2017 Tax Transcript PDF

2017 TAXATION LAW TRANSCRIPT
TABLE OF CONTENTS
General Principles (Atty. Cabaneiro) 2
Intro to Income Taxation (Justice Dimaampao) 6
Income Taxation (Justice Dimaampao) 10
Tax on Corporations (Justice Dimaampao) 29
Deductions and Exemptions (Justice Dimaampao) 36
Value-Added Tax (Atty. Cabaneiro) 42
Tax Administration and Enforcement (Atty. Cabaneiro) 77
NIRC Remedies (Atty. Cabaneiro) 85
Real Property Tax (Atty. Dy) 103
Local Taxation (Atty. Dy) 109
Tariff and Customs Law (Atty. Dy) 122
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In this world, nothing is said to be certain except for death and taxes.
GENERAL PRINCIPLES (by Atty. Nicasio Cabaneiro)
STAGES OF TAXATION (Aspects of Taxation)

1. Levying
2. Assessment
3. Collection
4. Payment
5. Refund
In other words, the ASPECTS OF TAXATION are levying, assessment and collection. Those are the
things that produce the lifeblood and if there is an error, then claim for refund.
TAX DISTINGUISHED FROM OTHER IMPOSITIONS
TAX V. LICENSE (FEE)

Now I think it is very important for me to also to distinguish taxes from other kinds of imposition, just like
how do you distinguish a tax from a license. That is very, very common in the bar examinations. I know
you know that very well but just to acclimatize more,
Taxes are of course pursuant to the power of taxation. Lifeblood, raising revenue.
License is implementation of police power of the State. So it’s more for regulatory purposes.
As to the amount:
The amount of taxes, unlimited
License, limited only to the cost of supervision and surveillance because it’s not for revenue-raising.
That’s why if the license is so big, that is already questionable because that goes beyond the purpose,
solely for regulation.
TAX DISTINGUISHED FROM DEBT

A tax is also a debt, except that you call it legal obligation – It is mandated by the law.
An ordinary debt is contractual, so in other words, compliance therewith may be optional because there is
a guarantee of non-imprisonment for non-payment of debt. On the other hand, in tax, if there is a
violation, you can go to prison, that’s why once upon a time there’s a question in the bar examination,
“Is the tax code a penal code?” because there are penalties for imprisonment.
It’s not so, it’s still civil in nature and the penalties there of imprisonment is just to be able to be sure that
taxpayer will be forced to comply.
That’s why in the case of Commissioner v. Algue, it’s very clear, despite the natural reluctance of a
person to part with his hard earned money, the government will be all-out to force taxpayers to pay,
unless the government will be paralyzed.
Now in this regard, I think in our country, there is really a problem in enforcement. So in other words, as
they say, even if we always say that we have so many tax laws but still sometimes, there are still so many
tax evaders, and sometimes the target for collection is not hit because the problem is really enforcement
that’s why our next topic on remedies will be very, very important.
No matter how good our laws are, but if there is defect in the enforcement, then it will not achieve
the objectives.
Reminds me of a Singaporean lawyer, tax lawyer, whom I met and he said that “Nagtataka ako d’yan,
how is it that in the Philippines, there are so many tax evaders? In Singapore you’d be happy if you find
one or two tax evaders. (Oh!? Yabang mo naman.) Why? Because in Singapore, if you cheat the
government in taxes by $200 SGD, the Government is willing to spend $1,000,000 SGD to place you in
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jail. Not in the Philippines, tax evaders don’t go to jail, they go to US. That’s the difference. That’s why the
Philippines is a strange country. That’s why Cebu Pac says ‘it’s fun in the Philippines.’
CLASSIFICATION OF TAXES
1. As to the Nature
a. Poll tax – you also call this as capitation tax. Formerly you call this as residence or cedula, now you
call it community tax, collected under the Local Government Code. The proof of payment is the
Community Tax Certificate.
Immunity: No person shall be imprisoned for non-payment of poll tax.

So the Government can be comforted in not collecting it because, anyway, it’s very small – a maximum of
P10,000 for corporations and P5,000 for individuals, depending upon the value of properties or value of
their income.
Sometimes, community tax certificate is not that needed anymore because even in having the documents
notarized, you can present any government-issued ID. Be that as it may, if you will not pay your
community tax certificate you will be inconvenient in some transactions, and you will find that in Section
163 of the Local Government Code.
Anyway, the Local Government Code dates back 1992, that’s why it’s Local Government Code of 1991.
Things should change now, Today for the notarization purposes, to identify the person who will sign the
document, you can present any government-issued ID. But still, for Bar Examination purposes, Section
163 of the Local Government Code is still there.
That’s why, you know, in Succession, there’s always the question, “Pwede na ho ba, Sir, na video will?”
Sabi ko “Di pa pwede” kasi what governs wills is still the 1950’s Civil Code, so it must be in writing,
comply with all the formalities in the Civil Code, although it is high-tech now, you can get pictures, pwede
ng online, pwede ng printed, ganyan. As long as no law supporting it, for Bar Examination purposes and
for legal purposes, it’s still the law because anything that has to do with legal implications, you go back to
the law.
b. Property tax – (actually, it’s the real property tax) is a tax for being an owner or possessor of a
property. That is also under the Local Government Code. It’s the Real Property Tax Code.
The situs rule is lex rei sitae, where the property is situated.
*Back to Poll Tax: Poll tax, situs is presence.

Who are exempted from community tax?
Sec. 159 of the Tax Code (transient visitors whose stay does not exceed 3 mos.)
For taxation purposes, it’s prudent to read the Tax Code. (Important to familiarize – Title I and Title VIII)
c. Excise tax – is the broadest of all (different in one from Title VI – excise tax as an internal revenue tax)
As a classification, it means any tax on the exercise of any right or privilege. It covers such things as
income tax, estate tax, donor’s tax, etc.
BAR: In case of computation of Estate Tax, the basis is Gross Estate which is the aggregate value of all
the estate of the person, which consists of personal and real property. Does that mean that estate tax is a
property tax? Answer is NO because estate tax is the tax on the right or privilege to transmit all of the
property of a deceased person to heirs.
Before 1970, in case of transfer taxes, it’s not only the giver but also the receiver is subject to tax, that’s
why that time, you have the Estate Tax and Inheritance Tax, and the Donor’s Tax and Donee’s Tax.
Now one important problem there before 1970 is the case of Casimiro Lladoc.
Casimiro Lladoc is a priest who was a recipient of many, many gifts or donation, so the BIR was
assessing him for donee’s tax. Fr. Casimiro Lladoc said I’m exempted because under the Constitution,
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properties actually, directly and exclusively for religious purposes are exempt from tax. That pertains to
property tax and donee’s tax is not a property tax—it is an excise tax on the right or privilege to receive a
donation. Also, Income tax is a tax on the right to receive income. It is not the tax on the income
itself.
d. Tariff – those are imposed under the Customs Code.
2. As to the Burden
a. Direct Tax
b. Indirect Tax
Remember those things about incidence of taxation and impact of taxation, shifting.
3. As to the Tax Rate

a. Specific – is the kind of tax that is the rates of tax are already provided for by the law.
In times before, cigarettes are taxed on the basis of packs per carton or petroleum on the basis of weight.
Matches on the basis of quantity.
All you need is calculator just to compute how much it is because the basis for tax is already provided.
b.) Ad Valorem – means per value; is a kind of tax where you need intervention of a third party before
you can pay the tax.
Best examples:
i. Real Property Tax – because you need the intervention of an assessor before you can compute the
tax.
What does the assessor do? The assessor is part of the regulatory body, the person who is validating the
valuation of the property.
For real property tax purposes, you know very well that it’s very important to know how much is the
assessed value. Under Section 202 of the Local Government Code, it is the obligation of any real
property owner to file the Zonal Statement of the Fair Market Value of his property to the assessor who
has the custody of the property, roads, where properties are listed and all persons are required to update
every 3 years the value of their properties, and the role of the assessor is to validate or question the
same.
FORMULA:
Fair Market Value x Assessed level = Assessed Value
[The assessed value is the tax base for the computation of the Real Property Tax.
Rate: 1% for province and 2% for cities and municipalities of Metro Manila.]
What if the assessor questions the validity, what is the recourse of the property owner?
Property owner must file a Motion for Reconsideration to convince the assessor that his valuation is
correct. He must be supported by his engineer or other appraiser.
If the assessor does not give in, the next recourse is to go and elevate his appeal to the Local Board of
Assessment Appeals. If denied, he should go to the Central Board of Assessment Appeals.
Under RA 9282, an appeal from the Central Board of Assessment Appeals is to the Court of Tax
Appeals en banc.
ii. Tariff - In case of dutiable goods under the Tariff Code, dutiable goods, when it enters the Philippines,
it goes to the Port of Entry, and in the Port of Entry, it is stocked in the Customs warehouse, and the
Customs Appraiser counts. So what does the Customs Appraiser do? Customs Appraiser determine the
value of the importation. So the importer is required to file an Import Entry. An Import Entry is a self-
assessing type of return where you declare the value of your property.
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For purposes of the tariff, the basis for the computation for the dutiable article is the Transaction value.
Transaction value is usually the invoice value plus all the costs, like insurance, freight, cost of
accessories, and all other expenses that are added to the goods from its place of importation to the
Philippines.
Tariff is ad valorem because it needs the intervention of a third party which is the appraiser to validate the
valuation.
Pag di mo binayaran ang tariff, di mo malalabas yung goods.
When does importation begin and when does importation end?

Importation begins from the moment the aircraft enters the jurisdiction of the country with the intention to
unload.
Importation ends from the moment the goods are released from the customs custody because they are
already paid and you are issued a “trade”(?) which is the authority to release the goods.
4. As to purpose:
a. General
b. Special purpose – grants franchise
Generally, special law should prevail over a general law. But in the Local Government Code, there
is a situation where the general law prevails over a special law.
- Revocation of exemption granted under the Local Government Code (Section 193)
SMART has franchise granted before the passage of LGC. – Revoked!
However, GLOBE also has franchise but it was granted after. Is it affected? NO. It is retained.
5. As to Scope:
a. National – NIRC, nationwide
b. Local
When you study remedies, you read Title I.

How will the Commissioner collect all the taxes in the Philippines?
That’s why we have Regional Directors. (since Philippines is divided into regions)
Each Region is divided into districts (headed by Revenue District Officer).
Read Title I (Sections 1-20)

Important in Title I – Sections 2, 4, 5, 6, 7
6. As to Graduation:
a. Progressive tax - the rate of tax increases as the tax base increases
b. Regressive tax – the rate of tax remains steady or decreases as the tax base increases
There’s nothing wrong with regressive taxation. If at all, it should only be avoided because under the
Constitution, the Government should only endeavor to achieve a progressive system of taxation.
NATURE AND APPLICATION OF TAX LAWS

- Prospective in application
- Rulings can be prospective if there is misstatement of facts or concealment of facts.
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INTRO TO INCOME TAXATION (by Justice Japar Dimaampao)
You read the coverage- don’t you know that there are 86 Sections of the NIRC which have been
consistently excluded in the coverage in the last 20 years. Now they are included. I’ll tell you my forecast
here, that will be the start of my review so you will have the confidence. There will be only one question in
percentage tax, there may be one question in excise tax, one on documentary stamp tax. Provisions on
documentary stamp tax, excise tax, percentage tax, they are now included in the coverage for taxation.
Another reason why taxation may emerge as a killer subject this bar exams- in the last bar examinations,
I screened the questions in taxation although I was the examiner in Civil Law. Justice Velasco asked me
to screen all those questions, still, it emerged as a killer subject. I recommended for the exclusion of
Customs Modernization and Tariff Act. Granted. Now it is included in the coverage. If ever I were your
examiner I would still exclude that. Your read that- RA 10863. There are 1,805 Sections. This law has yet
to be discussed in the College of Law- Taxation 2. It’s very unfair to include that. It’s very unfair to include
that. Just attend my pre-week lecture, I’ll tell you, because I’ve read that, and I could discern the possible
questions. There could be two questions there, or three. Very, very unfiar. 1805 sections- this new law on
customs duties, plus 86 sections of the NIRC. Conclustion: Taxation will surely emerge as a killer subject
in this bar exam. But the bulk of the questions, Income Tax followed by Tax I, there are significant
decisions on Income Tax as well as Tax Remedies. Tax Remedies I will discuss this during pre-week
because only income tax is covered by my lecture here. There may be 15 questions on income tax. I may
be wrong, because that was the trend in the last 3 years. I always monitor the questions on all these tax
laws, and income tax is always the favorite source of bar question. In 2015, there were 23 questions on
income tax. 23 Question in Income Tax. Last bar, there were 18. If you average that with 2014, 10, 23, 8-
13.67. In your bar exam, since income tax is the favorite tax law of your rumored examiner, there are
really 15. So I just hope and pray that we can cover, capture, and predict this 15 questions on income tax.
I was told, according to a reliable source, that questions in this bar exams in this 8 bar subjects, taxation
included, majority will be based on decided cases. Majority will be based on jurisprudence. There may be
only be very few questions on basic questions. It is possible there may be questions on definition, or
enumeration. I know Justice Bersamin is very brilliant. That is why it was rumored that I will be one of the
examiners this year. He likes challenging questions. In our review, I will tell you this type of questions. He
likes questions or problems based on a case which abandons old doctrines. That’s what he likes. In
Taxation there are so many her. So I’ll tell you those cases decided by the SC which abandon previous
rulings- that is really the type of question in the exams. You will be proud of this bar exams, once you
pass these bar exams. Your basic knowledge will not be enough to help you pass this bar. Yung last bar
puwede yon. But not this one. Why? I could hardly meet that 40% passing percentage. I was the
examiner in Civil Law 2013. The instruction of our Chairman: Make sure that the passing will not be more
than 20%. So 20-25%. Now here is a bar- Chairman: Make sure that our passing will not be below 40%.
You know what my co-examiners exceeded that! His instruction is that not below 40, more than 40! This
is what happened in Criminal Law, this friends of mine- Justice… ano ba yun? She passed 80%! She had
to adjust that. That’s why rumors circulated that no graduates of UP, Ateneo, San Beda, made it because
(It’s just a rumor ha) there were these examiners who exceeded the target. No that’s not true. Again, so.
I’ll take your review in so far as taxation is concerned, I will practically divulge to you all my secrets during
my lecture pre-week. I have 4hrs here so I’ll cover all including the Customs Duties… I can finish this
lecture tomorrow, I think before 5. After all I’ll focus on jurisprudence. Remember according to our source:
you tell them that cases which have never been asked in the Bar exams, they’re the ones who will come
out in this one. So those of you who are really previous bar, barely hope that those questions will be
asked again. So I’ll take note of that. I’ll tell you in the course of review that these cases have never been
asked in the bar so that will be the probable one. So this will apply to these 8 bar subjects. Sabir in,
provisions of the Civil Code and other laws, which have never been asked in the Bar Exams, will come
out in this bar exams. Really exciting ito! So take note of that! Jurisprudence, cases which have never
been asked, because that might have been the instruction of the chairman to the examiners: Avoid asking
cases which have already been asked. You look for decided cases which have never been asked.
Decisions which abandoned old doctrine- yun! Prepare for that! So If that’s the case, in Civil Law, this
nuisance per se, per accidens, which have never been asked, that may be possible! So a significant
provision will come of this! Because practically all the provisions have been asked. Let’s pray that the
examiners will be lenient and reasonable. But let me start with this: This lecture I hope and pray will
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capture and cover 15 possible bar questions. Because I will only cover Income Tax which happens to be
the most difficult. You cannot understand this through self-study. I have met a magna cum laude graduate
“Sir ang hirap talaga ng Income Tax”. Even most bar top notchers this is their problem: Income Tax and
Tax Remedies. Okay, so let me start with this 86 provision which are now included in your bar exams. If
you check the coverage from 116 to 129, these are sections on percentage tax. They are now included.
So in asking the chairman, Justice Bersamin, we include this what is the implication? There will be
questions! There will be one or two! Percentage tax- there will be question on this. That is why the
inclusion. They also included questions on excise tax, so from section 129-172. There may be one
question here, and I will tell you the controversial decision of Justice Bersamin on Excise Tax, that may
be the question. Your examiner likewise included question on documentary stamp tax, so from section
173-201. These are sections or provisions on documentary stamp tax. So 86 new provisions! So 1-1-1,
please prepare for the problems here. I checked the coverage, and sabi, make sure ang concept-
maniwala ka diyan. As previous examiners, some never bothered the check the coverage. Let’s just hope
your examiner will ask basic questions here. Nature and concept of percentage tax, excise tax,
documentary stamp tax. I must prepare you for decided cases kasi yun ang gusto ni Justice Bersamin.
PERCENTAGE TAX
In so far as Percentage Tax is Concerned, If I were your examiner, I will ask these two significant
provisions on Percentage Tax. First is section 116, the other one is 127-A. These are always excluded
from the coverage in the last 20 years. Yet- the examiners in taxation always ask this! Sometimes they do
not read the coverage. You must correlate this with section 109(V), the last item. Section 109 enumerates
31 exempt transactions from VAT. The threshold amount- I hope you know this. You really have to
memorize this. Meaning- if the gross sales or receipts of the year do not exceed 1,919,500, this sellers of
goods or services are exempt from VAT. So you must know this threshold amount. Again. If the gross
sales or receipts do not exceed, such seller of such goods or services is exempt from VAT. Your
knowledge of that is not enough. You must know, you must read Sec. 116. Nonetheless, he can be
subjected to another form of tax, and that’s what you call percentage tax! This came out in that difficult
bar exam in 2008 where only 5% passed Tax. So exempt from VAT, in that the seller does not exceed the
threshold amount, however he can still be taxed- and that’s the one your find in 116. He is subject to
percentage tax of 3% of the quarterly receipts or sales. I recall a question “Is he exempt from VAT?” and
“Can he be subjected to another form of tax?” Question number 2. That is the 3% Percentage Tax based
on quarterly receipts or sales. If this will not come out, then please prepare for this! Section 127(A) was
asked no less than thrice in the bar exams. Always excluded yet the examiner asked the same! The
reason is that this is very popular. The problem will pertain to sale or exchange of shares of stock. To be
subject to percentage tax, ½ of 1 % of the gross selling price, that’s the percentage tax- it must be shown
that these shares of stocks are listed and traded through local stock exchange. That must be the
condition. Supposed these shares of stock are not listed and traded through the local stock exchange
what may be the tax treatment? That’s the- remember the tenor of the question. If the shares of stock are
not listed and traded in the local stock exchange, what may be the tax treatment? It is subject to Income
Tax! You will find this in sections 24, 25, 27, and 28. This is a common rule. Common because it applies
to all taxpayers, individual and foreign. This will prove that indeed taxation in 2008 was a killer subject.
The examiner asked the examinees to state the rates. That portion will serve as a notice to you that you
really have to memorize these rates. As a rule you need not memorize tax rates, but these were already
asked in the bar exams. So ½ of 1% of the gross selling price was asked, you must also memorize this.
So if the shares of stock are not listed and traded thru local stock exchange, these are the rates: 5% final
tax, 10% final tax. So when do you appraise- this was a very unfair question- when do you apply the 5%
final tax? You read the law! Sections 24, 25, 27, 28. The net capital gain in the amount of 100,000. Can
you expect examinees to recall that? Net capital gain, more than 100,000 subject to 5% final tax. Any
amount in excess of 100,000, subject 10%. So these are the rates you have to memorize. ½ of 1% of the
gross selling price is a percentage tax. And you only apply that if the shares of stock are not listed or
traded in the local tax exchange. If they are not listed or traded thru the local stock exchange, apply the
final income tax rates of 5%, 10%. So correlation. Have you noticed 109(B) in relation to 116. Here, you
must know the tax treatment if the shares of stock are not listed or traded in the local stock exchange
subject to income tax. These are the type of questions of Justice Bersamin. Because he likes correlation.
There may be sub questions- would your answer be the same if the shares are not listed or traded in the
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local stock exchange? No! Because if they are listed and traded in the local stock exchange they may be
subject to income tax rates of 5-10%. There is no significant case on percentage tax.
EXCISE TAX
Regarding excise tax, I want you to read this case, penned by your chairman Justice Bersamin. This is
the case of Chevron Philippines v. Commissioner of Internal Reveue which you will find in 768 SCRA
414. If this controversial ruling will come out, those who have not read this will likely commit a mistake.
This is the controversial ruling of the court because I really agree with those who dissented. 6 Justices of
the SC dissented. That makes it a very controversial ruling of the court. Only 7 concurred with justice
Bersamin. One-liner jurisprudence: Excise Tax on Petroleum Tax are generally attacks on property. Is
that what you learned? That excise tax is a tax on property? It is not a tax on property! But don’t ever
make any comment! That is prevailing jurisprudence! Please! So let’s discuss very briefly the facts. You
must read Sec. 135(C) which is the subject of this controversial case. This is what you learned: That tax
exemptions must be strictly construed against the taxpayer, so that if the one exempt is the buyer, the
seller cannot claim exemption. So here, Chevron is the seller, and Clark Development Authority is the
buyer. Clark Development Authority is exempt from tax- direct and indirect. Chevron invokes such an
exemption. The only way for the court to gear to such postulation of Chevron is to change the
jurisprudence. So here, the majority did not take into consideration the exemption granted to the public.
Because that’s the only way to resolve. It is a tax on property, petroleum products. So if it is exempt, the
buyer can invoke such an exemption. The court ruled that excise tax on petroleum products is a tax on
property, specifically petroleum products. Such being the case, Chevron claimed exemption because the
subject of sale is exempt. That’s the jurisprudence here. I hope in the near future this will be reversed.
Since the ponente is your chairman, it may come out in your bar. If the questions are so basic, that
means that your examiner will follow the guidelines, you must read Sec. 149. Basic questions are asked
there. So as students of law, lawyers, you must know this. So excise tax. What may be the subject of
excise tax? We have there in Sec. 149, paragraph 1. Excise tax may be imposed on what? Articles
manufactured or produced in the Philippines for domestic sale or consumption. That’s one. Number 2,
imported articles may be subject to excise tax. Another basic concept you must know on excise tax based
on that guidelines, there are two kinds of excise tax. Par. 2. Of Sec. 149. First is specific tax- based on
physical unit of measurement. Volume, capacity, weight or measurement (32:39). The other kind is ad
valorem tax. As the word vaolrem, it must be based on the selling price, especially by value, of the goods.
So please read that case, having said that controversial ruling, you will clearly understand that.
DOCUMENTARY STAMP TAX

