. Even if it be assumed that in the The Secretary of Trade
exercise of such exclusive competence a and Industry (non-
taint of illegality may be correctly agricultural products)
imputed, the most that can be said is that OR Secretary of
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