Documentary Stamp Tax, there are two significant decisions of the court. Just mark these two sections.
Sec. 199, it enumerates those documents which are exempt from documentary stamp tax. They are- like
Insurance policies, granted by fraternal or beneficial societies, non-stock, non-profit organizations, official
documents, documents filed in court, oath of office- and the like. Now Sec. 201, as future lawyers, you
must know the legal consequences in case of failure to affix the requisite documentary stamp tax. So
these- the most important provisions ther. A.R.A. Shall not be Admitted in evidence in any court. R, shall
not be recorded by the registrar of deeds. A, shall not be acknowledged or notarized by a notary public.
Not are aware of this. If the question will be based on decided cases, let’s focus on these: these are the
significant cases on Documentary Stamp Tax. As to the concept or nature, read this case: Jaca
Investments v. Commissioner of Internal Revenue 626 SCRA 16. The SC said, Docu Stamp Tax is an
excise tax. It is a tax on the right or privilege Create, Revise, Terminate legal relationships through the
execution of documents. That’s our language. If you ask an ordinary taxpayer, it is a tax on documents,
that’s all. There is another case, and this is the type of case of your chairman. This case raises novel
issue. Ruling of first impression. PBCom v. Commissioner of Internal Revenue 794 SCRA 34. This is
the ruling of the court: It has something to do with the application of the two year period for the filing of
refund. What may be the recording date- considered as the date of payment. Before this ruling, BIR was
in a quandary. Even tax experts, Tax practitioners. Now it is clear. That’s why it is a ruling of first
impression. It is in effect a novel issue. So you must have learned that the recording date of the two year
period is the date of the- I am almost sure, that in your bar exam, there will be a question on tax refund.
There are som many decisions of the court. This is one of them which concerns documentary stamp tax.
One liner jurisprudence. The key word is IMPRINTING. The date of payment, which is the reckoning date
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of the two year period is the imprinting the documentary stamp on the taxable document. You look for that
in the facts of the problem. Disregard all other dates, because there may be other dates designed to
mislead you. The SC pronounced that the two year period shall commence to run from the date of
imprinting on the taxable document. That is precisely the reckoning date of the two year period. Nothing
to worry. Because if I were the examiner, those will be the questions that I will ask you. Now I’ll tell you
more during pre-week because the questions may no longer be there. Sometimes if the authotities, the
chairmans “exclude that”. Pag kumalat na yan, tatanggalin na yan! It’s but normal for the chairman if he
hears “Sir kumalat na raw yung-“ “Edi tanggalin! But ask another question”.
CUSTOMS MODERNIZATION ACT

So… what about your customs modernization act? I’ll tell you during my lecture sometime in November. I
scrutinized the provision and I noticed that there may be 15 possible questions there, of the 15 there will
be only two questions. There are- I hope your lecturer his has pointed out those significant amendments
that there are new rules laid down therein, and you must- he must appraise you of those. In any case, I
promise that I will cover all during my pre-week lecture here. Now let’s now start of our review of this
technical tax law. Law of Income, or Income Tax
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INCOME TAXATION (by Justice Japar Dimaampao)
One current event your examiner may be a consultant about the tax reform proposal pending before the
Philippine Senate. We are now trying to adopt Gross Income Taxation. At present, we have adopted Net
Income Taxation. It is but normal for examiners for examiners to ask questions based on current events.
So your examiner- rumored to be a consultant of this tax reform proposals, is aware of this gross income
taxations. So let’s start with your basic knowledge about gross income taxation. Now I’ll tell you, those
sections under the present law on income have adopted this. As in previous bar exams, in the 1980s,
explain the meaning of gross income taxation. Based on my experience as examiner in two bar exams,
these are the kinds of answers I’ve encountered. One will answer this in a paragraph. Another may
answer this in an itemized form: You adopt that! Why? Sometimes we check booklets from 12MN to 3AM.
Inaantok na yan. If you answer in paragraph minsan hindi madecipher. If you do it in a bullet form 1-2-3-
kahit inaantok yan we can still decipher answer your answers. So if you are asked, as it was asked
already, to explain the meaning of gross income taxation, we are geared towards that. You must point out
these three characteristics of features: 1. It is a system of income taxation that allows no deductions. 2. It
grants no exemptions. The proposal now is that Sec. 35 is deleted. The proposal is the effect that no
more personal and additional exemptions. It grants no personal exmption. This is not enough, this is
basic, every system of income taxation provides this and I am referring to Tax Base. The Tax base in
Gross Income Taxation is 3. Gross Income. So this is what we call basic knowledge in the concept of
gross income taxation- so you must know this. Having known this, to answer problems in the bar exams
you must know those taxpayers who cannot claim any deductions. Individuals who cannot claim any
personal exemption as the tax base is Gross Income. So let’s look for this provision. Making gross income
as the tax base. Therefore, these taxpayers cannot claim any deduction. So problem. Refer to section
25(B). There you will find the word “entire” which is the same as gross income. So you must know this
individual taxpayer. As regards corporation- so correlate. Refer to Sec. 28(A)(1). You can notice there the
tax base: Gross. So gross income taxation under the present system of taxation has been adopted under
2 sections. Let’s have Individual. Who is this Individual Taxpayer who is not entitled to any deduction. He
cannot claim any personal exemption simply because the tax base is his entire gross income. NRA-
NETB. Your examiner included C and D. B,C,D and E. C, D, and E have never been asked in the Bar
exams. Excluded from the coverage in the last 5 years. Youe examiner included these. So let’s prepare
for that. So you included Sec. 25, C, D, and E- these are what we call Special Non-Resident Aliens Not
Engaged In Trade or Business. This Sec. 25 C-E, there are three never asked in the Bar Exams. Why
special? Special because the 25% final tax is reduced to 15% R.O.P. You try to recall- those employed by
R: Regional or Area Headquarters of Multi-National Corporations, including Regional Operating
Headquarters of Multi-National Headquarters. O: Those employed by off-shore banking units. P: Those
employed by Petroleum Contractors or sub-contractors. Of these NRAs are taxed at 15% based on their
gross income. No deductions. Problem on Corporate Taxpayers. 28(B)(1) NRFC, is that entitled to any
deduction? So if a problem will come out of your bar exams, involving all those expense paid or incurred-
your examiner included sub-items 2, 3, and 4, which have never been asked in the Bar Exams. Excluded
from the coverage in the last 5 years. He included it, approved by Justice Bersamin. So let’s prepare for
this. They are what we call Special Non-Resident Foreign Corporations. Special because the corporate
rate of 30% has been reduced. 28(B)(2). Non-Resident Distributor of Cinematographic Films. It has been
reduced from 30 to 25%. 3, Non-Resident Lessor of Vessels Chartered to Citizens of the Philippines.
Corporate Rate reduced from 30 to 4.5%. 4, Non-Resident Lessor of Aircraft, Machineries, and
Equipment. Reduced to 7.5% I just hope that your examiner will not ask these rates. It will be very unfair
question if you will be asked. As I told you. Just memorize those ½ of 1%, 5-10%. We will recommend
that the question be treated as bonus questions. What is important here is that they can’t claim deduction
because the tax base is gross. You really have to take this bar, because this may no longer be the rule
next year. We will have a new law on income. Since the coverage clearly shows that provisions on Net
Income Taxation will be asked, I must appraise you of this. New rules which will eventually amended in
the event that the Tax Reform Package of this Administration will be approved. And most likely it will be,
next year. Net Income Taxation applies to 4 individual taxpayers, and 2 corporate taxpayers. Looks look
at all those sections in accordance with the concept of Net Income Taxation. First you must know the
basic concept of this. Net Income Taxation. That came out 1970s, 80s Bar Examination. Explain the
[TAXI NOTES] 10
meaning of Net Income Taxation. Bullet 1-2-3. Net Income Taxation is the system of income taxation that
has the following features or charactersitics: 1. It allows deductions. That’s why we have these deductions
under Sec. 34. There are 10 allowable deductions. 2. It grants personal and additional exemptions.
Section 35. Basic Personal exemption and additional personal exemptions. To complete your knowledge
about this, you must know the tax base. The basis of the income tax rates. Sec. 31- this was asked
already in the bar exams, uses the word Taxable Income. But Net Income may be used interchangeably
with Taxable Income. Now since Sec. 31 uses or employs the word Taxable, this can apply. The Tax
Base under Net Income Taxation, the basis of the income tax rates, is taxable income. Let me prepare
you for such problems including hypothetical problems here. So let’s group all those sections which
provide taxable income as the tax base. Individual, then Corporate. So Taxable Income must have been
mentioned here. Individual, 1, 2, 3- try to read Sec. 24(A)(1)(a), taxable income is mentioned by it. Now
who is this individual taxpayer who can claim deductions, who is entitled to personal exemptions:
Resident Citizen(RC). So RC is entitled to personal and additional exemptions. You complete that to be
able to answer problems in the bar. You read Sec. 23. Item A says he can be taxed on income derived
from sources within, and without. With this, according to the examiner of 1998, general principle, the rule
is this: Resident Citizen can claim of those expense paid or expenses within or without. That’s why you
can only understand or comprehend these rules of income if you make correlation with it. So in answer to
that question in the bar exams: What are the general principles of Income Taxation that apply to resident
citizen? Resident Citizens can be taxed on income derived from sources within and without. Resident
Citizens can claim those expense paid and incurred within or without. He can likewise claim basic and
additional personal exemptions. Number 2, individual taxpayer, who can claim deduction is entitled to
personal exemption. Is the same section. Section 24(A)(1)(b) NRC. This was question number 1 in 2002.
Correlation. Read section 23, B and C. If you will note therein that the rule has been changed. In that
effective Jan 1, 1998, NRCs, let me include overseas contract workers, can only be taxed on income
derived from sources within. NRC can only claim those expenses paid or incurred within because we
cannot tax income derived from sources without. So many examinees were not able to answer that
because they applied the old rule that non-resident citizens could be taxed from income derived from
sources within. That is no longer the rule. We can only tax his income derived from sources within, and I
checked the proposed provision here- it has not been changed. The proposed Tax law shows that you
must maintain such an exemption- meaning, you should not touch such an income derived from sources
without. It has been maintained in that proposed law on income. The third is the same section. 24(A)(1)(c)
Resident Alien. You must correlate this with Sec. 23(D). Resident Alien individual is taxable only on
income derived from sources within. Therefore, he can only those expenses paid or incurred within. Mark
this- because this is the most favorite of them all. Number 4, Sec. 25, A, 1. Then go to the last sentence-
that is the one asked several times in the bar. In your bar exams, you bar examiner will try to mislead you.
But if you know the provision which I asked you to underscore, you’ll never miss. He must be a NRA-ETB.
Engaged in Trade or Business, there is a test mentioned therein. More than- he must have stayed in the
Philippines for an AGGREGATE PERIOD of more than 180 days. In 2010, several examinees were
misled. They could hardly recall the word aggregate. The problem involved a Singaporean. He stayed
here and he went on vacation to Singapore, then he returned to the Philippines. Some could not recall the
word aggregate. So how do we tax this? What must be his tax? So some examinees asked, is it not that
to be considered to be engaged in trade or business, he must have stayed in the Philippines for a
continuous period, uninterrupted period of more than 180 days- Nooooo. You read the law! It does not
say continuous and undisrupted period- the word is aggregate. The totality rule. Even if he went in
vacation to his country, you add the number of days stayed here in the Philippines. If it is already more
than 180 days, in a problem, it will be taxed as a NRA-ETB, and therefore he can claim deductions! That
is the importance of knowing whether he is engaged in trade or business. The tax base is taxable income,
therefore he can claim deduction. Note this is the hypothetical question if I will be the examiner in the
future, and I will ask this- try to answer this- this is the type of question acceptable to justice Bersamin:
The problem categorically states that he did not engage in trade or business, but he stayed in the
Philippines for an aggragate of 180 days. Can he be taxed as a NRA-ETB and therefore, can he claim
deduction? You read the law. An individual NRA who shall come to the Philippines and who shall stay
therein for a calendar period of an aggregate period of 180 days shall be DEEMED a NRA-ETB. By legal
fiction- in contemplation of law! It is not the actual engagament in a a business that determines his status.
It is his stay here! As long as this aggregate stay is more than 180 days, he shall be taxed as NRA-ETB.
[TAXI NOTES] 11
Even if he did not engage in ETB. You use our language! How do you explain that in 2-3 sentences?
Unlike in other Bar subjects, here since the questions are too difficult, your answers must be brief. The
law must be there. That’s why I want you to remember that because I you really have to cite it. So the
problem deal with a NRA-NETB though he stayed in the Philippines for 180. How do we tax him? What is
his status? How do you know this? He shall be taxed as NRA-ETB, you have categorically answered the
question. He shall be taxed as NRA-ETB. You recall this one. The NIRC provides that if he stays in the
Philippines for an aggregate of 180 days, he shall be deemed a NRA-ETB. You have cited the law. You
explain that in your own words. To impress upon the examiner that you have understood the provision,
the word deemed. This being so, even if he did not actually engage in a business, by fiction of law, in
legal contemplation, he is considered ETB. Pwede na yan. I must tell you based on my experience, no
matter how long the problem is- it is possible you will encounter a 2 page problem. Don’t- make sure, that
your answers shall not exceed one page. My co-examiners told me that that answer which is more than 2
pages, is no longer brief. It is our view that no matter how long the problem is, you can answer that in one
page. Not to exceed. Here in taxation since the answers are very technical, two to three sentence will
suffice. You have cited the law, you have explained that in your own words. You will top the bar. That’s
what we need. You tell us- impress upon us and your examiners, that you know the law, and express it in
your own words. We will give you a high grade. This is one provision you should mark- because you
really have to say the law, and explain that in your own words. For example you can use “by legal fiction,
in contemplation of law” he is considered… so you may include that! Clearly the test is not the
engagement in business- it is as if you are lecturing the bar examiner! Now. That may be one. You try to
read Sec. 35(D) which has never been asked. It made mention of NRA-ETB. Now this is the rule which
you must have to learn. That NRA-ETB in trade or business can claim personal exemption based on
reciprocity. That’s precisely the gist of that law. Meaning this foreigner may be granted personal
exemption if his country likewise grants personal exemption to citizens of the Philippines doing business
therein. Take note! It shall not exceed our maximum personal exemption. In the case of basic personal
exemption, it is not 50,000. If it happens that the country grants 100,000 exemption to citizens of the
Philippines, there is such limitation, we cannot grant more. Now two conflicting views, my good friend
Professor Domondon, is of the view that the rule on reciprocity that the rule on reciprocity applies to both
basic and additional personal exemption, because the law makes no distinction. On the other hand, the
view of justice Vitug, another authority in Taxation, the rule on reciprocity, the rule on reciprocity applies
only to basic personal exemption. That has always been the legislative intent here. This is just a carry-
over provision from the 1939 Income Tax NIRC. If this will come out, our suggested answer will be in
accordance with the authority justice Vitug. In which case, the rule on reciprocity here applies only to
basic personal exemption, and that is 50,000. So that if the country of that alien grants additional personal
exemption to citizens of the Philippines, we cannot grant such additional personal exemption to this NRA
because of the view that it only applies to basic personal exemption.
TAXPAYERS
Here’s a bird’s eye view of those taxpayers covered by the net income taxation. Individual, Corporate…
and there are four, individual taxpayers that can claim deductions, are entitled to personal exemptions.
RC, NRC, RA, NRA-ETB. As regards corporate taxpayers, your try to read Sec. 27(A). It applies to DCs.
Taxable Income is the tax base of the 30% Corporate Rate. Those expenses paid or incurred within or
without. This is so because in Sec. 23(E), there you will find the rule “within and without”. Now,
correlation. RFC, Sec. 28(A). The tax base is Taxable Income. That means that it can claim those
deductions, expenses paid or incurred, within. This is so because in Sec. 23(F), we can only tax his
income derived from sources within.
Corporate Taxpayers: Offline Air Carriers
So all Bar Reviewers in Taxation are one in saying that the most probably bar question here- and I’m
referring- you should mark Sec. 28(A)(1) is the recent case of Air Canada v. Commissioner of Internal
Revenue. 778 SCRA 131. 48 page decision penned by Justice Leonen. So there is a new rule here. Air
Canada is undoubtedly an offline int’l carrier- therefore it has no landing rights. Offline implies it has no
landing rights. So if you have not read this case, you think we cannot tax it. No! We can still tax an airline
that has no landing rights. The Supreme Court ruled, Justice Leonen said, it is taxable under 28(A)(1). It
[TAXI NOTES] 12
says it applies to RFCs. With all due respect the expertise of Justice Leonen is Constitutional Law. So
medyo… with all due respect. It said it will be taxed under 28(A)(1)- dapat, it shall be taxed as RFC! And
therefore it can claim deductions because the tax base is taxable income. Diba mas malinaw yun eh?
And sabi pa “and not under 23(A)(3)!” If you read 23(A)(3) that is gross Philippine billings. You really have
to read the provision. It is now clear that offline international airline that has a general agent here in the
Philippines shall be taxed as a resident foreign corporation. Hence, the tax base is taxable income. It can
claim deductions. Subject- there is a qualification! Subject to the provisions of a tax treaty. If there is- and
let’s make it clear- if there is a tax treaty that must prevail over this. Subject to a tax treaty to which the
Philippines is a signatory. The implication is that the tax treaty must prevail over this. Is there a tax treaty
between the Republic of the Philippines and Canada? Yes! So that provision must prevail over this
provision of the NIRC, 28(A)(1). According to the Art. 8 of the RP-Canda Tax Treaty, the applicable tax
rate must not be more than 1 1/2 % of the Gross Revenues derived from the sale of tickets here in the
Philippines. So your examiner really has to ask this case. It was mentioned in the facts, Air Canda, to
apply this jurisprudence. If it were a hypothetical question making no mention of the tax treaty, apply the
general rule. In which case, such offline international airlien that has no landing rights shall be taxed
under 28(A)(1). The tax base is taxable income. It can therefore claim deduction. Hypothetical questions.
ABC airlines, XY airlines… that is a hypothetical question- that has an agent here in the Philippines,
derived income from the sales of tickets. If the problem made no mention of tax treaties, you apply
28(A)(1), 30% corporate rate. That’s the gist of this recent jurisprudence. To avoid any confusion, in
contrast, airline which has landing rights shall be taxed under 28(A)(3). That’s the meaning of the
pronouncement of the Court. Meaning not under 28(A)(3)- there you will find as the tax base the Gross
Philippine Billings. I’m sure many examinees will get confused here. That’s why I’m appraising you of this
new jurisprudence. When the Court says “not under 28(A)(3)”, the court means that that only applies to
an airline which has landing rights. Because if you read the definition of Gross Philippine Billings, as
amended, the source is the origin. The composition of this revenue is origin of passengers, of baggage or
cargo. So it presupposes that such airline has landing rights. But that’s’ not how the Court explained its
ruling. You really have to explain that. So if it has landing rights, the tax is 2.5% and the tax base is Gross
Philippine Billings. If it has no landing rights, but it has an agent here which will make it “doing business”,
it is 28(A)(1), so 30% of the taxable income.
Resident Foreign Corporations: Doing Business

Why are they considered as RFCs? Justice Leonen is absolutely correct in pointing out Sec. 3(D) of the
1991 Foreign Investments Act (RA7042). You must bear in mind this Corporation Law- it really has
connection with the simple jurisprudence in corporation law. RA7042 Sec. 3(D), it enumerates acts which
may constitute “Doing Business”. And this is one of them: appointment of an agent, or this regular…
which must stay in the Philippines for 180 days of more. So there is an agent there… that will make it as
doing or engaging in a business. As I always tell my students in commercial law review, you must
memorize- I told them. I told them that this will come out in your bar exam- it came out as No. 1! You
memorize RA 7042, 3(D) because there you will find this: acts which may constitute doing business. And
it came out as question no. 1 in Commercial Law! And some of my students who got 93, 95 they showed
me their grades! So memorize that! Only one was mentioned by the Supreme Court in Air Canada case-
the appointment of an agent. So let’s complete that. This is my humble contribution to Commercial Law…
in my lecture in San Sebastian. Now P stands for participating in the management or supervision of a
domestic firm, or business, or enterprise. O stands for opening offices or branches. We may discuss
branch profits remittance tax, its there. In establishing a branch here, that will make the foreign
corporation as doing business here. S stands for soliciting orders of contracts, and the most important,
which is the all-embracing phrase is: A- it implies the continuity of any ACT which implies a continuity of
commercial dealings and arrangements. You usually find this very in answering question on whether such
foreign corporation is considered as doing business. Remember in Corporation Law there is such Sec.
133, if it is doing business here, it must secure a license. And if no license is obtained, it cannot sue, but it
can be sued. You recall that? That is the importance of knowing this. Whenever it is doing business
because of the requirement of this license- that is Corporation Law! So here in Taxation, you ought to
whether it is doing business, because it can claim deduction. If it is doing business here, it is considered
as a RFC, and if you read 28(A)(1), the tax base is taxable income. That means you can claim deduction.
So Taxation and Corporation Law, these are well- those of you who would like to teach Taxation, as we
[TAXI NOTES] 13
have a scarcity of Tax Law professors, you really have to know it- your Corporation Law. So that you can
discuss these two laws and certain common provisions. So please read that case. It is now clear that the
Tax Treaty prevails over that provision of the NIRC, 28(A)(1).
Systems of Taxation
Decided case on these systems of taxation. When this came out already- in 2 or 3 bar examinations. the
latest was in 1997. So 20 years ago. Basically, there are two taxpayers: Individual and Corporation. What
about Estates and Trusts? Try to read Sec. 61- the Taxable Income of Estates or Trusts shall be
computed in the same manner and on the same basis as in the case of Individual Taxpayers- except
A,B,C! So with that provision, rules that apply to individual taxpayers will apply likewise to taxable estate.
So basically, there are two taxpayers under Title 2. The Law on Income. Individual and Corporate. We
have this landmark case, the favorite case of Justice Vitug, who was the ponente of this case. Tan v. Del
Rosario 237 SCRA 324. So this is a settled Jurisprudence. Here, the Supreme Court said, there are two
systems or methods of Income Taxation adopted under the Tax Code. One is the so called Schedular
System or Schedular Tax Treatment. The other one is Global System, or Global Tax Treatment. You
check the coverage, they are there. Coverage for Taxation made mention of this Schedular and Global
systems. So it can still be asked. Let’s simplify this provision. It answers to these two questions: 1. What
is the system that applies to individual taxpayers? Schedular. What is the tax treatment that applies to
Corporate Taxpayers? Generally, Global. Let’s prove that indeed, scheduler system is the one that
applies to Individual Taxpayers. These are the characteristics- I’ll dispense with the technical definition.
Based on the technical definition given in this landmark case of Tan v. Del Rosario, these are the
characteristics and features of Schedular system: 1, 2, 3. 1. It provides for different tax rules or tax
treatments. 2. It classifies or categorizes income. 3. It imposes different tax rates. These will simplify that
very technical definition in Tan v. Del Rosario.
***lost recording***
Because we have practically employed or adopted all the possible criteria, or basis in imposing tax or
income- you really have to memorize this. I’ll give you the keywords. Now, these are the critera we have
adopted under Sec. 23. R stands for Residence. We tax the income of RCs, RA, RFCs, because they are
residing here. So Residence. P stands for Place where the income is earned or derived. The following
taxpayers can only be taxed on their income derived from sources within: NRA, NRFC, and we may also
include that of RA, and NRC, because the new rule provides that they can only be taxed on their income
derived from sources within. And the most important is N- and that represents Nationality or Citizenship of
the Taxpayer. Its not the place. It is the nationality of the taxpayer. That is why on the basis of this
criterion. This RC, and DC, can be taxed not only on their income from sources derived from within, but
also their income derived from sources without. So don’t construe the principle of territoriality of taxation
literally. To mean that income derived from sources without, cannot be taxed. Congress has the power or
authority to fix the income tax sites. So here its clear ins Sec. 23, that RC and DC, can be taxed on their
income derived from sources within and without.
Partnership Theory
Benefits-Protection Theory
Theory of Favorable Conditions/Climate
No book has attempted to explain why You must bear in mind, that as a citizen of the Philippines, you are
entitled to such protection wherever you go. It must be based on Protection. Which brings us now to
these 3 settled jurisprudence. First in 1964. And that is the case of Commissioner v. Lednicky. All
taxation books have mentioned this. 11 SCRA 603. Through this Legal Luminary. Justice JBL Reyes. He
espoused certain principles, and that is the principle of partnership. Theory of Partnership. This is how he
explained. The right of a government to tax income emanates from its partnership in the production of
income by providing protection, incentives, resources, and proper climate for the production of income.
On the basis of this, in 1987, there was this case- this was a favorite bar question. And this is the
landmark case of Commissioner v. British Overseas Airways Corporation, 149 SCRA 395. Then the
court explained- now this was the first case decided by the court on offline international airline. This was
the case where the court first pronounced the rule that offline international airline is considered as RFC
because it sells… passes documents through an agent. The basis for this, this is what the court said, and
with all due respect to the ponencia of Justice Leonen, this should have been mentioned- what he
[TAXI NOTES] 14
expounded on- it is considered engaged in trade or business- there are so many cases that he cited- but
he never mentioned the reason! 42 pages! Let’s complete that ruling of the court with all due respect. He
should have mentioned it because you are in a quandary! Why is it that it has no landing rights here- we
can still tax? If you read that 48 pages he said no mention about it! He should have mentioned therein.
This is what the court said- now, I want you to memorize this two liner Jurisprudence. This will answer the
question: What is the basis for the imposition of corporate income tax on the income of an offline
international airline with no landing rights? The Court said: The flow of wealth proceeded from, and
occurred within Philippine territory, enjoying the protection of the Philippine government. In consideration
of such protection, the flow of wealth should share the burden of supporting the government. You
complete that decision of the court when answering the question: What’s the basis? It’s really based on
Protection. The activity proceeded here! The activity is conducted here- it enjoy the protection of the
Philippine government. In consideration of that, we should impose tax on income derived therefrom.
That’s the gist of the ruling of the Court. This is what we call jurisprudence. What is the jurisprudence
regarding the basis for the impostition of tax on the income of an offline international airline- meaning no
landing rights here? It’s Protection. When Justice JBL Reyes: In the production of income, by providing
protection- that the BOAC case- resources, incentives, and proper climate for the production of such an
income. In 2010, a new doctrine emerges- and that is the landmark case of CREBA (Chamber of Real
Estate and Builders Association) v. Romulo- that is known as the theory of Favorable Business
Climate. So we have 3. Theory of Patnership- and it has developed two theories there- Protection Theory,
that’s the BOAC case. And now we have this one. CREBA v. Romulo is a landmark case. You will find
this in volume 614 SCRA 605. If there will be question as it is very possible- on minimum corporate
income tax, you remember this jurisprudence. Even if your answer is not correct, your examiner cannot
just ignore your knowledge of the law. This is the rationale behind the imposition of this very popular
corporate income tax. Minimum Corporate Income Tax. But do you know the reason? Rationale? Basis?
You must memorize this settled jurisprudence. The Court said, this is the rationale: Underlying the
imposition of MCIT- I’ll give you the keyword here: CIR. With this, you can easily recall this one. These
are the operative words: C stands for Corporate Existence. I improve the financial market. R stands for
Reasonable Contrinution- and that is 2% of Gross Income. Let’s complete this- this will just help you
recall this. If you know the keywords, you can explain that in your own words. You need not memorize
this, verbatim, because I doubt that the examiner has memorized this. So what is this corporate
existence? This is what the court said, there are three sentences here: Domestic Corporations owe their
corporate existence and their privilege to do business to the government. They also benefit from the
efforts of the government to improve the financial market and to enhance favorable business climate.
That’s it. That’s the theory of favorable business climate. Third sentence. It is therefore fair for the
government to require them to make reasonable contribution to the public expenses. Simply stated. Since
the gov’t performs its reciprocal duty- and that is to maintain a favorable business climate- on your part as
a domestic corporation you should contribute. That’s how you should explain this. Were it not for the
efforts of the government to maintain a favorable business- you could hardly earn. You owe your
existence to the government. You should pay taxes. Reasonable- only 2% of gross income! That’s why
the Supreme Court held that’s the Constitution. Valid. No violation of due process. Please. Don’t mention
here Lifeblood. As much as possible avoid citing Lifeblood- your examiner knows this. Why can you not
remember Partnership Theory? Protection Theory? Favorable Business Climate? In lieu of Lifeblood. For
instance- you do not know of any answer and the question is “Is this item of income taxable?” DON’T
answer Lifeblood. Why can you not explain “that is taxable because it receives protection!” I had a
student- this reminds me of my former student. I failed him twice in Taxation. He passed in the last bar
exams! You will never pass the bar if you recite Lifeblood in all your answers. Taxable- Lifeblood.
Deductible- Lifeblood!
All Events Test

Just remember. Let me end this morning’s lecture with this very useful… Have you heard of All Events
Test? You should know by now that indeed this is very useful because this will help answer two possible
questions in your bar exam. It will help you answer questions on whether income is taxable or not. It is a
test on taxability. That is the case of Filipinas Synthetic Fiber Corp v. Court of Appeals 316 SCRA
480. I mentioned 1, 2, 3. It is also a test on determining whether an expense is deductible or not. So test
of deductibility of expense- there are two requisite laid down in that case of Commissioner v. Isabela
[TAXI NOTES] 15
Cultural Corporation 515 SCRA 516. USA. It will help you recall. Even if your answer is not correct- you
cite this as your basis- It is taxable because according to the all events test, the requisites of taxable
income are present. This is based on American Jurisprudence. Some books fail to mention this. It is 33
AmJur 04 1995 doctrine. What is this U? The right to receive must be Unconditional. You will know that
it’s not the actual receipt- because we have this so called constructive receipt of it. It is the right to receive
that determines when to include the amount in question. The right to receive must be Unconditional. Try
to recall this. Valid. Valid and Enforceable. The most important word is Unconditional. The right to receive
must, not the actual receipt, must be unconditional, valid, and enforceable. S stands for Susceptible of
Reasonable Accuracy. This is the principle of Reasonable Accuracy. Explanation is this: it need not be
precise, it need not be completely accurate. The Taxable Income is just the reasonable amount. The
amount must be paid in due course. The complete submission is this: there is that reasonable expectation
that amount will be paid in due course. If it were a question of expense, even if you do not know the case,
if it is deductible you must answer this. This is the Isabela Cultural Corporation 515 SCRA 566 case.
Now based on this American Jurisprudence, the expense is deductible under the all events test upon the
concurrence of two requisites. F stands for Fixed. The liability to pay must be fixed by a contract or
agreements. R stands for Reasonable. The amount of liability must be reasonable so the common rule
here is reasonable accuracy. The taxable income need not be precise. Reasonable Amount will suffice.
The deductible expense need not be preciseor completely accurate. Reasonable amount will suffice. In
this case- most of you have not reads this, this is the legal application: legal services were rendered in
1985. Isabela Cultural Corporation did not claim that as a deduction. It only claimed that when it received
that statement of account in 1986. The argument of Isabela, the amount of the expense was only
determined when it received such statement of account in 1986. Now question: should the BIR disallow
that? Is the disallowance of BIR correct? Yes. Because applying the all events test, such expense should
have been claimed in 1985. It was in 1985 when these two requisites where present: when there such an
agreement between the lawyer and the client. Requisite One was present. Jurisprudence tells us it need
not be precise or completely accurante. Now it has been explained here, that in as much as the lawyer
has been rendering services for 30 years, based on factors prevailing and obtaining in this case. The
amount can be determined with reasonable accuracy in 1985. This will serve as a notice to you that the
receipt of statement of account, or billing statement, is immaterial. That is the misleading fact there so
don’t be misled. What is required in the all events test is the reasonable amount of liability, reasonable
amount of income as mentioned in this case of Filipinas Synthetic Fiber v. Court of Appeals. So very
useful doctrine- you examiner just cannot ignore this. You mention this, even if you have incorrectly
applied this, he really has to give you credit. For knowledge of the law.
Withholding Agent
So what we are now discussing is a bird’s eye view on the law of income. So we discuss methods,
systems, basic rules on income, situs, test of taxable income, test of deductible expense. Let’s go to
collection. I notice based on feedback that these are still discussed by your professors in taxation, and
these are included in the coverage based on Sec. 57, there are two methods of collection of income tax.
The first one is the called the creditable withholding tax system, and you must be able to distinguish this
from final withholding tax system. Jurisprudence- the common rule here is that there must be a
withholding agent. Now Jurisprudence tells us- and I notice that some books fail to explain this- in that
1965 case- that’s the case of Philippine Guaranty Company v. Commissioner. 15 SCRA 1. That’s the
case wherein the Supreme Court explained the two-fold duty or obligation of a withholding agent. And
then I’ll tell you the possible question here. 1. A Withholding agent is an agent of the government in the
withholding and the collection of taxes. 2, A Withholding agent is an agent of the taxpayer in the filing of
income tax return and the payment of income tax. This question was asked no less than 5x in the bar
exams. This is a favorite bar question. Does the withholding agent have the legal personality to file a
written claim for tax refund? In 1988, this was the subject of two conflicting cases- the favorite type of
question of Justice Bersamin. May two conflicting views and there is such decision that settled the same.
Okay. To be exact, on April 15, 1988, two decision of the court were conflicting. One says no, withholding
agent has no legal personality to file a written claim for refund because only a taxpayer can file a written
claim for refund. The one other case- I don’t know if you’ve come across that- YES! This is the prevailing
view- on December 2, 2001. That’s the landmark case of Procter & Gamble Philippines v.
Commissioner of Internal Revenue. Which you will find in 204 SCRA 377. The prevailing view is
[TAXI NOTES] 16
YESSS! The Withholding Agent has the legal personality to file a written claim for refund. The Supreme
Court simply said because it’s not only an agent of the government, it’s also an agent of the taxpayer. So
technically, it’s a taxpayer. That’s not a complete pronouncement of the court. The Court failed to mention
this. So when the Court ruled that it is technically considered as a taxpayer, it should have expounded on
that. Agent of the taxpayer in the filing of income tax return and in the payment of the tax. So let’s
complete that. So if this were to come out again- this must be your authoritative answer so that the
examiner will learn from you. So that’s how you impress the examiner. You are trying to impress the
examiner by citing jurisprudence that you have read. This is the decision of the Court which has not been
answered in the Procter & Gamble case. So yes, withholding agent has the legal personality to answer a
written claim for refund. You have categorically answered the question. That is the prevailing view.
Withholding agent is not only an agent of the government in the withholding and collection of taxes. It is
also an agent of the taxpayer in the filing of the income tax return and in the payment of income. This
being the case, thus, hence, it is technically answered as a taxpayer. That’s how you reason out in the
exam.
Tax Credit
Now there is- there are technical terms here. This can be the source of bar question based on
jurisprudence. You will note here the tax credit- so that must be tax credit. Items subject and governed by
Creditable Withholding Tax system, they are subject to- the tax withheld is in the nature of tax credit. You
might be asked to distinguish this from Deductible Tax. These are two different terms. These are technical
terms. Those of you who are not accountants you might not know the meaning of this. Now you should
know the meaning of this. Because I’m going to explore a possible question based on decided case. Now
what is meant by Tax Credit? This is the tax withheld, and it can be as a tax credit. Now according to a
decided case- the case of Bicolandia Drug Corporation v. Commissioner of Internal Revenue. 496
SCRA 176. Based on the definition in the black’s law dictionary, Tax Credit reduces taxpayer’s tax
liability. Those of you who are compensation earners, you must have been given by your employer this
BIR Form 23-16. There where taxes are withheld. That’s the one. It may be claimed as deduction from
your income tax due or payable. In 1970 there was a question on the meaning of income tax due or
payable. The meaning of this is that you apply the income tax rates to the income taxable- taxable
income. That’s where you deduct that tax credit. Now if you deduct this from your income tax payable, the
effect is that it reduces your tax liability. On the other hand, deductible tax reduces- check your answer,
taxpayer’s taxable income. You refer to Sec. 34(C). One of the allowable deductions, deductible taxes.
And it is claimed as deduction from Gross Income and if you deduct that taxpayer’s gross income the
effect is that it reduces the taxpayer’s taxable income. This may now be the question has yet to be aked
in the bar exam. You bar examiner is a senior citizen. Very likely he will ask this: his senior citizen
discount- is this a tax credit or deductible tax. In 2005, the Supreme Court in that case of Central Luzon
Drug Corporation v. Commissioner of Internal Revenue, 456 SCRA 414 declaring invalid such
Revenue Regulations- that 20% construing the first law on Senior Citizens RA 7432 is a tax credit- can be
claimed as tax credit. If this comes out, because this has yet to be asked- what may be your answer: No
longer a tax credit, it is now a deductible tax. This is clear in Sec. 4 of the subsequent laws on Senior
Citizens- RA9257, RA9994. It can now be claimed as deductible tax. No longer as tax credit. So take note
of that. That’s the type of question of Justice Bersamin. You get asked on the prevalent jurisprudence by
the examiner. Do you know the prevalent jurisprudence? That is why I am asking you this question. What
is the tax treatment of the 20% discount granted to senior citizens? Answer: By virtue of this subsequent
laws, RA 9257 and RA 9994, this can now be claimed, no longer as tax credit, but as deductible tax.
Every bar examinations there is, or there are questions or items subject to Final Tax. So please prepare
for this. 57(A) enumerates 28 items. But of these 28 items, only 10- one, zero, are favorite ones. So let’s
have these significant items of income subject to final withholding tax. I have developed a new keyword
not in the memory aid. This bar examination I have practically changed all my keywords, so don’t rely on
my previous lecture- bago na yon. That’s unreliable. So I have developed a new keyword- mnemonic
which will reflect this 10 favorite items of income subject to final tax. They are there is Sec. 57(A).
FBSWSDRIPS. Now if these were all asked in previous bar exams, the examiner will just modify it. F
stands for Fringe Benefits under Sec. 33(A) subject to final tax. B stands for Branch Profits Remittance
Tax Sec. 28(A)(5). This was excluded in the bar exams in the last 5 years- your bar examiner now
proposed that it be included. Approved. So why did he include this? He msut have a purpose. There is a
[TAXI NOTES] 17
new case here- he must have that in mind. This I will tell you when we discuss branch profits remittance
tax. 15% that’s a final tax. Then let’s go to SWS. I mentioned this this morning. Sale or Exchange of
Shares of Stock not Listed and Traded thru Local Stock Exchange. Don’t memorize rates… but since this
came out in that technical bar exam in taxation in 2008 that will serve as a notice to us that you must
know these rates. 5% Final Tax- this applies to the net capital gain not more than 100,000php. 10% Final
Tax with respect to Net Capital Gain in Excess of 100,000. W stands for winnings except Philippine
Charity Sweepstakes winnings and Lotto winnings as they are exempt. If they are taxable, winnings are
subject to final tax. S- I may be wrong, but I made a survey, and this emerged as the number one favorite
question in income tax. You must mark this. I’m referring to Sale or Exchange of Real Property
considered as Capital Asset- in that it is not used in Trade or Business. You will find this in two sections
which we have before Sec. 24(D) and Sec. 27(D)(5). Now this 6% is a FINAL Tax. DRIPS. This is another
favorite question in the Bar Exam. In 2015 there were 5 questions on Dividend Income. 2 of them this are
the ones. Dividend will be subject to final tax under 2 cases of situations. 1. The recipient is an individual
taxpayer. 2 it is likewise subject to final tax if the recipient is NRFC. We’ll expound on this when we
discuss dividend income. R stands for Royalties subject to Final Tax. I refers to Interest income. It is only
subject to final tax if it comes from bank deposit. Whether Philippine of foreign currency deposits. When it
is an interest income from loans- that is not subject to final tax. If it is an interest income on banks- that’s
not subject to final tax. That’s why you must underscore that. It is that interest income derived from bank
deposits. P stands for Prizes. Here you must also take note of the qualifying phrase- prizes are subject to
final tax, the amount must be more than 10,000php. If less, that is not subject to final tax. That was asked
in the 2001 Bar Exams. Now S stands for the Share of a Partner from the Net Income after Tax, or a
Taxable Partnership. You might ask- supposed the Source is a General Professional Partnership, that’s
not subject to final task. So that’s how you should understand certain provisions because your examiner
is a tax expert. He will try to mislead you. So what is the tax treatment of that share of a partner from the
net income after tax of a business or taxable partnership? Answer: That is subject to final tax and
therefore the business parter need not report that in his ITR. Would your answer be the same if the
source is a GPP? Answer: It would not be the same, because the tax treatment under Sec. 26 is that, it
must be reported by the Professional Partner. Subject to the progressive rates of 5-32%. Now why do you
have to know this? You ought to know then the cause of these basic rules. On Final Withholding Tax
System. Already asked in the Bar Exam 2001. First- so these are the rules under the Final Withholding
Tax System. One. The withholding agent- the source, or the payor, has the legal obligation to pay this
final tax. Many examinees in 2003 committed this blunder. That was precisely the question. Who has the
legal obligation to pay this final tax on fringe benefits? So many examinees answered this wrong.
Managers, Supervisors, that’s not correct. It is the employer that has the legal obligation to pay this final
tax on fringe benefits. So this also applies to all other items of income subject to final tax. That’s one.
Rule Number 2. The recipient of such items of income, subject to final tax, need not report this in his ITR.
This is so, Rule No. 3. The final tax withheld, serves as a complete and full settlement of the tax liability
on these items of income. So you remember these 3 basic rules under the final withholding tax system.
This system has never been asked under Revenue Regulations 2-2003.
Substituted Filing of Income Tax Return

There is this rule- It is 2-2002 I stand corrected. That Individual Taxpayers are no longer required to file
ITR if he is qualified under the so-called Substituted Filing of Income Tax Return. This may be asked in
the form of problem. So the possible question here is this: Based on facts- so that’s why you must have
mastery of these requisites: Is this individual taxpayer required to file ITR? Under this system, as long as
all these requisites are present, this individual taxpayer is no longer required to file IRT. I have been
waiting for quite a long time. I think this question will be waiting for you. 1- you must read the facts
because I tell you- andaming misleading facts sa Bar. Diskarte ng examiner yon. So don’t be bothered by
that. First is that the source of income must come only from Compensation Income. If he has other
sources of income, such as business or professional income- he must, or she must file his or her ITR. So
the source of income must only be compensation income. Number 2, One employer in the Philippines. So
if he has 2 or more employers, he is not qualified for this. Therefore he must file his ITR. One employer,
the only source of income, compensation income. 3. The tax withheld by the employer must be equal to
or the same as the income tax due applying the progressive rates 5-32%. It’s always 0. Those of you who
are compensation earners. There was this old rule to the effect that these individual taxpayers will only be
[TAXI NOTES] 18
exempted from filing ITR if the gross compensation income will not exceed 60,000php. This has already
been deleted. There is no more limitation here. RA 9504 deleted such threshold amount. It is possible
that the compensation earner earned 1 million compensation income a year. He may qualify under this as
long as the tax withheld by that one employer is the same as the income tax due. That’s the amendment
here. And number 4, if the employer is required to file the so-called Information Tax Return showing
therein- so that’s BIR Form 1604- which must reflect the tax withheld on the compensation income of the
employee. And you must have heard the testimony of former Commissioner Henares against Former
Chief Justice Corona. She mentioned about Alpha list. You will never find this word in the Tax Code. That
is just a list of all of those compensation earners in that list, opposite their names, the taxes withheld. This
Alpha List this is a word invented by the BIR. We don’t have this word in Sec. 51. That is in effect the
information tax return of the employer. So if an individual taxpayer has only one source of income, it must
be compensation income, one employer, tax withheld is the same as the tax due. And then there is this
Information Return filed by the Employer. This individual taxpayer is no longer required to file ITR. That’s
the meaning of the word substituted. So in lieu of the taxpayer’s ITR, in that BIR Form 2316, there is this
word: “I hereby state under oath that I am qualified under the Substituted Filing of ITR”- you cite that.
Make sure that that is the only source of income because you are under oath, and you can be charged
with Perjury. That’s the only source of income. This will serve as your ITR, so if the bank will require you
applying for a bank loan, you present this. This is as good as an ITR. And if the bank will question it-
“That’s not the ITR that I know!” then you lecture at the bank. There is such a rule- that “don’t you know?
That in lieu of an ITR this is the requirement” Not all bank managers know this. Even Justices of the
Supreme Court and the Court of Appeals- mind you! They ask me “am I required to file the ITR?” I told
them there is such a rule as substituted- they are unaware of it! That if your only source of income-
compensation income, one employer- the judiciary, then you are not required to file an ITR. So there is
really a problem on BIR Rulings, Circulars, and Revenue Regulations, 2-3-2002. It was effective in 2002-
and to our surprise, just imagine- Justices of the Supreme Court, the Court of Appeals, Sandiganbayan-
well Court of Tax Appeals no because they are tax experts. They ask me: “Am I required to file ITR?” So
they’re not aware of this. Now you are now better than them- because you know this.
Sources of Income
Now. Having been given a Bird’s Eye View, let’s now discuss Specific Rules on Income, and I will
appraise you on the jurisprudence or decided cases based on the same. Let’s start with Sec. 32(A)
enumerates 11 kinds or categories of Income. Sir please appraise us of the important items there
because not all will come out in your Bar exams. So let’s be guided by that information given to us. First-
questions will be based on decided cases. Provisions which have never been asked- jurisprudence which
has abandoned previous rulings of the Court. I cited one early- the 20% discount granted to senior
citizens. You mark item 1. That’s a favorite bar question. I’m referring to compensation income. Item 2
you can easily understand the same- business, trade, or professional income. No challenge there. You
must mark Item 3. Gains derived from dealings in Property. We discuss this- we really have to discuss
Sec. 39- there are now, I think, 3 decisions of the SC on this. And these are new decisions. I’ll tell you
later on. Item 4, there is this RMC. 18-2011. This may apply to interest income. We will discuss that later
on. Rent. Royalties. You go to Item 7. Item 7 has been the subject of 8 sections, that why I say that
dividend income is a favorite question in the bar exams. You mark that- please. So it will appear- prizes…
There are only 4. So let’s focus on these. In Sec. 32(A)- your examiner is after your knowledge of the law.
What is that law or rule or provision in 32(A) which you must know and therefore underscore the same?
The phrase “derived from whatever source”. You must remember this. Because this will help you answer
questions supposed as it is now the news of the day- it is derived from smuggling or illegal against.
Taxable? YESSS! That is definitely taxable. And this is a provision that you must cite- gains derived from
smuggling, illegal gains, are taxable. The Tax Code 32(A) provides that income derived from whatever
source- you have cited the provision, you explain that to me! You have cited the law but that’s not
enough! I will not give you full credit if you cannot explain that in your own words! Derived from whatever
source- that implies that the source of income is immaterial- so you explain. By the word whatever source
is meant, it is implied that the source of the income is immaterial, and then you can cite this American
Jurisprudence, to impress the examiner that you don’t only know Philippine Jurisprudence but you also
know American Jurisprudence! As we have adopted that provision from US… This is the case of Rotkin v.
U.S. that is the claim of right doctrine- Those of your who have read that book Basic Approach to Income
[TAXI NOTES] 19
taxation, I discussed this. Based on that: U.S. v. Rotkin. 343 US 130. Now you cite this- in taxing or in
imposing tax or illegal gain, this is consistent with the Claim of Right Doctrine which dictates that the state
has the right to impose tax on illegal gains, or income derived from problem, prodigal sources. Imagine
your examiner: “Maruning ito ah! He can even cite American Jurisprudence!” he deserves to top the bar.
Okay that’s the most important phrase there. Now let’s have the sub-questions, because there may be
sub-questions there. Illegal gains are taxable. Supposed you are asked- illegal or unlawful expenses?
These are questions that will be asked in one problem. In Sec. 34, it is a basic- that uh to be deductible, it
must be paid or incurred in connection with legitimate or legal business. It’s now clear- as this was I think
inserted by Senator Enrile- he said 34(A)(2). It is now clear illegal expenses are non-deductible. So to
complete your knowledge about this you must know about this… that Illegal Gains are Taxable, 32(A),
while Illegal Expenses are not deductible, 34(A)(2). In item 1, I want you to underscore this phrase which
was really the basis for such a problem being answered at the UP Law Center… the phrase “whatever
source… whatever form paid.” So the form of payment is material here. In whatever form paid. You must
know this: two favorite questions in the bar exams. Cancellation- this was one asked in 2014.
Cancellation, Forgiveness, or Condonation of an Obligation. The test is employer-employee relationship.
So the debtor is the employee, the creditor is the employer. The problem stated that the employer creditor
condoned the obligation of the debtor employee in consideration of his services rendered. The Employee
receives an assessment from the BIR: “Why did you not report that?”. Now this debtor employee argued
that he received no payment! It is clear there that compensation for services IN WHATEVER FORM
PAID. It need not be in cash. It may be in kind, through cancellation, forgiveness, or condonation of an
obligation. This rule is not there in Title 2. You will find this in Sec. 15 of the Old Revenue Regulation No.
2. There is such a rule that cancellation, forgiveness, or renunciation of an obligation may amount to
taxable compensation income if it is cancelled, condoned, in consideration of the services. So, the test is
employer-employee relationship. So the argument of the debtor employee is not correct. The BIR is
correct in making such an assessment as that is considered as taxable compensation income. This was
last asked in 2003. You should also know that the payment is not in kind if it is made through the payment
of Life Insurance Premiums. The employer here paid premiums on the life insurance policy of the
employee. There are rules- the rules are qualified, unlike before. We must qualify the rule. Refer to Sec.
33(B)(10) you will find that- life insurance premiums. So it depends upon the insured employee. If the
insured employee is a manager or supervisor, apply Sec. 33- that shall be taxed as Fringe Benefit subject
to final tax. On the other hand, if the insured employee is a rank-and-file employee, apply 32(A)(1)- it shall
be taxed to the insured rank and file employee as part of gross compensation income. It shall be taxed as
taxable compensation. In item 3… why do you have to mark this? Every time questions are asked of this-
it happened in 1999, killer ang tax. 2008- killer ang tax. These are really the technical questions on
income tax. You really have to know these recent decisions of the court. So, let’s jump to Sec.39 of the
NIRC. I just hope that you are still awake because these cases might come out in your bar exams.
Capital and Ordinary Assets

These Gains Derived from Dealings in Property. Sec. 39 So you jump to Sec. 39. There you will find the
technical definition of Capital Asset, and you must be able to distinguish this from Ordinary Asset. The
word property there in 32(A)(3) is now termed as Asset here. It’s no longer property but they are the
same. Recent case: SMIED Philippines Technology v. Commissioner of Internal Revenue 739 SCRA
691. The Supreme Court thru Justice Leonen made this pronouncement, and this has given Judicial
Imprimatur to my humble opinion- my view is this: construing 39(A), ordinary asset is defined by way of
enumeration. On the other hand, capital asset is defined by way of exclusion. That’s how we construe
that, and in the present case, the SC categorically pronounced that these are the only ordinary assets.
This is the new acronym- keyword: PARIS. In the book of Justice Vitug, and in the book that I wrote…
now since this is the latest jurisprudence, let’s follow this. So, read Sec. 39(A)- not in the order. These are
the 5 exclusive ordinary assets: 1. P- Primarily held for Sale. So, property primarily held for sale to
customers in the ordinary course of trade or business. So, underscore the word business, as it implies
that this must be a business collected tax. A- the word for Allowance for Depreciation will help you recall
this ordinary asset. Asset subject to Allowance for Depreciation- and we call that in accounting parlance
as Depreciable Asset. The law is clear. It must be used in trade or business. So again, it must be a
business connected asset. R, Real Property used in Trade or Business. Again, the word Business is
there. It must be a business connected asset. These two are considered as one according to Justice
[TAXI NOTES] 20
Vitug. But a recent decision of the court considered this as two separate ordinary assets so let’s respect
that. I stands for Inventoriable Asset. These are assets that remain in the inventory of the taxpayer at the
end of the taxable year- raw materials, the goods in process, are finished goods. So definitely it must be a
business connected asset. S stands for Stock in Trade. So it must be a business connected asset
because of the word trade- which is the same as Business. So all you have to do is memorize this. If you
don’t find this in the problem, you are set to conclude that the asset is a capital asset. That’s the rule. So
it’s a must that you memorize PARIS. That’s why capital asset is defined by way of exclusion: those which
are excluded from this enumeration shall be treated as capital assets. So how do you now define- this
was asked several times in the bar exams- capital asset? You must start with this and then mention this
one- it’s there in 39(A): Capital Asset which property held by the taxpayer, whether or not connected to
his trade or business, but does not include- which means that except, other than, PARIS. To emphasize
that it is defined by way of exclusion. The hypothetical question: When the law says capital asset, means
property held by the taxpayer whether or not connected with his trade or business- what does that imply?
It implies that there are those capital assets which are held by the taxpayer in connection with business. It
must be one not included in this part! Now, can you think of a business connected asset which is not
included in this 5, therefore it is considered as it- ayan ang thought provoking question. Okay- this
happened. Inasal was sold to Jollibee. The subject business goodwill is that may be treated as a capital
transaction. The transaction between Jollibee and Inasal- that sale of business goodwill is considered a
capital transaction- the gain derived by the owner of Inasal is treated as capital gain and not an ordinary
gain. Another- you must also have of Discounting of Accounts Receivable. So these are receivables from
those businesses of the taxpayer. So it has connection with the business- but since accounts receivables
is not one of the ordinary assets, any gain derived from the discounting of the accounts receivable should
be treated as capital gain. Let’s have this American Jurisprudence mentioned in a decided case-
question: May a capital asset be converted into ordinary asset? YES! 2 American Jurisprudence provide
such a rule. 34 AmJur 89- this is the Jurisprudence which we have adopted in an American case. Capital
asset may become an ordinary asset when the amount of improvement is twice the cost of the original
price of the property. This is an indication that such an improvement- that the owner has this intention…
to sell this to customers in the oridinary course of trade or business. Another Jurisprudence: 34 AmJur
92- this has been cited in the Philippine case of Justice Vitug- that’s the old case of Calasanz v.
Commissioner of Internal Revenue, 144 SCRA 662. This case mentioned this. Justice Vitug developed
this Doctrine of Substantial Improvement- and he is correct. Because according to this AmJur, such
capital asset may be converted into ordinary asset, if the property is substantially improved, or actively
sold. This is a limitation, that a property may be held primarily for sale to customers, in the ordinary
course of trade or business. Why do you have to know whether an asset is capital or not? Answer: You
really have to know whether the asset is capital or not because if it is a capital asset, this shall be
governed by these three technical rules which you will find in Sec. 39(B), (C), and (D). So these are
technical rules on Income Tax. When this rule on 39(B) was asked in 2008, only 5% passed Taxation in
that bar exams. This was one of the questions. When item (C) came out in 2003, only 10% passed
taxation. You really have to know this. (D) has yet to be asked so let’s prepare for this.
Holding Period for Capital Gains Tax

These are really technical terms, and (B), I hope this will not be the first time to have this- that is the
Holding Period Rule. The word period implies that there is a period that must be observed. Apply the law.
These are the rules: You really have to know the date of sale. If the sale involving capital asset occurred
within that 12-month period, the capital gain is 100% taxable. Note that the law says: 12-month period,
not 1 year. Because these are two different connotations. Having known this- you read… So, don’t sell
your capital asset within that one year period from the date of acquisition. Sell it after that 12-month
period, because it says that the capital gains is only 50% taxable. So indeed, this is a form of tax
avoidance- yes! In previous bar exams, tax avoidance was asked! So, prepare for this! Give an example
of tax avoidance! You can cite this as an example! So how do you explain that? First the sale must
involve a capital asset- not within that five (ordinary asset enumeration) so the taxable capital gain will be
up to 50%, sell it after the end of the 12-month period. That’s how you should explain that. Sale of Capital
Assets after 12 months from Acquisition. If there is a capital gain, that is only 50% taxable. That’s the
meaning of the word “recognize”. It does not say taxable. The law says 50% recognized, that means 50%
is taxable. It’s clear that it only applies to individual taxpayers. It does not apply to corporate taxpayers-
[TAXI NOTES] 21
“other than a corporation.”. What is 39(C)? That is the rule that says: Capital Loss Limitation. It simply
means that Capital Loss is deductible only from Capital Gain. Therefore, you cannot deduct capital loss
from ordinary gain. In 2003, problem 6, those who took that bar examinations considered this as a
shocker question. According to them “Sir we never encountered such explanation.”- this was the
question, and try to answer this. It’s alright if your answer is not correct. What is the rationale behind such
a rule, that capital loss is not deductible from ordinary… and you read a book. That was really the
complaint of the examinees. One said: “I’ve read a lot of books but I never encountered such an
explanation or answer to this!” What is the rationale behind such rule that capital loss is not deductible
from ordinary gain? Some answered because there is such a rule that capital loss is deductible from such
capital gain! He was just paraphrasing the provision! One point only. That’s very liminal. You really have
to think. Okay. The book that I wrote- basic approach, I simplified the answer to this. And this is simple
answer- it appears to be a very technical question but it can be answered very easily. It boils down to
your knowledge of deductions: because the question deals with deductions! Now if you read Sec. 34,
there is this rule mandated by the principle of matching of costs against revenues- that from gross
income, you can only deduct business connected expenses. There is no doubt that Capital Loss is not a
business connected expense- you see! To deduct capital loss from ordinary gain, would be to violate
such a rule that only business connected expenses are deductible from Gross Income. Without a doubt,
undoubtedly, it’s clear, that capital loss is not a business connected expense! It’s basic! And you may or
you may not say this- “this is in accordance with the economic principle of matching of costs against
expenses.” Very simple. Don’t ever cite here Lifeblood! No connection! Some say “Because Taxes are
the Lifeblood of the- aaaaah bagsak sa bar.”. This rule proves that there are technical questions sa
taxation, so always regard it as a killer subject in the bar exams. Now Sec.39(C) is clear- it applies to
individual and corporate, except Bank and Trust Companies. These two were asked already in the bar
exams.
Net Capital Loss Carry-Over

Sabi ng source natin: “Sir, you discuss a provision which has never been asked as that may be the
instruction of the chairman of the examiners.” Now, I went over questions of this- and I discovered that (D)
has yet to be asked. Iniiwasan yan ng examiners kasi many examinees may not be able to answer this.
It’s another technical rule on Capital Transactions that is described as Net Capital Loss Carry-Over or
NELCO. So it’s clear that what may be carried over as a deduction from Capital Gain in the succeeding
year: Net Capital Loss! And this is defined in 39(D)(3)! It is the excess of Capital Loss over Capital Gain. It
means that Capital Loss is more than Capital Gain. Example: Capital Gain 10,000php. Capital Loss:
15,000. The result: Net Capital Loss. That’s the one. It may be carried over in the succeeding YEAR.
There is no S there. Only ONE year. As a deduction from Capital Gain because you can only deduct that
Capital Loss from Capital Gain- IF ANY. Otherwise, it becomes nullity. You might be asked- the rule is
that you cannot carry over an expense- is there an exemption? Yes, there is. You can carry over- what is
that? Net Capital Loss. It’s clear here that it only applies to individual taxpayers. That’s the meaning of the
phrase “other than a corporation”. It does not apply. Taking cue from that source: “Ask questions
especially those that are from new provisions not asked in previous bar exams.” This is it. Have you heard
of Net Operating Loss Carry-Over? Yes, that is yet to be asked. So you must compare 39(D) with
34(D)(3). This is a new provision introduced by RA 8424 which has never been asked in the Bar Exams.
Your examiner will try to check your knowledge about this. Now first, as to the taxpayer, net capital loss
carry-over applies only to Individual. In contrast, Sec. 34(D)(3) makes no distinction. Business Enterprise
can be Individual or Corporate. That applies to both Individual and Corporate. Another point of distinction
which is the most obvious one as to transaction covered: Net Capital Loss Carry-Over- Capital implies
that it must involve capital asset. On the other hand, NOLCO- Net Operating Loss. The word Operating
implies that this must involve or cover ordinary asset. It must be an ordinary transaction. Period Covered:
A while ago I pointed out “Succeeding Year” there is no S there. So it covers only this NELCO- One Year.
While NOLCO under 34(D)(3) made mention of THREE taxable years, whilst some companies FIVE-year
period. That will suffice. You must know all these notable distinctions.
Gain by Legal Fiction: Forced Sales and Capital Gains Tax

Before we point out the distinctions, let us first discuss the common rules provided for in Sec. 24(D) and
Sec. 27(D)(5). First that the subject of sale must be a real property, and it must be a capital asset. In you
[TAXI NOTES] 22
Tax Code, you make a note and say capital asset means not used in trade or business. Indeed, it is a
capital asset. Then you should know the tax rate. It is a final tax- it is 6% capital gains tax. This rate must
also be memorized. Every time this is asked, the examiner never mentioned rate because you are
expected to know this. That is the most popular of them all. 6% Capital Gains Tax. The word capital
implies that it must cover capital assets. Real property. Next, the tax base of the 6%- this is the word:
higher. The higher amount between the gross selling price. In the law it says in Sec. 6(E)- you change
that. You make it- that’s the Zonal Value. So, it is the higher amount between the Gross Selling Price and
Zonal Value. This was the subject of a bar question in 2001. It is in Presumed Gain. What does this
imply? In American Jurisprudence, this is known as Gain By Legal Fiction. With this- try to answer this bar
question in 2001. The seller was a doctor by profession. He sold his parcel of land. There was no doubt it
was a capital asset, acquired 10 years ago. At 800,000php. He acquired it and that must be the cost 10
years ago… 1 million. So incurred a loss in the amount of 200,000. He did not pay capital gains tax
because his argument was: I derived no gain. In fact, I incurred a loss of 200,000. There being no gain,
I’m not liable to pay the 6% Capital Gains Tax. So, the BIR made an assessment and that was his
argument- is his argument tenable? No, it is not tenable. So this is the law you must state: So, his
argument is not tenable because the tax code Sec. 24(D) & 27(D)(5) makes as a basis this presumed
gain- the Tax Code provides that the 6% shall be imposed on the presumed gain from the sale of
exchange of real property considered as capital asset. Oh, you explain that. You have cited the law. You
are sure of 2pts there. Now impress upon the examiner that you know the law. Now explain that in your
own words. The basis, the tax base of the 6% is Gross Selling Price, or Zonal Value, whichever is higher.
In that bar problem in 2001, there was really no mention of Zonal Value supposed so consider the selling
price as the tax base. So, note that cost is not a deductible item. It is imposed on the selling price here.
800,000. So the law does not take into account the cost because the tax base is Gross Selling Price. So,
you mention that. Then you counter his argument- that “having received no gain, he is not liable”- well,
this is the Gain by Legal Fiction. It is the law that presumes when you say real property considered as
Capital Assets, you derive gain. So even if he incurred a loss, the law does not allow Cost as a
Deduction. He derived gain by legal fiction. You really have to mention that. Though he did not actually
derive gain, by legal fiction he derived gain because that’s the meaning of presumed. And then you cite
that American Jurisprudence: This is known as gain by legal fiction. That’s how you answer that. Now,
let’s have a decided case. When it says sale, does it include Forced Sale? Or that may cover Extra-
Judicial Sale? Yes! This may cover voluntary sale, or foreclosure sale. Now- jurisprudence. This is the
case of Supreme Transliner Inc. v. BPI Family Savings Bank, which you will find in 644 SCRA 59. This
is the pronouncement of the court: to be subject to the 6% CGT, it must be shown that the mortgagor
failed to redeem the property within that 1 year period. As set forth in Sec. 6 of Act 3135. Now I must tell
you that this is part of Civil Law. That Act 3135. So your Bar Reviewer in Civil Law must discuss that. Not
in Commercial Law. I was the examiner in Civil Law in 2013, so I recommended to Justice Brion, that it is
about time to include this in Civil Law, not in Commercial Law. So granted. That’s why it’s now part of Civil
Law- questions on this can only be asked in Civil Law and no longer in Commercial Law. Now there is
such 1 year period for the Mortgagor to Redeem the same. If he exercises his right of redemption, there is
no sale. Common sense dictates, there is no sale to speak of, that’s why that’s not the 6% will not apply.
It will only apply if there is an extra-judicial sale or legal sale, or forced sale, or involuntary sale. So, the
6% applies. Our problem is, you don’t apply this provision under 27(D)(5) or 24(D)- you don’t apply this
and that’s why you ought to know this. And this is what the Court said, this is the jurisprudence: “The
basis of the 6%, or the tax base is the price paid by the highest bidder.” That’s the tax base of this 6%. It
also pronounced that this 6% CGT must be paid within 30 days after the lapse of the lapse of the 1 year
redemption period. So that’s the jurisprudence of this. I repeat. It is now settled that thte 6% CGT applies
also to forced legal or extrajudicial sale or public sale. Now let’s now point out distinctions between these
two, because questions may be asked based on cases, instances where sale is made by individual- you
really have to apply 24(D)- or domestic coporation- you really have to apply 27(D)(5). Precisely, that’s the
number 1 point of distinction as to the taxpayer or seller. But 24(D) applies to individual seller, and
27(D)(5) applies to domestic corporation. In one of my lectures, question was asked: “Sir there is such
BIR Ruling saying that this 6% applies also to RFCs” That’s an erroneous BIR Ruling or Opinion, because
if you read 28(A) which is the provision on RFCs, you will never find provisions on this. The 6% CGT, so
what is clear here is that it only applies to DCs. As you only find this, as far as corporate taxpayers under
27(D)(5). So, that’s an erroneous view or opinion. So only domestic corporation is covered by this. You
[TAXI NOTES] 23
might ask: Sir, supposing that the seller is a resident foreign corporation? So you apply the corporate rate
of 30%. Should be reported as other income. Point of Distinction No. 2: As to property, you will see the
distinction, 24(D)(1), it specifically says real, real property. On the other hand, refer to 27(D)(5), it covers
only lands and buildings NOT used in Trade or Business. I must appraise you of this latest jurisprudence
here. In that case that I have cited, SMIed Philippine Technology v. Commissioner of Internal
Revenue- again, that is 739 SCRA 691, I may be- I think it’s on pages 713 and 714- this may be the
subject of that problem. Domestic Corporation sold its machineries and equipment- and gain was derived
therefrom. Question: What is the tax treatment of such gain or income? Note that 27(D)(5) will mention of
lands and buildings NOT used in trade or business. So exclude machineries and equipment. So the
answer here as correctly pronounced by the court, that should be taxed at the Corporate Rate of 30%. In
other words, the 6% will not apply. It will only apply if the subject of sale- land or building, NOT used in
trade or business. If the subject of sale is either machinery or equipment, it’s the 30% Corporate Rate that
applies. That’s the recent jurisprudence on this. We’ll stick now to that. Another point of distinction: Sale
covered under these two sections. In 24(D), it made mention of an unconditional sale, or absolute sale,
including that of a conditional sale that may cover pacto de retro sale under Art. 1601 of the Civil Code. In
contrast, 27(D)(5) it made no mention of conditional sale, as it only applies to absolute or unconditional
sale. Point of Distinction No. 4, the situation is this: The buyer is the Government. The government here,
according to 24(D)(1) may include instrumentalities, agencies of the government, including GOCCs. In
24(D)(1), it is clear that the individual seller is granted this option- that is, he may avail of the 6% CGT or
the rate under 24(A)(1)(c), that’s the progressive rates of 5 to 32%. Up to now, the BIR has yet to come
up with a clear-cut regulation on this. But just remember that an option has been granted to the individual
seller; that is to avail of the 6% CGT or the rates under 24(A)(1)(c). While if the seller is a DC, it is granted
no option there as the only applicable rate is 6%, and this is the most important point of this section.
Exemption from Capital Gains Tax

As to tax avoidance, read 24(D)(2)- this was asked several times in the bar exams. It is a must that you
memorize this, 1-2-3-4, conditions for exemption. First, is that the proceeds of the sale must be used
either to construct or purchase new principlal residence. Number 2, 18-month period. How do you explain
this? The construction or purchase of new principal residence must be made within 18 months from the
date of sale. That’s how you explain that. (3rd) 30 Notice to the BIR. Now explanation. The individual
seller must notify the BIR within 30 days from the date of sale of his intention to avail of this exemption.
Four, 10-year period. Explanation: This benefit of exemption or tax avoidance scheme can only be
availed of once every 10 years. I noticed that reviewers, taxation books, fail to mention under their
requisite for exemption. When this came out in 2013, as I told my students, you take note of 24(D)(2), it
will come out. I was not allowed to lecture- but it really came out! The problem was quite long, it
consumed one page- the question there was “how do you advise the seller of the residential house and
lot in Dasmariñas Village in Makati, on how to avoid the payment of 6% CGT?” So, this is the answer to
that. You really have to explain, appraise your client or your friend, about these conditions for exemption.
I called the attention of the office of Justice Brion, that I noticed that it only mentioned 4. There is another
requisite for exemption, and that is provided for by Revenue Regulation 17-2003. Some books on
Taxation fail to mention this. This is an additional requisite and that pertains to the execution of ESCROW
Agreement. You explain this in this way: Based on this Revenue Regulation 17-2003, that the seller,
buyer, authorized agent bank, revenue district officer, may execute this so called escrow agreement, to
the effect that the 6% CGT shall be deposited under an Escrow Account. Within 30 days from the
expiration of this 18-month period, the individual seller must present proof before the authorized agent
bank, that he has complied with these requisites, particularly the use of the proceeds either to construct
or purchase a new principal residence. If he can present proof to that effect, he can withdraw from the
authorized agent bank, that 6% CGT. In effect, he has succeeded in avoiding the payment of 6% CGT.
Indeed, it is a form of tax avoidance. Read 27(D)(5), you will never find tax avoidance therein. It is
27(D)(5) that you must develop mastery, because the one that is always asked 24(D), your examiner
knows that. So to recapitulate, 27(D)(5) applies only to domestic corporation. The subject: only lands and
buildings, NOT used in trade or business. The same must either be absolute or unconditional sale. No
option is granted to the seller domestic corporation, even if the buyer is the government. And last, DCs
cannot avail of a tax avoidance scheme. That summarizes all the rules of this. We have cited
jurisprudence, we have scrutinized all provisions of Sec. 24(D) and 27(D)(5). I’ve cited 3 rulings of the
[TAXI NOTES] 24
court here, and clearly have cited the distinctions between 24(D) and 27(D)(5), you are assured of 10pts
there, but here must have mastery of this.
Interest Income
What about Interest Income. After which Dividend Income. Okay Jurisprudence- 32(A)(4)… Let’s collate-
group all those sections on Interest Income which the Code says Exempt. So as a rule, Interest Income is
Taxable, except… let’s try this keyword: LIFE. Mga natutulog gising na. Let us give life to this Interest
Income. I must tell you, two of these items came out in 2008- killer ang Tax. Two of them came out in that
difficult bar exams in 2008. So, this is a compilation of tax exempt interest income. This has never been
asked. One is Interest Income from Long Term Deposit or Investment Certificate. I’ll explain that later on.
So the basis is, first, this is defined in Sec. 22(FF). There you will find the definition. Exemption is granted
under Sec. 24 & 25. It is exempt. I stands for interest income from Investment- we include Deposit,
received by International Financial Institutions. This must be established by foreign government. That
may include Regional Financial Institution Established by Foreign Governments. You will find this
exempting provision in Sec. 32(B)(7)(a). It is one of the exclusions from Gross Income. Interest Income
from Investment or Deposit Received by Financial Institution Owned, Financed, Controlled by Foreign
Government. The purpose of the law- it is also 32(B)(7)(a) is to encourage foreign investments here.
That’s why they are declared exempt. Now this was the one asked in that difficult bar exams in 2008. E
stands for Expanded- so Interest Income from Deposit made under the Expanded Foreign Currency
Deposit System. Take note- you underscore this- it is only exempt, as many examinees were not able to
answer this- if there recipient is NON-RESIDENT, Corporate or Individual. You will find this in Sec. 24,
then 27, and 28. So again, underscore this, it is only exempt if the depositor is a Non-Resident Individual
or Corporate. That was one of the question in 2008- the last two questions dealt with this. Now,
supposing depositor is resident corporate or individual- that was the sub-question. What is the Tax
Treatment? And if so, what is the applicable rate? Very unfair question. This is the answer: It’s there in
24(B)(2), it is subject to 7.5% final tax. Now, can you expect examinees to know this? Not all. These were
the two questions asked in 2008 where only 5% passed in that examination. Again. The source is the
Foreign Currency Deposit System You really have to qualify unlike the Court. Could seller be depositor or
recipient? If the recipient is NON-RESIDENT, Corporate or Individual- it applies to both, that is exempt.
On the other hand, if the depositor or recipient is RESIDENT, Corporate or Individual, that is Taxable
subject to 7.5% of Final Tax. Now let me expound on this most probable one. Long Term Deposit or
Investment Certificate. So the word Long Term brings us to this 5 year term. That explains the word “long
term”. Then you must know the depositor here. You read 22(FF), there your examiner can formulate
question this time to mislead you. There it is clear it is implemented by RMC. 18-2011, that the exemption
applies only to Individual Depositor. That’s the trick. If the depositor is a corporate, even if it is 5 years or
more, the exemption will not apply. Another possible source of misleading fact- you must know the
depository, or depositary. There it is clear that the depository must be a bank. Finance companies may
engage in such business. If the depository is a finance company, this exemption will not apply. When it
says deposit, this may cover time, savings deposit, individual, joint deposit. When it says “Investment
Certificate” that covers investment account. It is also clearly provided for in Sec. 22(FF) of the NIRC, the
form or the denomination must be prescribed by the Bangko Sentral ng Pilipinas. 10,000php
denomination. So we have explored all the angles of this provision and this has never been asked- it’s
about time to ask this. Again, Interest Income from Long-Term Deposit or Investment Certificate is
Exempt from Income Tax.
Dividend Income
Now Dividend Income- there are 1,2,3,4 decisions of the Supreme Court on this. That is item
Sec.32(B)(7)- Dividend Income. I have mentioned this morning- and let’s start with this, two instances
where dividend income is subject to final tax. So, recall what we have just said. This need not be reported
by the recipient thereof. One received by Individual Taxpayer, you will see that in Secs. 24 and 25. Two
received by NRFC- you check, this is based on 28(B)(5)(b). Clearly, the recipient is a NRFC. That came
out in 2015, as there were 25, 23 questions on income. So, when is it tax exempt? Let’s focus on this.
One, DC receives Dividends from another DC. This is known as Intercorporate Dividends. Now Sec.
27(D)(4) says “shall not be subject to tax. It is exempt. That is the exempting provision, 27(D)(4). Another
[TAXI NOTES] 25
exempt Dividend Income DC… RFC receives Dividends from a DC. This is a common mistake or blunder-
some will say that it is taxable, that is not correct. It is still exempt by virtue of Sec. 28(A)(7)(b) which
says: “Shall not be subject to tax”. Question No. 1 in 2013. Liquidating Divident is Tax Exempt. This must
be based on that 1947 case. That’s the case of Weiss Company v. Meer and Collector, 78 Phil 655. Try
to memorize this jurisprudential pronouncement of the court, explaining why it is tax exempt. The Court
said: “Liquidating Dividend is in effect a relinquishment of the interest of the stockholder in a corporation.
It represents a mere return of capital.” No gain or profit realized. That is why it is tax exempt. Four. Stock
Dividend is tax exempt- Sec. 73(B), declares “shall not be subject to tax”. Decided case: Commissioner
of Internal Revenue v. Anscor (Andre Soriano Corporation) 301 SCRA 152 pronounced that stock
dividend shall not be subject to tax. If this will be asked again as it was repeatedly asked in the bar exam,
you impress the examiner by citing these two reasons: Reason 1 must be based on Sec. 73(B) of the Tax
Code. Reason No. 2 must be based on the decided case: Commissioner v. Anscor. So, is stock dividend
taxable? Answer: Stock Divided is not Taxable. Reason: 1. 73 of the NIRC or Tax Code says it just
represents a transfer of the surplus to the capital account. That’s what it says. No. 2, Jurisprudence,
Commissioner v. Anscor: It is just an increase, unrealized increase in the interest of all stockholders in the
Net Equity of the Corporation. Then you conclude from these, there is really no realized gain or profit. If
that’s the way you reason out, you will top the bar. You are citing the Tax Code, and you are citing as
settled Jurisprudence, and you made a conclusion which is absolute. There is really no realized gain! No
flow of wealth! That’s the reason why stock dividend is not subject. You might be asked on the exceptions
to the rule: You prepare. I must tell you that bar examiners always ask on exceptions rather than the
general rule. Because he expects that everybody can answer questions on the general rule. Ganon ang
mentality ng mga examiners. So, you focus on this. What are the exceptions to the general rule? This
time dividend is subject to tax. I have developed a new acronym or keyword here. And this you can easily
recall: COURT. COURT! Now what does C represent? Sec. 252 of RR. No. 2 says: “subject to tax if there
is a change in the stockholder’s interest in the corporation! For instance, before the declaration of the
dividend, the stockholder’s interest is 10%. Stock dividend has been declared- it must increase! 11 or
12%. That represents the taxable element or income there. When there is an increase in stockholder’s
interest in the net asset or equity of the corporation, that will result in taxable stock dividend. Nothing to
worry because your examiner received this instruction from the Chairman: “Don’t ask questions which
require computation” That’s the good news. I just hope that your examiner- I think he will- follow. It was in
1996 when a question requiring computation was asked. You know the question there? “Compute the
allowance for depreciation of property that has the estimated useful life of 10yrs, 20yrs, fair market value,
100,000php, salvage value 100,000…” Only accountants can answer that! From that time on, a special
instruction is issued to every examiner in Taxation: “Don’t ask questions that require computation”. It’s
really unfair! You are not taking the CPA Board examinations! So, we are assured of that! Now, what is
this O? Stock dividend is subject to tax- the word here is “if it is received by a stock… ah- holder other
than the stockholder”. Let me explain this. This is based in Revenue Regulation- some books fail to
mention this- No. 2, Sec. 251. Some books there were omissions. Professor Noledo- have you heard of
him? He was a noted authority in Taxation, made an explanation on this- and it was only in his book
where you can find this commentary here. The situation is this: LMN Corporation, ABC Corporation- they
have stockholders. Now stock dividends were declared by LMN Corporation, received by the stockholders
of ABC Corporation. So here, “other than the stockholders”. Professor Noledo- it is only in his book that
you can find this annotation or commentary- described this as “Dividend in Stock” Baliktad. Stock
Dividend- that’s the term you are familiar with! But there is such term Dividend in Stock and he explained
that must be a stock dividend by the stockholders of another corporation- and that is Taxable. That is the
one that is subject to tax- that’s the meaning: other than the stockholders of the giver corporation. U is
based on decided case. It is taxable if it is received by Usufructuary, and this is the jurisprudential ruling
of the court in that old case of Bachrach v. Siefert, 87 Phil 483. The majority view- and that’s the
prevailing view, “if the recipient is a usufructuary, that is taxable”. The minority view, it is still exempt. Here
the bases of our Supreme Court is Art. 566 of the Civil Code which provides that Usufructuary has the
rights over the natural, civil, and industrial fruits over the thing in Usufruct. So that’s the majority or
prevailing view- stock dividend received by the Usurfuctuary is Taxable. To my mind, this may be the
most probable: R represents taxable is there is such Redemption of Shares of Stock issued as Dividends.
This has been explained in that landmark case- it’s quite long, you try to read the case of Commissioner
of Internal Revenue v. Anscor (Andres Soriano Corporation, I mentioned a while ago 301 SCRA 152.
[TAXI NOTES] 26
Now those of you who have yet to read this, just remember this jurisprudence: “It is taxable”… this must
be the qualifying phrase: “Redemption of Shares of Stock issued as dividend, may result in taxable
income under this situation.” The Supreme Court said: “If the source… Stock Dividend declarations…”
You must know what the Court said: “That it is not taxable if the source is initial capital investment, or
original subscription”. Now this requires your knowledge of corporation law to understand this. By way
of… recall Sec. 6 of B.P. 68, and that pertains to the Articles of Incorporation(AoI). The AoI may classify
shares of stock into redeemable shares- or preferred shares of stock. If that is the source of this, that will
never result in a taxable gain, because the Court ruled “it is just a return of investment” which these
shares of stock are redeemed. But if during the existence or operation of the Corporation, there are stock
dividends declared, in the form of Redeemable Shares of Stock, that’s the one referred to by the Court
which may result in a flow of wealth- and therefore it is taxable. So, you must know the source. So with
this you may now read this case. The last one, T stands for Treasury Shares of Stock. Try to read the
case of Commissioner of Internal Revenue v. Manning 66 SCRA 42. We all note that Treasury Shares
of Stock are not entitled to Voting Rights and that of Dividends. But it may happen as it really has in this
case- that the board may declare dividends in the absence of Unrestricted Retained Earnings. It
happened in this case in Commissioner v. Manning. So the Board declared dividends not in accordance
with Sec. 43 of the Corporation Code, which requires the presence on Unrestricted Retained Earnings, so
no dividends were legally declared here. But the Court described that as “in the guise of Stock Dividends”
and this was a shocker question in 1994. Question 1: “What are disguised dividends?” Many examinees
suffered mental block. Those who aimed to top the bar… they were really upset “I could no longer top the
bar because I could not answer this. I have reviewed for 6 months, one examinee commented, I
practically read all books in Taxation but never encountered this. What do you mean by disguised
dividends?” It was really a shocker question so I must advise you to maintain equanimity there- because
once you suffer a mental block, for 15min you cannot think of an answer. So avoid that! The consolation
here: Why worry? That is only good for 10 or 2 points! I can still top the bar! How did he answer? “In the
guise of disguised dividends”, that’s the phrase used in this case! They are dividends declared not in
accordance with the Corporation Code as they were declared in the absence of Unrestricted Retained
Earnings. The words “in the guise” meaning to avoid the payment of tax on dividends. So these are the
decided cases on the Stock Dividends which are- you focus on these exemptions to the rule.
De Minimis Benefits
I am quite sure there will be question on Tax Exempt de minimis benefits. There are 7 Revenue
Regulations on this- so please update the book reviewer that you have read, because this may not be
there in the book that you have read. Let us consider this 7 BIR Regulations consistent being seen back.
The following Fringe Benefits are Tax Exempt as they are Tax Exempt de Minimis Benefits I have, for the
first time in my lectures, developed a keyword here because I am quite confident one or two of them will
come up in your bar exams. Last bar, this kind hearted Justice of the Supreme Court, Velasco, asked me
to submit 20 questions on Taxation although I was the examiner in Civil Law. He asked 8 of the 20, those
who were under me in Tax Review, enjoyed answering because I asked them in their Final Examination.
Justice Bersamin is a good friend of mine. It is a remote possibility, that he will ask me to submit- a very
remote possibility, but the possibility is there. If that happens, where will I source my questions? Of
course, my lecture! This is the keyword that you must remember. Very easy to remember:
GOCCREALPCGG. There are 11 exempt de minimis benefits. Covered by 7 BIR Revenue Regulations.
The examiner cannot just ignore it. Okay, let’s have 1. G represents Christmas Gifts- the threshold
amount, it is exempt only up to 5,000 a year. And that will also cover major anniversary gift. Gift may be
the same as bonus. To avoid any confusion, let’s have this 32(B)(7)(e), has been amended by RA10653
th
in that it increased the Lump Sum exempt amount from 30,000 to 82,000php. The law is clear. 13 month
pay and other benefits exempt up to 82,000. Other benefits include Christmas Bonus and Productivity
Incentive Scheme of Benefits. So Christmas bonus is part of this. So the word used by law is “Christmas
Bonus”, you apply this. It is exempt as it is included in the 82,000 lump sum limitation. That is just one of
th
the items! The word lump sum indicates that there are other items there such as 13 month pay,
productivity incentive bonuses. If the examiner uses “Christmas gift”, he must have this in mind. It is a tax
exempt de minimis benefit up to 5,000 a year. That’s how you approach the problem. O stands for
Overtime Pay. I doubt this will come out- OR meal allowance 25% of the basic minimum wage. This is to
my mind, the most probable because it is very common but it has never been asked in the Bar Exams. C
[TAXI NOTES] 27
stands for Clothing or Uniform benefit or allowance and the exempt amount is 5,000php a year. Per
annum. C, another C, stands for Cash Medical Benefit. Now please draw a line- the recipient here is the
Dependent of the Employees! And the exempt amount, very small, very unrealistic, 125php a month. Do
you think this will be enough to cover one box of Cortal, Immodium, White Flower, Omega Pain
Killer…??? REAL. This came out in the 2007 bar Exam- no doubt this is very common. R represent Rice
Subsidy. It used to be 1,000 a month, before when it was asked. Now it is 1,500 a month. Still, it may not
be enough to cover the cost of one sack of rice. It’s about time to increase this. 2,000 nalang. E stands for
Employee’s Achievement award, exempt up to 10,000 monetary value a year or per annum. A refers to
Actual Medical Benefit given to the employees. You must have noticed the distinction here. The 125php a
month which must be in cash, the recipient is the dependent of the employees. If the recipient is the
employee, you apply the 10,000 monetary value of that actual medical benefit. L stands for Laundry
Allowance. Very small. 300php a month. It’s about time to increase that. Now P stands for Private
Employees as regards receipt of the monetized value- okay, underscore- of the 10-day vacation leave
credits. What does that mean? Taxable in excess of that 10-day vacation leave credits. Likewise taxable
if it represents monetized value of sick leave credits. In other words, it is only granted exemption- private
employee, with respect to the monetized value of the 10-day vacation leave. C, this is the most recent
one- Benefits granted under CBA. Collective Bargaining Agreement. Revenue Regulations 1-2015- some
books fail to mention this, so take note of this. It uses the conjunction AND. There are two benefits. The
exempt amount is 10,000php a year which must cover the benefits under CBA AND Productivity Incentive
Scheme. That’s what it says. G stands for Government Employees as regards receipt- so no more
limitation, qualifications, or conditions. On the receipt of the monetized value of Vacation and Sick Leave
Credits. Revenue Regulations 5-2011 mention only of the words leave credits. So that may cover
vacation and sick leave credits. Some of you may raise this question: “Sir is that not unfair that
government employees are fully exempt, whereas private employees are exempt only up to the
monetized value of the 10-day vacation leave credits.” The BIR-DoF is ready to counter that. It is based
on substantial distinction. Because private employees render no public service whereas government
employees render “genuine” public service, so it is based on substantial distinction. Yes, you are correct.
To impress the examiner, you must state the purpose or purposes. CHEG. There are two characteristics
of de minimis benefits. These are precisely the reasons why they are exempt: 1. They are relatively of
small value. So just imagine 125php a month, 300php a month. The most important purpose or purposes:
CHEG. What is C? This may be given or granted to Promote Contentment. H to promote, no doubt,
Health. E, to promote Efficiency. And G stands for Goodwill. To promote Goodwill, please don’t ever
reason out in this way: Rice Subsidy should not be subjected to tax because it is given to promote Health.
My God. You did not understand. There are only two where you can use that! The Cash Medical Benefit
given to the dependent, and the 10,000 actual medical benefit that may be given to the employees.
Please mention this.
[TAXI NOTES] 28
TAX ON CORPORATIONS (by Justice Japar Dimaampao)
Your examiner added more corporate rules in this bar exams. In the last 5 years, there are only four (4)
significant corporate rules included in the coverage. I don’t know why they added four (4) more. So, there
are now eight (8) significant corporate rules that are included in this bar exam. That’s why I feel there
<incomprehensible> taxation will really <incomprehensible> probably additional rules that are included by
your examiner. So, we really have to discuss these and then focus on the most probable ones. Of these
eight, I think 2 would come out because these 2 have been subject of new decisions of the Court. So
these are the eight (8) corporate rules included in the coverage for taxation.
8 Corporate Rules
Law Tax Rate Tax Base Jurisprudence
Sec. 27(E) - CREBA v.

Domestic Romulo,
Corporations 614 SCRA 605
Minimum Corporate 2% Corporate
1. Gross Income
Income Tax Income Tax
Sec. 28(A)(2) - Manila Mining v.
Resident Foreign CIR,
Corporations 499 SCRA 782
Corporate Profits
Cyanamid v.
or Earnings
CIR,
improperly
Improperly 322 SCRA 639
accumulated
2. Accumulated Sec. 29 10%
Earnings Tax Helvering v.
Exceptions: PBI National Grocery
(Sec. 29(B)(2)) Company
304 U.S. 282
Air Canada v.
Resident Foreign
CIR,
Corporation
778 SCRA 131
3. Sec. 28(A)(1) 30% Taxable Income
- In regard to Offline CIR v. BOAC,
International Airline 149 SCRA 395
Marubeni
Philippines v.
CIR,
Profits applied or
Branch Profit 177 SCRA 500
4. Sec. 28(A)(5) 15% final tax earmarked for
Remittance Tax
remittance.
Deutsche Bank
v. CIR,
704 SCRA 216
Tax Sparing Credit Cash/Property P&G v. CIR, 204

5. Sec. 28(B)(5b)
Rule Dividends SCRA 377
[TAXI NOTES] 29
International Air
Carrier and Gross Philippine
6. Sec. 28(A)(3) 2.5%
International Billings
Shipping
Offshore Banking
7. Sec. 28(A)(4) 10% Gross Income
Units
Tax Treatment
Regional or Area
headquarters
8. Sec. 28(A)(6)
Regional operating
10% Taxable Income
headquarters
1. Minimum Corporate Income Tax
The conclusion is this: It applies only to domestic corporations and resident foreign corporations. MCIT
does not apply to non-resident foreign corporations. Remember that.
Problem No. 1: Suppose a corporation had no taxable income in that the gross income and expenses are
the same. For instance, Gross Income=10 Million, Expenses=10 Million…zero…no taxable income. So
you’ll not be asked to compute but your examiner will test your knowledge of this question: Is this
corporation domestic corporation or resident foreign corporation that had no taxable income subject to
this MCIT 2% gross income? Revenue Regulations 9-98 which the Court sustained its validity, Yes. So, a
corporation that had no taxable income is still subject to this corporate rate of 2% of gross income. The
reason is obvious. Note that the tax base is gross income. That’s why it is still subject to this 2% of gross
income. So, 2% of 10 Million, that is the corporate income tax that must be paid.
Problem No. 2: Gross Income=10 Million, Expenses=15 Million, the result is a net loss in the amount of 5
Million. Question: Is this corporation that incurred a net loss in the amount of 5 Million subject to MCIT?
The answer is Yes. This is clearly provided for in RR 9-98. Again, this is all because the tax base is the
gross income.
Now, before January 1, 1998, the practice of corporations discovered by Sen. Enrile, because he was the
principal sponsor of this — he’s really a tax expert. He finished taxation in a reputable school in the
United States — he discovered that corporations resorted to this practice of over claiming deductions in
order to reduce income tax payments. So before January 1, 1998, we could not tax these corporations
that had no taxable income or incurred a net loss. So that is the evil of allowable deductions. That’s why it
has been deleted in that proposed tax reform <incomprehensible> under the present administration.
So, he introduced this, the MCIT. This will bring us to the bar question in 2001: What is the purpose of
MCIT? Now, recall what I have said. Now, the prevailing practice before January 1, 1998, corporations
resorted to this overstatement of expenses in order to reduce income tax payments. So, there was such
connivance between the domestic corporations, resident foreign corporations and BIR examiners. They
overstated their expenses, meaning, not all these expenses are business-connected ones. There was
corruption there. So this must be the answer. The purpose of MCIT, and this is the word used by Sen.
Enrile, (to) forestall the prevailing practice of corporations of over claiming deductions in order to reduce
income tax payments. That’s the authoritative answer to that bar question in 2001.
So that even if such corporations will continue overstating their expenses, they can still be subjected to
this corporate income tax and that is 2% of gross income.
[TAXI NOTES] 30
So, if the question is the purpose, that must be the answer. But if the question is explain the rationale,
that’s another. That’s a different type or tenor of such question. Before what I have told you in CIR, the
rationale underlying the position of MCIT according to the Supreme Court in CREBA v. Romulo,
domestic corporation is as follows: Domestic Corporations owe their corporate existence and their
privilege to do business to the government. They also benefit from the efforts of the government to
improve the financial market and to enhance favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to the public expenses. That is the
philosophy or rationale.
Now, these are the decided cases:
1. CREBA v. Romulo, 614 SCRA 605
The ruling of the Court: the Court held that this MCIT is valid and constitutional. There is no violation of
due process and contrary to the claim of the petitioner that it is attached on capital. It’s not attached on
capital. The tax base is gross income. So it is still a tax on income.
Another ruling in this case. The validity of RR 9-98, providing such a rule that corporations that had no
taxable income or incurred a net loss are subject to MCIT.
2. Manila Mining Corp. v. CIR, 499 SCRA 782
Ruling of the Court: The Supreme Court sustained the validity of the so-called safeguard or equitable
provision. So this is considered in the language of the Court as an equitable provision of MCIT and this
has something to do with the application in that it only applies on the 4th year of corporate existence.
Indeed, it is equitable because the view here is that — we must have learned this in Corporation Law —
for the first 3 years will be considered as period of adjustment. It is presumed that the corporation has
stabilized on the 4th year of corporate existence. In this regard, this brings us to the notable distinctions
between these normal corporate rates and this MCIT.
These are the distinctions:
Normal Corporate Rate MCIT
As to Tax Rate
30% 2%
As to Tax Base
Either Taxable Income, or Gross

Income (for Non-Resident Foreign Always Gross Income
Corporations)
As to Applicability
Even on the 1st year of corporate On the 4th year of corporate

existence. existence.
The word “minimum” implies the corporate income tax that must be paid must NOT be lower than 2%. So,
if the normal corporate income tax applying that 30% rate, assume is 650,000. And let us also assume
that the MCIT 2% of gross income is 750,000, this is where you can squarely apply this. It must not be
lower than 2%. So the corporate income tax that must be paid must not be below 750K. That’s why the
normal corporate rate is…it is 750,000 that must be paid because that is what it implies. Not lower than
2%, so not lower than 750,000. Of course, it’s given that if the normal corporate rate is higher than…it is a
[TAXI NOTES] 31
tax-free corporate income tax that must be paid. For instance, normal corporate income tax is 750,000.
2% of gross income 650,000, so common sense…it is 750,000.
2. Improperly Accumulated Earnings Tax
Read Sec. 29. You might ask, the law makes no distinction. However, RR 2-2001 clarifies that it only
applies to domestic corporations. That is now clear. Read Sec. 29(B)(2). You must have noticed this: BPI.
So if the problem deals with any of these three, your answer is: This 10% improperly accumulated
earnings tax, it is inapplicable. These are the corporations, these are exempt from this 10% improperly
accumulated earnings tax:
B - Banks and other nonbank financial intermediaries;

P - Publicly-held corporations (because covered are Closely-held Corporations);
I - Insurance companies.
Jurisprudence: Cyanamid v. CIR (322 SCRA 639)
It is in this case where the Supreme Court adopted this foreign or American jurisprudence and that is
what we call the Immediacy Test. Immediacy Test is an American jurisprudence. Is there a
corresponding provision in Sec. 29? Yes. Refer to Sec. 29(E). The word “reasonable” according to this
case of Cyanamid is the same as the word “immediate”. So this is how you should explain this. This is to
those who took the 2010 a shocker question. That they realised that, “immediate” is the same as
“reasonable”. So “immediacy test” is a test consistently applied by US Courts in determining whether
corporate earnings or profits are reserved for the immediate which may be the same as reasonable
means of such corporation. So, if such corporate earnings or profits are reserved for the immediate or
reasonable needs of such corporation, it is not subject to this 10% tax.
American jurisprudence, the case of Helvering v. National Grocery Company (304 U.S. 282), this is where
it said: This 10% tax is a form of penalty. So, this is where you can apply this general principle on taxation
that is the power to tax may be used to regulate, meaning, to achieve a non-revenue purpose. So, here in
imposing 10% on improperly accumulated earnings, the power of taxation has been used to regulate such
corporate practice because it is really unsound for corporations to improperly accumulate earnings. They
are supposed to distribute profits. Investors are after them. So, it’s a form of penalty in effect to deter
corporations from adopting/resorting to such unsound corporate practice.
Not all examinees can answer this.
Is this 10% a tax on improperly accumulated earnings or profits prescriptible or imprescriptible? Now,
have you read an annotation relative to this? You read all books on taxation here in the Philippines. In
fact, I read <incomprehensible> and there is no such ruling because it’s an American jurisprudence. It is
in this case where it held that the law cannot…this is common sense…the law cannot compel a
corporation to report improperly accumulated earnings. That’s the <incomprehensible> failure of such
unsound corporate practice. That’s why it has been held…so this is an American jurisprudence, which we
must adopt…how we discuss the nature of this…therefore the law, to compel a corporation to report
improperly accumulated earnings, this is in effect imprescriptible. So, what you learn is this: Internal
Revenue taxes are prescriptible because of Sections 203 and 222, which provide for 3-year / 5-year / 10-
year prescriptive periods. This is an exception based on this American jurisprudence. We have adopted
them. Before we do not have a provision of this in the 1939 NIRC.
3. Resident Foreign Corporation
These are the rulings in the Air Canada case.
1. Offline international airline, one that has no landing rights and has a general agent here is considered
as resident foreign corporation.
[TAXI NOTES] 32
2. The applicable rate as a rule is 30%.
3. The tax base is taxable income, meaning, it can claim deductions.
4. This 30% corporate rate will not apply if the Philippines has an existing tax treaty with the government
where such airline has been organised. So tax treaty must prevail over this Sec. 28(A)(1).
5. In this actual case of Air Canada v. CIR, there is this RP-Canada Tax Treaty which provides under
Article 8 thereof, that the maximum corporate rate that may be imposed on the gross revenues derived
from the same of passage documents in the Philippines, not more than 1 and a half percent (1.5%) again
of the gross revenue.
Justice Leonen is absolutely correct when he pointed out that since this is a special law applying the
pacta sunt servanda, if a certain international law…international agreements must be complied with in
good faith, this must prevail over this corporate rate of 30%. In other words, as he explained, this is a
general provision and it must yield to a special provision and that is, that tax treaty between the RP and
Canada.
What is lacking here is the basis/reason why we can still impose tax on an airline that has no landing
rights. So, which have the BOAC doctrine to complete all these jurisprudence.
The basis for the imposition of this corporate rate is that this corporation, this airline that is admittedly no
landing rights, but receives protection from the Philippine government. So, recall what I have said which I
urge you to memorize. The flow of wealth proceeded from and occurred within the Philippine territory,
enjoying the protection of the Philippine government. In consideration of such protection, the flow of
wealth should share the burden of supporting the government. You include that here.
4. Branch Profit Remittance Tax
Why did your examiner include this? It was excluded from the coverage in the last five (5) years. I also
think this must be included because there are significant decisions of the Court on this, old and new.
Marubeni Doctrine
Branch profits that are subject to this 15% final tax are profits that are effectively connected with the
conduct of trade or business here in the Philippines. Here, there was a direct investment made by
Marubeni of Japan in Atlantic Pacific Gulf. It was not channeled through its branch office, Marubeni
Philippines.
Ruling of the Court: That does not constitute branch profits subject to this 15%.
This may be the reason why your examiner included this because there is a new case on branch profit
remittance tax.
Deutsche Bank v. CIR
This is a new jurisprudence. What does this ruling of the Court dictate? This Sec. 28(A)(5) imposing a
15% final tax must yield to the provision of a tax treaty. There is a tax treaty entered into between the
Republic of the Philippines and Germany. So he (examiner) must mention this case.
There it is clearly provided under Article 10, Sec. 6, that the tax that may be imposed on these branch
profits remitted by this German corporation to the head office must not be more than 10% of the gross
profits remitted. So, the question will revolve around this. So it must be a German corporation and there is
an existing tax treaty reducing that to 10% and the tax base is gross profits remitted to the head office.
[TAXI NOTES] 33
5. Tax Sparing Credit Rule
It’s not easy to understand this. Let’s simplify this because there is a case here, ruling of the Court which
has never been asked.
The situation is this: Actual case, Procter & Gamble.
Procter&Gamble U.S.A. is a non-resident foreign corporation. It made an investment here in the

Philippines by establishing a domestic corporation. That’s the popular Procter&Gamble Philippines in
Makati. This is a domestic corporation. So, it made an investment here so it is after its sharing of profits
so, cash or property dividends may be declared or distributed by Procter&Gamble Philippines. So, non-
resident foreign corporation receives cash or property dividends from a domestic corporation, that’s the
situation here. So, it’s clear that the applicable rate is 15% so the tax base — since the subject cash or
property dividends — the amount of cash or property dividends, that must be the basis of the 15%.
Having said or visualised the situation, you can now explain the meaning of the word “sparing”, which
means there is really a tax saved. In that we could have taxed this income — cash or property dividends
— at 30% but the law, Sec. 28(B)(5b), lowers that to 15%. Indeed, there is a tax saved percentage-wise,
15%, that explains the word used by the Court, “sparing” or “saving”.
There is a condition. It’s in the law that we will lower the rate from 30% to 15% if the foreign government
shall allow tax credit. That’s the one which has never been asked. The one that is always asked is: Does
a withholding agent such as P&G Philippines have the legal personality to file a written claim for refund?
We have authoritatively answered that. Yes.
Now, what does the law say? The Court is correct. In Sec. 28(B)(5)(b), there is no such word “actual”
because what you will find therein is the word “allow”. The Court ruled — this has been the subject of two
conflicting decisions of the Court — this is now the prevailing view. This is the jurisprudence that settles
two conflicting decisions of the Court. So, the issue here is that: As a condition sine qua non, could the
imposition of this reduced rate of 15% — that is tax credit — is such non-resident foreign corporation,
P&G USA, required to present proof of the tax credit actually granted? In one decision, Yes. That’s not
the prevailing view.
The prevailing view now is it’s enough for such non-resident foreign corporation to prove — I am now
clarifying that ambiguous ruling of the Court and this must be the provision. It’s enough for the non-
resident foreign corporation to present proof that there is an existing provision in the US Revenue Code
allowing tax credit. That will suffice.
Is there a provision in the US Revenue Code allowing American corporations to claim tax credit as
regards taxes paid to the other countries such as Philippines. The answer is Yes.
That is the case of P&G v. CIR. You will now enjoy reading this decision.
6. International Air Carrier and Shipping
Let’s now make a distinction between this International Air Carrier and that of Offline International Airline.
The definition of “Gross Philippine Billings” has been amended. You read there and it is clear that the test
is the origin of the passengers or cargoes, as the case may be. Hence, to be subject to this 2.5%, it must
be shown that this international air carrier or airline must have landing rights. If it has no landing rights but
an agent has been designated here in the Philippines, you apply the 30% tax rate, tax base is taxable
income, except if there is such tax treaty.
This was likewise excluded from the coverage in the last 5 years. This international air carrier which your
[TAXI NOTES] 34
examiner included. So, he might ask this.
7. Offshore Banking Units
8. Tax Treatment
You must qualify the answer to this. Multinational corporations: we have a Regional or Area Headquarters
here that is exempt. The one that is taxable as it is subject to 10% corporate rate based on taxable
income a Regional Operating Headquarters of multinational corporations.
[TAXI NOTES] 35
ALLOWABLE DEDUCTIONS AND PERSONAL EXEMPTIONS (by Justice Japar Dimaampao)
These are not really field or sources of bar questions. There are bar examinations where no questions
were asked on allowable deductions and personal exemptions. But I noticed in the last years, there were
really questions on allowable deductions and personal exemptions. I think there may be question on
personal exemptions because there is a significant case of this penned by Chief Justice Sereno, which I
will discuss later on.
I’ll just apprise you of the rulings of the Court, or jurisprudence on allowable deductions. Let’s start with
Section 34. This will be my last two (2) lectures on this because allowable deductions are directed from
that proposed law on income. But I really doubt…are we prepared to adopt gross income taxation
because usually we are not yet prepared. And my humble take is let’s have a modified income
<incomprehensible>.
But for purposes of these bar exams, we really have to discuss this. So Section 34, I have developed a
key word here (BIR-CTC-LD2B). So, there are ten (10) allowable deductions. These are itemized
deductions. So, the approach is simple. Try to memorize these. If there will be question on allowable
deductions, and it’s not one of these ten, you are safe to say that it’s not deductible. Let me teach you
how to embrace the examiner.
“Expressio unius est exclusio alterius”. Everybody knows that. These are the only itemized deductions.
So, if it’s not one of these ten, meaning to say, it’s not deductible because it’s not one of those allowable
deductions under the Tax Code. The maxim “expressio unius est exclusio alterius” squarely applies.
What is not mentioned is deemed excluded. And then you cite the principle, because allowable
deductions are in the nature of exemptions, (it) must be strictly construed against the taxpayer and
liberally in favour of the government. Cite those two well-known doctrines. One is expressio unius, and
the other one is strictissimi juris.
B - Business Expenses
They are known as ordinary and necessary expenses.
I - Interest
R - Research and Development Expenditures
C - Charitable and Other Contribution

T - Deductible Taxes
C - Contribution to Pension Trust
L - Deductible Losses
D - Depreciation
D - Deflation
B - Bad Debt
Each may be useful. Even if your answer is not correct, you cite this provision. So as far as the Tax Code
is concerned, there is now a test. The test of deductibility insofar as ordinary and necessary expenses are
concerned. Please refer to Sec. 34(A)(1)(a). There you’ll find keyword D-O-M.
D - Development
O - Operation
M - Management
If your answer is a deductible ordinary and necessary expense, you cite the law. This is the law. Because
it is paid or incurred in connection with the development, operation and management or conduct of
taxpayer’s trade or business.
[TAXI NOTES] 36
Jurisprudence
There are certain jurisprudential rulings on the test of deductibility of ordinary and necessary expenses.
1. Capitalisation Test
- Atlas Consolidated Mines & Dev’t Corp. v. CIR, 102 SCRA 246
Ruling of the Court: Re-organization costs shall be spread out or amortised over a reasonable period of
time.
- CIR v. General Foods Philippines, 401 SCRA 545
Ruling of the Court: Expenses paid or incurred to protect the franchise is in the nature of this. Therefore, it
should be spread out or amortised over a reasonable period of time. Simply stated, you cannot claim that
as an expense during the year when it is paid or incurred. It should be spread out or amortised over a
reasonable period of time.
2. Production Test
- ISO Standard Eastern Inc. v. CIR, 175 SCRA 149
This may be the question and I hope this will come out. There is this margin fee/s in the amount of
340,822.04. Is such amount deductible?
Ruling of the Court: No, because such an amount was paid or incurred after the production of such an
income. So, to be deductible, such an expense must be paid or incurred in the production period. Again,
margin fees are paid or incurred after the production of income; therefore, they are non-deductible.
3. All-Events Test
- CIR v. Isabela Cultural Corp., 515 SCRA 556
These are the two (2) requisites, and I reiterate what I have said:
a. There must be liability to pay fixed by an agreement or contract; and

b. The deductible amount need not be precise or completely accurate. What is required according to this
all-events test is reasonable amount.
Non-deductibility Interest
There is this case which has yet to be asked on non-deductible interest. Is theoretical interest deductible?
This has been answered by the Supreme Court in the case of Picop v. CIR, 750 SCRA 434.
Ruling of the Court: No. There are two (2) reasons cited by the Court.
a. It is not paid or incurred (Sec 34), it is merely computed or calculated.

b. It does not arise from interest-bearing obligation. That is an indispensable requisite for the deductibility
of an interest expense, that it must arise from interest-bearing obligation.
Those of you who have read that comprehensive taxation review of Prof. De Leon, there is that view
which he expressed which is not in accordance with this Revenue Memorandum Circular 17-71 dated
July 12, 1971. In the problem, and this was asked in the difficult Bar in 1999, interest on preferred source
of stock, Prof. De Leon qualifies his answer. That should not be qualified. It’s an absolute rule that interest
on capital, and let me include preferred source of stock, is NOT deductible.
[TAXI NOTES] 37
Again, it’s an absolute rule, by virtue of this RMC 17-71 that interest on capital, and the interest on
preferred source of stock is non-deductible interest.
Tax Benefit Rule
The one that is always asked…let’s emphasize this…I just hope that you have understood this tax benefit
rule which you will find in Section 34. There are two (2) instances where you can apply this:
a. Sec. 34(C), 2nd Paragraph - Tax Refund
You read the provision. There you will find this tax benefit, “to the extent of the income tax benefit of said
deduction.” That’s the tax benefit rule.
b. Sec. 34(D) - Recovery of bad debt
All these three were asked in previous bar exams. You must know these.
Since the one that is offered, it says it covers two items…so let’s qualify that — it covers tax refund and
recovery of bad debts. This may be the qualification: in Philippine setting, this is how you should explain
for the <incomprehensible>. Now it is a rule that “limits” the recognition of income arising from tax refund
and recovery of bad debts written off.
Tax refund and recovery of bad debts written off are taxable only if the taxpayer received benefit in that
the tax refunded and that bad debt written off are previously claimed as deduction. That’s the meaning of
this common provision. This is a common provision. Compare Sec. 34(C) and 34(D). The common
provision there is “to the extent of the income tax benefit of said deduction.” The simplest way to
understand that is this: tax refund may amount to taxable income if the tax refunded was claimed as
deduction from gross income in the previous preceding taxable year. Your examiner will give credit for
that.
The same, also in the case of recovery of bad debts later on, it will amount to a taxable income if the bad
debt recovered was previously claimed as deduction from gross income in the preceding taxable year.
Since the tax that is the subject of refund…in order to amount to taxable income, must be a deductible
tax, you must know these non-deductible taxes. And you will find them in Sec. 34(C). If this is the subject
of tax refund, this will never result in taxable income simply because the taxpayer received no tax benefit.
You must understand that when it is claimed as deduction, that reduces taxpayer’s taxable…that is
precisely the tax there.
So, S-I-D-E, these are non-deductible taxes:
S-Special Assessment
I-Income Tax
D-Donor’s Tax
E-Estate Tax
This is the one that is the subject of tax refund since it is non-deductible, it acts as if there is no tax benefit
there. Therefore, refund of any of these, is not taxable. So you can now answer the question/s:
When is tax refund taxable?

Is recovery of bad debt written off taxable?
Tax refund is taxable if the amount that the taxable income…first, if the tax refunded is a deductible tax.
Second, the tax is actually claimed as deduction.
That’s the authoritative answer.
[TAXI NOTES] 38
When will recovery of bad debts written off amount to taxable income? Two requisites must concur:
1. Bad debt must have been written off / charged against the taxpayer’s books of accounts in the previous
preceding taxable year; and
2. It must be actually claimed as deduction.
That’s the impressive answer in the question, “Is recovery of bad debts written off subject to tax?”
There is a case which has yet to be asked in the Bar exams relative to this requisites for the deductibility
of bad debt expense. And that is the case of PRC v. CIR (256 SCRA 667). The Supreme Court added
additional requisite. This requisite for the deductibility of bad debt expense under Sec. 34(E) must also
include — and this is in effect a judicial requisite for deductibility of bad debt expense — the Supreme
Court said in this case of PRC v. CIR, that the debt must be uncollectible in the future.
The Court then explained that to be considered as deductible bad debt expense, taxpayer must observe
those steps and these are precisely the concept of earnest efforts. In other words, you must exert efforts
to collect such debt or collectible. This is how the court explained this.
So, let me show with you this very accurate keyword (SCRA). This actually happens so you have
uncollectible receivable. The Court is telling us: observe these steps before you can declare the same as
uncollectible in the future.
Steps (S-C-R-A):
1. Send statement of accounts;

2. Collection letters will follow;
3. Referral of the case to a lawyer;
4. The lawyer will now file an action in court.
Optional Standard Deductions
That is the subject of substantial amendments. So try to refer to Sec. 34(L). R.A. 9504 introduced these
amendments that are really substantial:
1. The rate is now 40% that used to be 10%.
2. The tax base has been changed. That used to be gross income. Many examinees committed a blunder
there. From gross income, it’s now gross sales or receipts (individual taxpayers).
Corporate taxpayers can now avail of this, except of course, non-resident foreign corporations. Now the
tax base is gross income.
So don’t interchange these. Again, individual taxpayers the tax base is gross sales or receipts. Corporate
taxpayers, the tax base is gross income.
Bar Question: Is such an option revocable or irrevocable? The rule has not been changed. In Sec. 34(L),
once this is availed of, it is irrevocable during that taxable year.
So those are the possible questions on basic additional personal exemptions.
You must know your basic personal exemption and it’s now uniform in that it applies to all. That is the
uniform basic personal exemption of Php50,000. It applies to single individual, legally separated
man/woman without dependence, head of family, and married individual.
[TAXI NOTES] 39
Are our congressmen correct here when they fixed it at 50,000? That they are in effect telling us “you are
similarly situated.” They failed to understand with all due respect, the nature of basic personal exemption.
Under Sec. 36(A)(1), you cannot claim as deduction your family, personal and living expenses. As a
substitute for this allowance you are granted by law, these are <incomprehensible> amount because this
is not really enough to cover your one year personal, family and living expenses.
Now, let me ask you: Married individual, single individual, you mean to tell us our good Congressmen that
they incur the same amount of family, personal and living expenses? They are not similarly situated. Why
grant them the same amount…is that not unfair to married individuals? <Incomprehensible>
But don’t ever make any comment: Mr. Examiner, I want you to know that I disagree. Let me cite my
humble reflection…Ah, don’t ever do that.
Now, the additional personal exemption of Php25,000 for every qualified dependent child, but not to
exceed four (4). So, the maximum is Php100,000.
Let’s have this… the possible Bar question in the light of a recent case decided by the Court. Please refer
to Sec. 35(C), the last paragraph thereof. These new rules have never been asked in the Bar exams.
It may happen during the taxable year that your dependent child became married, so marriage of the
dependent during the taxable year. Question: Can you claim the Php25,000 as a personal exemption?
Another…During the taxable year, your child became gainfully employed. So, gainful employment of the
dependent child during the taxable year. You read the provision. It says “it is as if he became married at
the close of the taxable year.” “It is as if he became gainfully employed at the close of the taxable year.”
The answer is: Yes, full amount.
Chief Justice Sereno in that case of Soriano v. CIR, there is no such thing as pro-rated personal
exemptions. This is the full of taxable year treatment.
ANSWER: The taxpayer can claim the full amount of Php25,000 personal exemption. And the Tax Code
provides, “it is as if he became married at the close of the taxable year.” By legal fiction, such marriage
took place at the closing of the taxable year. In contemplation of law, no marriage transpired during the
taxable year.
That’s how you should answer it.
It is also in regard to gainful employment. For instance, the child became gainfully employed in December
or June during the taxable year.
ANSWER: Yes, the parent can claim the Php25,000, full amount, additional personal exemption. Cite the
law, Sec. 35(C). The Tax Code says, “it is as if he became gainfully employed at the close of the taxable
year.” By legal fiction, such gainful employment occurred at the close of the taxable year. In
contemplation of law, no gainful employment transpired during the taxable year.
You try to go over Sec. 35. There is a situation which cannot be answered by this. What is clear there in
item B, if the spouses are legally separated, the rule is clear, the one who can claim the additional
personal exemption is the spouse who has the legal custody of the child. So, if both are awarded legal
custody of the child, they should agree as they really have to make sure that it must not exceed the
maximum amount of Php100,000, or not more than four.
It is silent on this situation: Suppose they are married individuals. Who may claim such additional
personal exemption? BIR rulings tell us, it’s the husband. Because the husband is considered as the
head of the family under the Family Code.
[TAXI NOTES] 40
Are there cases where the wife can claim the additional personal exemption? It cannot be answered by
Sec. 35. It’s an incomplete law. But try to read that BIR Form, it’s at the back. The wife can claim the
additional personal exemption if the husband is a member of the PALAMUNIN group.
Let me clear this. Even if the husband receives income, the wife can claim this additional personal
exemption if she assert her authority as speaker of the house. And when will that happen? If here, the
wife may ask the husband to execute a waiver in your favor. This may only happen if the husband is a
member of these notorious organizations:
1. RAMBO: Report Agad kay Misis Bawat Oras

2. PUKSA: Pangkalahatang Ugnayan ng mga Kalalakihan na Sunud-Sunuran sa Asawa
3. KIKIAM: Kilusan ng mga Kalalakihan na Inaapi ng Asawang Makapal
These will not come out of the Bar exams.
[TAXI NOTES] 41
VALUE-ADDED TAX (by Atty. Nicasio Cabaneiro)
For all those taxpayers who are not vatable, or hindi na reach nila yung limit for vat registration, they are
liable to the 3 percent percentage tax that is in title V, kaya sa title V yung mga banks, yung mga banko,
once upon the time they tried to apply the VAT in banks way back in 2003, I was still with the bank during
that time and there was a directive that VAT bank transaction will be subject to VAT, we have a task force
to change our records, to change our procedures, manuals, to be able to comply with the VAT law in
2003 and its very hard to apply input taxes and output taxes in VAT transactions specially an electronic
transaction. Its very very hard to monitor the input taxes and output taxes, unlike in manufacturing
companies where you see the stages of production very very clearly, in banks no. So what happened?
After one year of application, they found out that the BIR got less revenue because of applying the VAT
on banks so immediately there was a law that says, “henceforth banks will be subject again to percentage
tax”. Kaya one yar lang yun. So in 2004 the banks were back in the tax system, GRP, gross receipts tax
but title V is not included in your bar examinations anyway so for purposes for our study, let’s concentrate
on Title IV. What are the other entities in title V na hindi pwede iapply yung VAT rules natin? Mga telco
companies, mga insurance companies, insurance companies pay premium tax, mga banks,
intermediaries pay the gross receipts tax, franchise tax. So anyway as background, you know very well,
this law has always been subject to taxpayer’s suit all because this is based on consumer tax. All of us
are liable for this because all of us need to buy things, all of us need to eat, ride transporation, avail
services. And this encompasses a lot of transactions, cover sale of properties, services and importation.
So anyway what are the pertinent rules? Initially, we have sec. 105, ang dapat pag aral niyo nitong VAT,
dapat kabisado niyo muna yung provision, kasi sec. 105-115 maikli lang naman yun. Sec. 105 says that,
any person who in the ordinary course of trade or business…” is subject to VAT and also importation of
goods is subject to VAT and since VAT is an indirect tax, it may be shifted from vendor to vendee, from
lessor to lessee, vendor to user. What is clear in sec. 105 is the definition of the item, “in the ordinary
course of trade or business.” This you have to memorize because it encompasses a wide range that is
more than how business is understood to be, when you look at sec. 131 of the local government code.
Kasi yung definition ng business in LGC, I think is very limited one, they always say business, one is
characterized by regularly exercised for livelihood purposes but what is the connotation of the word “in the
ordinary course of trade or business” under Sec. 105? It encompasses not only the one that is regulary
engaged by the business, but it includes also incidental transactions, irregardless of whether you are
selling to any government entity, or non stock non profit institution, or exempt institution, they too can be
subject to VAT. So remember VAT is a percentage tax. What is the difference between percentage tax
and income tax, if you are asked in the bar? Income tax is a tax on income, it is on a person’s income,
economic test, doctrine of constructive receipt test, pero ang percentage tax is a tax on the act of selling.
So what is sought to be taxed on percentage tax is the act of doing the sale, whether you earn income
does not matter. Kung benta ka ng benta, lugi ka naman, babayad ka pa rin ng VAT, yes, babayad ka ng
percentage tax. Eh kung lugi ka, eh di wala kang babayaran na income tax, so that is how it is. So a
percentage tax is a tax on the act of selling. Ngayon at the same time, if you are still earning income, then
you pay income tax. So we pay VAT in the act of selling, and you pay income tax for realizing income.
Question, is that double taxation? Yes. Is that double taxation which is unconstitutional? No. Why?
Because that is double taxation in a loose sense. It is an indirect duplicate taxation because the basis of
the tax is different. Income tax is based on income and for VAT is for doing an act of selling. Once upon a
time they asked that in the Bar. What are the characteristics of the VAT system? Okay, it is tax on the
value added. Ok kaya yung value added, that word by itself, that already prevented tax pyramiding.
Because the system whereby, pag bumili ka ng purchases, papasahan ka ng input tax, simplify nalang
natin ah, kasi pag sa libro napakagulo. Kung businessman ka ang unang rule, eh titignan mo muna if
kailangan mo magparegister sa VAT, ngayon ang sabi ko you only have one thing all throughout your life,
eh kung tanong sayo yung BIR, ikaw ba VAT registered? Magkano ba ang sales mo? Magkano ang
annual receipts mo during the year? And in fact kahit ang annual receipts mo during the year does not
reach the benchmark of 1, 919, 500, you can still register for the VAT. Because a person can always avail
[TAXI NOTES] 42
of the optional VAT registration, kahit hindi umaabot yung volume ng receipts mo yung benchmark.
Cause generally if your receipts has reached annually, in the amount of 1919500, it used to be only 1M5,
in the passage of RR 16-2011, it was increased, pag umabot mo yung annual receipts mo ng ganun, you
need to register for the VAT, mandatory registration yun. What do you call when you are required to
register but you didn’t register? Ang tawag sa iyo ay VAT registrable. Tanong, what is your obligation or
liability if you are VAT registrable, which means you are supposed to register for VAT but you opted not,
or you probably deliberately did not registered. You are considered VAT registrable. It means you are
liable for output tax but everything that you buy, yung input tax mo, you cannot use that as an offset
against output tax. The most critical for a businessman specially if you are VATable, eh kung yung input
tax mo ay madisallow ng BIR, bakit ma disallow? Hindi ka kasi nagparegister sa VAT. Ang mga receipts
mo are not qualified as input tax receipts. Ang laking diperensya nun. Ang compute yun is output tax
minus input tax equals VAT payable. Eh kung idisallow yung input tax mo, puro output tax yun. Kaya
importante yun. Kaya I always tell my VAT clients, titignan mo ng maigi yung pag namimili ka, kung ang
binibigay sa iyo na VAT receipts are those in compliance with RR 16-2005, kasi mga VAT receipts
ngayon naka sepciify yung eto yung receipt for VAT exempt, eto ang receipt for zero-rated transactions,
eto ang receipt for VATable. If hindi ka magcomply doon, yung mga requirements, yung mga TIN, ayun
ay disallow ng BIR. So it’s very critical for a businessman to be under input tax. So output-input, you are
able to avoid tax pyramiding. Kasi in times past, walang ganun. In times past, dagdag lang ng dagdag
ang tax. Pag bumili, ang tax ka nakapatong, magiging purchase price na rin yun, sa susunod na benta,
itatax nanaman yun, eh pyramiding yun, habang lumalayo yung benta mo, tax is always mounting. Now
with the system of VAT system, pag may input tax ka, mas mababa sa output tax, ah walang pyramiding
yun. That is the advantage of that. That is why the VAT law now has actually prevented what was
prevalent in times past which is tax pyramiding. So it is a tax on value added. Kung ano yung dinagdag
mo. Another, of course, under RA 9337, it is a transparent mode of sales tax. Why? Eh kasi recorded
lahat ng transaction mo ditto. First of all, yung mga receipts, registered yan. And then if it is registered,
the BIR has counter party records for that purpose, specially now with electronic filing. Hindi ka
makakalusot ditto. Mga vatable persons specially under the present distinction, napakahirap niyan
gumimik. Probably in times past, mga 1988, kaya minsan bibili ka sa cash and carry noon, hingi ka ng
resibo, “magkano yan?” “90 pesos po” “hingi ako ng resibo” “ay 110 toh.” Anong reason noon? Eh
kasipag hindi ka humingi, ng resibo, wala record yung sa VAT, nakalibre sila. Ngayon mahirap na gawin
yun. Because of the electronic system of monitoring so it is a very transparent form of tax. RA 9337. For
all our purposes here, yung 795, yung tax reform code nakasam nay an sa 1997, kaya ang una niyong
style ng VAT ay dapat kabisado niyo yung 105-115. 10 sections lang yun. Malalaman niyo lahat dun kung
ano bigi sabihin ng zero rated sale, transaction deemed sale, foreign currency denominated sale, eh
nandun lahat niyon. 206, FDC, zero rated sale, transac deemed sale, sale of services. Kaya tandaan niyo
pag nagbasa kayo, ano ibig sabihin ng gross receipts, gross selling price. Tinuturo ko sa inyo, dapat
basahin. Again I wish to reiterate and I always mention that reading codal provision is a must. Please
please. Kahit yung mga lecture ko sayo from the start of organization of bureau, and remedies. I am really
appealing to you to please read the codal provisions. Kasi pag alam mo yun, nakakaabante ka na. kahit
basahin mo yung commentaries, makakarelate ka. At sa examination, ang pinakamagandang answer
alam mo legal provisions. Sometimes, that’s the only one that catches the examiner’s eyes. Kung
mamention mo pa yung Section,lalong maganda. Kaya ulitin ko, Title I basahin niyo yung Title 1
provisions, 4, 5, 6, 7, 8. Statue of limitations. 223, 204, 205, 206,208, 219, 220. Basahin niyo lahat yun.
Very important. Ngayon ditto sa VAT, 10 sections lang. Sections 105-115. Dun lang sa 105, madaming
kailangan intindihin dun. Lalo na yung “in the ordinary course of trade or business” cause the meaning is
so broad. Bibigayan ko kayo ng sample problem. There is an organization of lay ministers in order to
support their activites, they sold raffle tickets, it exceeded the new VAT threshold of 1.5m, ngayon
1919500 na yun, will the sale be subject to VAT? O yan Bar question yan. No, because this is not an
econimic and commercial activity. The law under Sec. 105 (3) defines the phrase in the ordinary course of
trade or business, or the regular conduct or pursuit of economic transactions include those incidental
thereto, regardless of whether or not the person is engaged therein is a non stock non profit, irrespective
[TAXI NOTES] 43
of the disposition of the income and whether or not it sells exclusively to members of the guest or
government entities. So even government entities can be subject to VAT. Because it is a tax on the act
itself, it is not on the entity. So, whatever you do as sale, that is already VATable. Kaya yung coverage
nung ordinary course of trade or business is a very very wide coverage. Ok, so yan imemorize niyo yan.
But of course even in the ordinary course of trade or business, hindi mo naman sinasama yung mga
isolated transactions. Merong case dito, yung Mindanao Geothermal, yung Mindanao Geothermal ay
bagong kaso 2015. Sa geothermal, it is engaged in gas, geothermal energy, meron siyang isang Nissan
patrol na ginagamit for the activity and the time came when the Nissan patrol na yun, ibebenta na kasi 5
years, kasi papalitan ng bago. Is that an incidental transaction, is that an isolated transaction? That is
decided by the SC. SC said it is an incidental transaction, because that used to be used in the business.
The fact that they are selling it now, meron bibili second hand, that is incidental, not isolated. Ano
example ng isolated transaction? Pag binasa yung 105, yung word ng ordinary course of trade or
business. Palagi tinatanong sa bar yan. Kaya nga, I am appealing to you yung knowledge nung 105-115,
please basahin niyo all the provisions para you have an idea of transactions deemed sale, foreign
currency denominated sale, zero-rated sales. Puro technical yan, kailangan niyo maintindiahn yan. Kung
sale of services, ano ang tax base? Gross receipts. Pano dinefine ang gross receipts? Naka define din
dya. Dapat alam niyo yan. Pano kung sale of goods? Gross selling price. Ano definition ng gross selling
price? Iba sa gross receipts yun. Pano kung importation? Ano yung basis? Pag nag import ka, whether
for business or not, that is subject to VAT. That is the only transaction which is not for business and yet it
is subject to VAT. Despite VAT is a business tax. Kaya magandang tanong, is there any transaction in the
code which although not for business purposes, will nonetheless be subject to VAT? Answer mo yes. If a
person imports items from abroad. If he imports items from abroad regardless of whether that is for his
business or personal purposes, then the VAT is liable. And for the purpose of VAT, the VAT will be
collected by the Bureau of Customs in trust for BIR. Yung mga ganung items, very technical yun. Eh pag
pumunta ka sa sec. 109, eto yung mga VAT exempt. Ano yung mga Makita mo sa VAT exempt?
Tolentino said VAT is regressive. But since there are provisions for VAT exempt transaction, zero rated,
ano makikita sa VAT exempt transaction? Eto yung mga pangtapat sa regressivity. Sale of fertilizers, sale
ng mga food items in original state, yan ang pangtapat ng regressivity of taxation. Ang zero rated sale
naman dalawang klase yan. Automatically zero rated and effectively zero rated sale. Dito sa VAT na
napakarami ng technical terms, but you have no choice but you have to understand it come what time.
What is the difference between automatically zero rated sale and effectively zero rated sale? What is the
most famous transaction in automatically zero rated sale? Export sale. Sale of gold to BSP. Bakit yung
sale to gold automatically zero rated sale? Because the BSP needs gold for their reserves. Nababasa ko
sa diyaryo na Marcoses are offering to return the gold. Saan pupunta yun? Dadalhin sa BSP because
that will be the reserve requirement for our money in circulation. Cause ang BSP, namimili talaga yan ng
gold. Kaya nga pag ikaw, may gold ka, pag BSP, zero rated sale yun. Pag wala, under banking laws,
pera in circulation, tinatapatan yan ng reserve. Kaya pag nagkulang yan, ma force yung BSP to buy gold,
para money circulation is backed up by the duly reserved gold of BSP. Kaya sale of gold to BSP is zero
rated sale. That is why I am glad to see the news that Marcoses are offering to return the gold. That will
be favorable to our economic situation. That will be sent to BSP as reserve. Anyway, also, you will notice
VAT is broad based tax on consumption. Pag sinabi mo broad based, it covers everything. Kaya this is a
consumer tax. Everything you need in life. Shoes, clothes, eat, transportation, services, lahat yan may
VAT. Magpadala ka sa LBC, may VAT yan. Because all these services are VAT-able and the tax is being
shifted to the end user. Bihira naman yung mga businessman that they opted to shoulder the VAT on
their own. VAT is always been traditionally a passed on tax. Tandaan niyo yun. Diyan nag apply yung
Impact of taxation and incidence of taxation. Yung VATable person, ang tawag mo dyan para at least
malinaw, you call him statutory taxpayer. Kaya pag liable yung VAT sa seller, statutory taxpayer kaya the
one who is really directly liable is the statutory taxpayer, pag pinapasa yung burden, ang pinapasa ang
buyer is the burden. Kaya the buyer is only indirectly liable. Kaya yung discussion ko sa inyo noon
regarding the rural bank, bank of malolos na bumili ng computer, di maalis na siya ay exempted. Because
he is exempted only from tax of which he is directly liable. Pag pinasa, indirectly liable lang siya. In VAT
[TAXI NOTES] 44
law, the one who is directly liable, is the seller. Ang pinagpasa lang ay ang burden. It is a broad based
consumption of goods, it includes everything. Properties, all kinds, services, of course it is an indirect tax.
That’s clear in Sec. 205. Tax is collected through the tax credit or invoice method. Eto yung sa resibo na.
Kasi, sa resibo under RA 9337, kailangan indicate yung amount ng tax as a separate item. Pero kasi
under 9337, and 16-2005, they disregarded the tax inclusive method. Ano yun? In times past, pag hindi
nakalagay sa resibo, kasi kung malinaw this is the basic amount, this is the invoice price plus 12% VAT,
total payable, yun separate indication of VAT. Eh pag walang nakalagay, nakalagay lang this is VAT
inclusive, pano mo inextract ang VAT? In times past, you divide the 1/11 yun para ifactor mo yung VAT
for purposes of determining magkano yung input tax mo. But under RA 9337, eh the tax inclusive method
was disregarded and in favor of separate indication of VAT exposure in the receipt. So that is RR 18-
2011, ok so most of these regulations came out of the time of Commissioner Henares, she knows very
well na if you do not place a proper tip etong VAT, madami makakalusot. So who are the persons liable?
Sec. 105. Seller of goods or properties. Ano ang base ng 12% VAT? Gross selling price. What is gross
selling price? A consideration that is given what the commodity is cost plus plus, you can remove the
discount so long as it is granted at the time of the sale. Hindi yung afterthought. Kaya pwede mo na
ibawas dun sa gross selling price ang mga discount, sales returns, if it happens simultaneously, not later.
So another thing there is also an actual from deemed sale? Yung deemed sale, you have to look at that,
that is one of the peculiarities of the VAT law. Dito lang tinatawag na transaction deemed sale. What is
the reason for the that? Transaction, actual or deemed sale, VATable sale in the ordinary course of trade
or business, tax base is gross selling prace. The rates may be 12 or 0. Kaya madami tayong
jurisprudence ditto. Tungkol sa zero rated sale. Kasi ang magandang tanong ditto, how do you distinguish
a VAT exempt transaction from a zero rated transaction? In that instance, walang VAT yun, yung isa VAT
exempt yung isa zero rated. Anything you multiply by 0 is 0 pero technically, pag tanong, what are the
VATable transactions under the Code? Ther are two. One that is subject to 12, one that is subject to 0.
Kasi yung 0 percent, is in reality a VATable transaction, kaya nga ang ginagamit mo na factor is zero.
Ngayon eh yung VAT exempt, Sec. 109, how do you differentiate from zero rated sale? Kasi yung VAT
exempt, the moment you are VAT exempt, any input tax that is shifted to you, that is just part of your
expense. Example? Kunwari bumili ka ng sapatos sa SM, dadagdagan ng 12% VAT yun, ano gagawin sa
12%? That is your expense, that is an additional cost. Eh kung ikaw zero rated, kung exporter ka, pag
yan ang bumili ng commodity and pinasahan siya ng input tax, yung input tax na yun, pwede niyang
irefund. Sec. 112 of the Tax Code. Dapat Sec. 112, ang daming jurisprudence yun. Pag aralan niyo
mabuti yun. Sec. 112, a, b, c, d. kasi if there is an input tax that is shifted to you and the transaction is a
zero rated transaction, you can have a refund of that input tax. What are the rules? Malimit na binibigay
sa Bar yan, kasi yan ang madaming cases na dinecide ng SC. Pagka ang input tax is attributed to zero
rated sales, or yung kayang binibili mong capital equipment is zero rated din, pwede mong irefund yun.
Ano ang mga rules for refunding? Imporant syempre ang prescriptive period. Time bound yun. If you do
not avail, prescribe yun. Eh ang lalaki nitong mga input tax na ito, madaming malalaking corporation
millions of pesos ito. Kaya pag nagkamali ka, if you sleep on your rights, you forfeit everything. So
ngayon, remember also the seller of services are subject to VAT. That’s why this is broad based. In sec.
106, eh nakaenumrate yung mga tinatax sa VAT, kahit mga rights to use, telecommunications, rights and
franchises, yung mga cinematographic, puro VATable yan. Now, with services. The tax base of services
is gross receipts. Ano ibig sabihin ng gross receipts? Di sinasama ang excise tax diyan, syempre hiwalay.
So, services are performed for a fee or for compensation in the ordinary course of trade or business. The
tax base is gross receipts which may either be 12 or 0 depending upon if you fall on zero rated
transaction, puro Sec. 105 ito. Then we have importer, in case of importer of goods, whether done in the
ordinary course of trade or business or for personal reasons, tax base is transaction value, depends upon
the landing cost used by the Bureau. What are the other indications? Who are the special types of
persons who are engaged in taxable transactions? What is the aggregation rule? For purposes of
aggregation rule, husband and wife are considered as separate taxpayers, kaya yung wife kung meron
siyang pinagkakakaitan na iba, aside from the regular activity, ah yun lahat nay un icombine mo and
tignan mo if it will reach the benchmark amount of registration. Sa VAT, ang tinitignan ay yung annual
[TAXI NOTES] 45
receipts mo, pag nakaabot ka sa 1919500, mandatory registration yun. If hindi ka registered, magiging
VAT registrable ka. What is the penalty? Liable for output tax, input tax di madeduct. That is a very harsh
penalty. Ok how about an incorporated joint venture? Isa pa na critical in case of Bar. An incorporated
joint venture, undertaking construction activity is subject to VAT, although exempt from income tax.
Tandaan niyo definition ng corporation under Section 22(B). a corporation includes all group of persons
working together like joint accounts, sinedad de nomina, and formal partnerships except for joint ventures
that has a construction agreement with the government. Ayun exempted from corporate income tax but
are they exempted from VAT? No, because according to VAT law, an incorporated joint venture
undertaking construction activity is subject to VAT although they are exempt from income tax.
Government functions are exempt from VAT cause government instrumentality that is in keeping with a
directive that if our government is engaged in sovereign functions, you can always say that is exempted
from any tax. They will not also be subject to VAT. If it is engaged in proprietary function, it will be subject
to VAT kahit na government entity, because it is motivated by proprietary motives. And then we have non-
stock, non-profit associations, mga social clubs, condo corporations, homeowner’s associations, are they
subject to VAT? Yes. Pareho din yun, homeowner’s asscn under Sec. 30 are exempted from corporate
tax but they are not exempted from VAT. What is the reason? Because the VAT is imposable on the act
itself. Kaya taxable yan. Kaya associations and special assessments, homeowners’ association dues,
condos with special assessments and fees, and fees for use of facilities. Taxable yun. Income from
operating a restaurant, taxable. When sec. 106 sale of goods or properties, sec. 107 importation of
goods, 108 sale of services, VAT is imposed under taxable transactions. When seller of goods or
properties, or VAT registered agent lalo na brokers, subject to VAT, sub contractor erroneously issues a
VAT invoice, or receipt covering VAT exempt transaction, VAT is imposed on the taxpayer as a penalty.
Anong kasalanan? Nag issue siya ng VAT invoice when in reality the transaction is VAT exempt, you will
be penalized for that. Look at sec. 106 and 109. Kaya ang pagbasa sa provisions are very important.
What are the requisites for taxation? 1, there is actual or deemed sale – Sec 106 ang deemed sale.
Memoryahin niyo yan kasi tinatanong sa Bar yan, what are the transactions deemed sale under the VAT
law? There is actual or deemed sale, barter or exchange of property, consumed in the Philippines. Anong
relevance of the word in the Philippines? Kasi for situs rule, only transactions happening in the Philippines
will be subject to VAT. Situs ditto ay where the transaction happened. IF there are Filipinos who sold
property for commission and they are in California, di mo ma VAT yun, kasi the transaction is outside the
Philippines. The situs rule for VAT is where the transaction happened. In the course of trade or business,
or exercise of profession. Sec 109 its nice for you to look at what are those exempt from VAT
transactions. Tama ang SC na sinabi na regressive ang VAT pero may pantapat ang VAT ng tax code for
the regressivity, as seen in Sec. 109. What are the transactions there? School, those under employer-
employee relationship. Kasi sa school if sinama mo sa VAT ang school, tataas ang tuition fee, that is a
passed on tax. Kayo magbabayad niyan that is why it is exempted. Sale of agricultural products in their
original state, sale of fertilizers, gamit ng farmers, VAT exempt yan. In the latter portion, yung mga houses
na provided by SLURB, low-cost housing, not subject to VAT, specially for residential purposes.
Magkakaroon lang ng VAT yan if you are using it for business purposes. Kaya if you look at Sec. 109, if
you look at all items, it indicates what are not subject to VAT, because it will affect the poor and middle
income families. Seller is a VAT registered person. Important sa VAT is yung person if registered siya,
suppose a VAT registered person deals with a VAT non-registered person, what is the implication? Yung
VAT registered person mapapasahan ako ng VAT, syempre because a VAT is a passed on tax, it can be
shifted to anybody else, what am I going to do with the VAT shifted to me? It will just form part of my
expense. It is part of my additional cost. The application of the VAT is when it is different to the VAT
registered person. Ang bumibili VAT registered, ang binebenta VAT registered din. Dun pinakikinabangan
ang VAT na pinapasa sa kanya. Kaya yung VAT registered persons, their main job is to have a very very
keen eye on input taxes na pinapasa sa kanila lalo na yung mga receipt. I admonish you to read RR 16-
2005, di masyadong mahaba para magkaidea kayo sa compliance requirements. It is the implementing
rules of RA 9337. At least mababasa yung mga concepts ng ibig sabihin ng effectively zero rated sale,
automatic zero rated sale, transaction deemed sale. A regulation is a formal pronouncement that clarifies
[TAXI NOTES] 46
the law kaya kung 9337 may kalabuan, yung 16-2005 endeavors to clarify those. Kita mo lahat ditto ng
requirements you need to know. Bago mo basahin yung memory aid, basahin mo yung revenue
regulation, it adds up very much to your understanding of the commentaries. Pag binasa mo yung
commentaries agad without reading the codal provisions parang pilay. Sa pag aral sa tax, you need to
know the provisions and the regulations, so when you read the commentaries, madadalian ka na. 16-
2005 explains the transactions of special economic zones. How do you treat that? Is that export sale?
Meron nakalagay yung mga compliance requirements, installment basis transactions. For example,
PAGCOR, gross receipts of other franchisees are those covered by Sec. 119, franchise tax, these
includes PAGCOR and its deemed license operators, subject sa VAT yan. How about insurance
companies? Life insurance companies hindi vinaVAT, and vinaVAT ay non-life insurance companies.
Nasa regulation yun. What are the transactions subject to zero rate? Ang important ay yung mga zero
rated, if there is an export, remittance of the payment, is coursed through the BSP. Kaya cause of the
expansion of 9337, nakalagay din sa regulation ay sale of electricity, is subject to 12%, provided
renewable sources of energy shall be subject to 0% VAT. Pag ang electricity is by generation, 12%, pero
biogas, biomass, solar, ay 0% VAT. I want you to read this for you to have complete understanding of the
implementing rules of VAT. 10 sections lang yung VAT. Basahin mo na yung 16-2005, please basahin
niyo. Pano pa kung mapilitan ka mag adopt ng tax inclusive? May separate formula ditto. 16-2005, you
read that. How about export sales of goods? Pag export sale of goods, one of the best examples of zero
rated sales. That generates foreign exchange to the country, so long as the foreign exchange will be
coursed through the BSP. Export sales cover actual shipment of goods to a foreign country, sale in
delivery of goods located and doing business in a special economic zone and Freeport zones, is also
considered as export sales. What is a custom territory? It is a territory located in the Philippines, except
those covered by special economic zone PEZA, BCDA, which are treated as foreign territories by fiction
law. Kung ikaw may transaction ditto sa mga entities nito, although geographically located in the
Philippines, by fiction of law, they are considered foreign territiories. Freeport zones, ecozones, special
economic zones. PEZA law, BCDA law provides boundaries in customs zone. Kaya pag nagbenta ka
dyan, you are like selling to a foreign country, kaya pumapasok sa export sale. The concept of foreign
territory by fiction of law applies only for VAT purposes because for income tax purposes, ecozones and
Freeport zones are treated as within the Philippines. VAT is a special kind of treatment. Transactions
deemed sale includes the following: transfer, use, and consumption not in the course of trade or business
of a good or property originally intended for sale. Meron question na binigay dyan sa Bar. In other words,
tandaan mo, here is a VATable person, he has a minimart, pag kumuha siya ng any goods for
consumption purposes, or cigarette, that is transaction deemed sale, although for personal consumption.
Question is, what is the reason na magbabayad siya ng VAT? Because although that is for personal
consumption, if he doesn’t pay for VAT, there will be no way of recouping the input tax na pinasa sa
kanya nung binili niya yun kaya remember that for the rationale. The filing of VAT return is monthly, within
the first 10 days of succeeding months. Eto lang ang return na pinapafile ng BIR na monthly, tapos at the
end of the quarter, quartlery. Walang final return ito. Thorughout the year, you accomplish monthly VAT
return. Parati ang porma niyan ay total sales, total output tax less purchases, input tax. Ang liable sa BIR,
pag malaki yung output tax mo against input tax, VAT payable to BIR. Kung malaki yung input tax, ano
ginagawa sa excess na input tax? That is creditable for future transactions. Kung input tax is attributable
to zero rated sale, under Sec. 112, maclaim mo na refund yun. Kaya person who is a zero rated sale is a
special kind of taxparyer under the law. These sales are treated by the law as conducive to Philippine
economy. What are the other transactions deemed sale? Transfer, use, or consumption which are not in
the ordinary course of trade or business which is originally intended for sale. Withdrawal of goods without
any valuable consideration shall be treated as deemed sale. Kaya ang isang VATable person, wala siya
iulam, kumuha siya ng sardines dun, niluto niya, kinain niya, dapat mag bayad siya ng VAT. Because if
not, there is no way of recouping the income tax, madadaya yung gobyerno dun. What are the other
transactions deemed sale? Distribution or transfer to shareholders a share in the profits of a VAT
registered person. Kaya yung mga corporations, instead na dividend ang idistribute, are goods, that is
transaction deemed sale. Or pambayad sa creditors in payment of dets, dacion en pago yun, instead of
[TAXI NOTES] 47
cash, bayaran mo ng isang kahon ng beer isang kahon ng sardinas, that is VATable transaction deemed
sale. Ano pa yung iba? Consignment of goods if actual sale is not made within 60 days. Shoemart
ganyan ang style, lahat na binebenta, for consigment. Kaya if there is no actual sale within 60 days, that
will be considered deemed sale. Retirement or cessation of business with respect to inventories existing
at the time of the retirement, is deemed sale. So bayad ka pa rin ng VAT. Kaya itong transaction deemed
sale, it is a peculiarity within VAT law lang. that’s why for purposes of Bar examination, this merits your
attention. Sec. 105, how do you construe in the ordinary course of trade or business? Something that
needs your attention. It was specifically placed there in Sec. 105 for a purpose, to make the VAT as
comprehensive as possible because it is a tax on the act, regardless of who that person or entity is.
According to this, in the course of trade or business, the regular conduct or pursuit f a commercial or
economic activity, includes transactions incidental thereto, so pag construe mo toh, incidental, may
relation to the business. Isolated is totally divorced from the business, regardless of whether or not the
person or business is non stock non profit, irrespective of dispostion of its income, whether or not it sells
exclusively to members or its guests, or governmental entity. So therefore, according to sec. 105, the rule
of regularity, services rendered in the Philippines by non-res foreign corporation shall be considered as
rendered in the course of trade or business. Well of course that is obvious. Because the services are
rendered in the Philippines, so even if they are non resident corporations or persons, fact of the matter is
that it is rendered in the Philippines. Now, isolated transactions which are completely divorced from
business. Pag nagbenta ka ng bahay mo, talaga naman isolated transaction yun, because it has nothing
to do with business if you are a businessman and you sold your house, that is not considered as
incidental to your business. Incidental income follows the taxation of the principal activity, in other words,
as long as you can link the incidental income to the main activity, pasok yun dun. So incidental income
follows the taxation of the principal activity. For example, the sale of scrap materials, by a VAT registered
person is subject to VAT, as sale of its finished products. But, rental income of a bank is subject to gross
receipts tax, not to VAT, because the bank is not VATable entity. So what does incidental mean?
Incidental is something else necessary, appertaining to, dependent upon another, which is the principal.
So if you connect it as necessary, related to, dependent upon another which is the principal therefore it
will be considered as incidental. Pano pag isolated? Isolated transaction is not necessarily disqualified in
incidental in the ordinary course of trade or business. Kaya ditto sa kaso ng Mindanao geothermal
partnership, some things like tinitiganan ko parang isolated yun, eh bakit sinabi ng SC na incidental yun?
Kaya medyo its hard to decipher if the transaction is incidental or isolated. Kasi although the primary
business of a taxpayer is manufacturing of garments for sale abroad, the sale of its motor vehicle to its
general manager is considered incidental to its business, tignan mo parang personal naman yun, eh bakit
sinabi ditto ay yung incidental. So parang di ko gets pag interpret nila ditto. Although the primary business
of the taxpayer is manufacturing of garments abroad, the sale of a motor vehicle to its general manager is
transaction incidental. Eh diba parang isolated yun? Eh bakit incidental? Tinanong ng Mindanao
geothermal partnership, it sold its Nissan patrol owned by the company, SC said it’s incidental. Pero
meron namang isang kaso in July 2006 eto namang CIR vs. Magsaysay Lines, yun daw lumang barko ng
Magsaysay Lines ginagamit nila pang biyahe parang Aboitiz yun, eh yung luma, pinagbenta na nila, yun
daw isolated, parang di ko gets yung logic nun. Kasi, unang una, yung selling of garments abroad, the
motor vehicle to the manager, ano naman relation nun dun sa garments? But sabi ng SC, incidental.
Yung binenta yung Nissan patrol to a person who is interested to get it second hand from the company, it
is incidental. That was in 2013,, eh july 2006, yung Magsaysay Lines, ginagamit nila vehicle tapos binenta
as secondhand to somebody who bought it, isolated daw yun. Ah eh, bahala na kayo dyan, bakit ganyan
ang interpretation nun? Siguro ang magandang interpretation dyan in the light of what the SC says, in
Mindanao geothermal, kahit may kaunting relation to the business, sabihin mo incidental nalang yun,
parang yung isolated malayong malayo. What are the nontaxable transactions under the VAT law? Di ka
subject sa VAT? Change of control of the corporation where the corporation acquires controlling interest
of another corporation. CIR vs. Dapudaw & Sons, 2015. So if you transfer your assets for stock where the
transfer is for purposes of gaining control, and it involved only a change in the nature of ownership of the
property from an unincorporated to incorporated, eh yun tax base. Dati unincorporated to a sole
[TAXI NOTES] 48
proprietorship, incorporate yung business mo from sole proprietership to corporation, nagbago yung
porma, ngayon corporation na, pero yun din yun. Kasi dati owner ka ngayon nung tinayo yung
corporation, ikaw tsaka yung pamilya mo, eh di ikaw din yun. So it is a mere transformation of the
business of a sole proprietorship to a corporation but if you see it, it is owned by the same family. Pag
ganun daw, there is no VAT transaction because it is a matter of change of control. Also in case of
merger and consolidation, san yun Makita? If a corporation merges with another corporation and transfers
properties in exchange for shares, while it is a tax event because there is a transfer of property, that is
exempted from tax. Why? For merger purposes. The spirit of the law encourages merger and
consolidation. Even the BSP. Dahil sa general banking law, the BSP in enhancing the progress of rural
banks since many rural banks are in the verge of collapse, so they encourage bigger rural banks to buy
the big rural banks, and buy it for purposes of merger, they are given incentives. So BSP they give you a
moratorium, and to comply with the reserve requirement as an incentive. so ganun rin yun ditto, under the
Tax Code, when there is merger and consolidation, it is always looked upon the court as something
favorable because when a corporation merges with another corporation, specially a strong corporation
merging with a weaker corporation, that means the big corporation will survive it wont collapse. That’s
why merger and consolidation is given incentive by the law not only in the Tax Code, even in the general
banking law, they are given incentives. In case there is change of control, or in cases of merger and
consolidation, change in corporate name, walang VAT implication yan. So what are the requisites for
taxation in case of Sec. 106 and 109? All these commentaries are looking into those sections from 105-
115. 106, yun yung mga transactions deemed sale, foreign currency denominated sale, export sales, 109
naman yung mga VAT exempt transactions. So what are the requisites for taxation? The seller executes
a document of sale. So that is the main document. Deed of absolute sale or kung partial payment lang,
contract to sell, and of course the real property must be located in the Philippines because the situs is
Philippines. Sale under 109 is not exempt from VAT. Real property not held primarily for sale or lease in
the ordinary course of trade or business is exempt from VAT. Ang pinaka guide niyo dito sa mga
exemption from 109, specially in the case of sale of real properties or lease of properties, eh kung iyong
property is for personal purposes, kaya hindi exempt sa VAT yun. Once there is a business motive
already, magbabago yun, maVAt ka nun. VAT exempt transactions mahaba yun, yung dulo nun is about
the sale or lease of real properties, kaya yung mga specifically for dwelling purposes, hindi VATable yun
kasi for humanitarian reasons, exempted from VAT yun. Sec. 109 (B). how about in case of installment
sales of real property? In those cases, sale with initial payment of less than 25% of the gross selling price,
then you can report the sale as installment basis, so this is in line also with NIRC in income tax, where if
the initial payment is not more than 25%, you can avail of installment sale. If more than 25%, ano na ang
tawag dun? That is what we call a deterred payment sale. If deterred payment sale, it is like a cash sale.
Tandaan niyo yun ah. Sa VAT law material yun. So in case of VATable transaction, there is sale in
installment and there is initial payment of 25% or below, there is a privilege for the buyer to pay the tax in
installment, if more than 25%, it is already deferred payment. Pag deferred payment, you consider it as
cash sale. So irecord mo nay un talaga as property that you acquire except that you still owe the seller for
the next few years to pay your payables. By the way, initial payments means the downpayments plus all
monthly amortizations in the year of sale. Di lang downpayment. Now, regarding this exempt sales of real
properties. Ito yung latter portion ng section 109, ditto nag appear yung 1919500. Sale of property not
primarily held for sale to customers or for lease in the ordinary course of trade or business these are
personal. Hindi ito yung for business properties. Real properties for low cost and socialized housing,
residential lot valued at 1.5M but beginning 2012, increased to 1919500. So be aware of that change.
That is 2012 so in other words, magpaparegister ka sa 1919500 sa 2012. House and lot and other
residential dwelling valued at 2.5M sa 2012, 3199200, is exempt from VAT. Why? It is not for business
purposes, it is residential. I urge you to memorize. The tax base of sale of goods of property is the gross
selling price, GSP. How do you define? It is the total amount of money or its equivalent, baka property in
kind, which the purchaser pays or is obligated to pay to seller in consideration to pay the seller. But
remember for purposes of computing gross selling price, you exclude the VAT, kaya yung apply mo, yung
VAT hiwalay yun. The VAT is a separate item to be indicated in the invoice. May nakalagay if the gross
[TAXI NOTES] 49
selling price is unreasonably lower than the actual market value, the commissioner is authorized to
determine the prescribed actual value to be used as tax base, pwede pakialman ng BIR yun. And the
GSP is considered as unreasonably lower than the actual market value, if it is lower than by more than
30%, the magic word, yung 30% of the actual market value. If the person underdeclares his sales by
30%, that’s prima facie of tax evasion. As a rule, output tax accrues on sales of good or properties at the
time of the sale when the sales invoice is issued. Pag inissue mo ang sales invoice, that is the
tantamount to a consummation of sale. Although only part of the selling price is paid in case of
installment. Now, tax base. Excise tax shall form part of gross selling price. Ano ba yung mga excise
taxes? Sa mga motor vehicle, eto yung mga tax na essential. So in the interest of house financing or
installment sale is subject to VAT output tax. Ngayon yung mga sales discounts, should be determined at
the time of the sale for the purpose of you to offset it from the sales invoice. It cannot be granted later. If
granted at a future time, that will not be included anymore. This one is important to me. The 20% sales
discount to senior citizens under RA 9257, dated febrauary 20, 2004, shall be deducted from the gross
receipt or gross selling price. They do that everytime I buy something. They remove the VAT and I have
still a 20% discount. What are the sale of goods that are subject to zero vat? Pag may importante sa VAT,
eto talaga yung mga zero rated. Pag may input tax sa zero VAT, eh sinusuli yun. What are the coverage
of sale of goods subject to zero VAT? Actual export sales. deemed export sales. What are deemed export
sales? Eto yung mga internal or constructive export sale under BOI law. BOI exec order 26, omnibus
investments code and other special laws, 7916, Freeport zone, 7227, they are geographically located in
the phil but for purposes of VAT law, they are like foreign entities. And they are called automatically zero
rated sales. Kaya yung mga ecozones, Freeport zones, they are deemed foreign territories by fiction law.
That is the SC decision in Commissioner vs. Seagate technology tsaka Toshiba Information Equipment,
so remember that ha. Yung actual export sale, yun talagang out of the country, yung deemed export sale,
ditto sa Pilipinas yun, by fiction of law, they are foreign territories, yung mga ecozones na. for as long as
the goods remain in the zone, they are duty free and tax free. Coconut oil refiners association vs torres.
Ano naman yung effectively zero rated sales? Tanungin sa Bar yan. Distinguish automatically zero rated
sales from effectively zero rated sales. Yung effectively zero rated sale, eto yung mga sale to entities
which are covered by an international agreement signed by the Philippines with other countries. Meron
itong back up. Meron pinirmahan na Philippines. Like sales to Asian Development Bank. ADB kahit
nandiyan yan sa Ortigas, ay that is just like a foreign territory. Yung mga embassy. The difference of zero
rated sales, before you avail of the exemption, you need approval from the BIR. Kaya pinaparegister yan
sa BIR. Ang automatically zero rated sale, hindi na, automatic na siya. Kaya pinakafamous dyan ang
export sale and sale of gold to the BSP. Then yung mga transactions sa ADB, sa mga embassies,
kailangan mo to approve sa BIR yun. Kasi tawag dun effectively zero rated sales. Sales of gold to BSP is
subject to 12% VAT but this does not cover sale of silver, it is only for sale of gold. Foreign currency
denominated sale, this is also including the balikbayan program, zero rated yan. Sale of goods or
equipments to persons engaged in international shipping or international air transport operations, so
international ito. Zero rated sale yan. So and again how do you distinguish zero rated sale from exempt
sale? In case of zero rated sale, the transaction is completely free of VAT because the factor that you use
to multiply s zero, on the other hand exempt sale, removes the VAT at the exempt stage, in other words,
kaya nagkakaiba dun, kapag zero rated sale at pinasaahan ka ng input tax, ang privilege mo you can
claim it back, eh yung exempt sale, tayo yun, kahit anong bilhin mo, may VAT ka, that is part of your
expenses. Also, VAT registered seller can reclaim input taxes passed on to it for seller of goods, cause
you can avail of it in form of refund. So basahan yung mga kaso ng Mirant Pagbilao. Except taxpayer
cannot reclaim VAT passed on to it by VAT registrable seller. Why? That ends up as part of their
expenses. Zero rated sales in taxable sales for purposes of registration as VAT taxpayer. Kahit taxable,
and rate is zero, bottom line, wala ring liability. Exempt sales are not taxable sales for VAT purposes,
because precisely they are exempt. How about importation of goods? Sec. 107, there is importation of
goods, whether or not connected with trade or business, in the exercise of professon, kahit personal, that
is subject to VAT. What is the tax base? Total value used by the bureau of customs in determining tariff
and customs duties plus customs duties plus excise tax and other duties. Sa tariff code, ang ginagamit
[TAXI NOTES] 50
diyan talaga transaction value. Whenever you pay tariff, you pay transaction value. Customs duties are
determined on the basis of quality and volume of the goods, VAT shall be based on landed cost and
excise tax. Yun ang ramification dun. Customs duties are based on quantity and volume of goods, VAT
shall already be based on landed cost plus excise tax. How are these taxes paid? By the importer prior to
the release of the goods from customs custody. When does importation end? When the goods are
released from customs custody because you have already paid all the taxes. Bayaran mo na lahat ng
taxes, the customs will issue you an ATRIG – authority to release imported goods. Kung may VAT
component yun, sisingilin na rin yun ng customs, but this is held in trust for the BIR. Eventually they will
be remitted to the BIR. And then in case of transfer of goods by a tax exempt person to a non-exempt
person, the non-exempt person shall be considered the importer thereof. So ano ang binibigay sa bar
diyan? Yun nga, yung ADB executive, after 3 years of stay in the Phils, naturally he doesn’t leave with his
luxury car, he will leave it in the Phils, mga maganda pa yan, and that is usually sold as second hand to
enterprising Filipino aficionados who are mahilig sa kotse, now ang rule doon, pag binili mo yun, you will
be considered the importer. Bcause the person who owns it is a tax exempt person, so under the law, the
tax exempt person sells a property to you like a car, the buyer will be deemed to be the importer. So you
have to pay all the taxes which the tax exempt person should have paid. Nasa batas yan. Be aware of the
VAT. Don’t forget the destination principle or the cross border doctrine. Simple lang intindihin. Pag ang
activity or goods, ay doon iconsume outside of the country, destination principle ibig sabihin foreign yan.
Kaya yung isang abogado na mag render ng services to a client who is in Hongkong and he goes to
Hongkong to render the services, zero rated yun. Why? Because cross border doctrine, it happened
outside of the country. On the other hand, pag nag import ka, cross border doctrine, ditto mo incosume
yun, if you consume it here, you are liable for VAT. That is the rationale for the importation. Kaya pag nag
import ka, kahit na hindi for business, eh ditto mo iconsume yung goods na inimport mo, under the
destination principle, cross border doctrine, since it will be used in the Philippines, that will be taxed in the
Philippines. Let’s go to 108, 109. Sale of services. Pag sale of services, this includes lease of properties
kahit na yung mga licensing agreements, kasama yan. In contracts of lease or licensing agreements, it is
required that the property leased or used in the Philippines, regardless of the place where the contract is
executed, the service performed by the person listed in sale of exchange of services, includes lease and
use of copyright, patents, intangible yan, intellectual property, the list of services is performed or to be
performed in the Philippines for another person or entity. So this transaction is not exempt from VAT.
What are the other services under Sec. 108 and 109 are worth your understanding? Construction and
service contractor, yung mga HMO, healthy maintenance organizations, they are independent contractors
taxed in their entire gross receipts. Yung mga security agency, they are subject to be taxed for services
they rendered. Travel agencies. Hotel rooms charges for foreign tourists and travel agencies, however,
are not part of the gross receipts. Definitely naman. Ang matatama lang sa VAT dun ay yung mga service
fees. What about reimbursement of expenses for VAT purposes? How do you treat reimbursement of
expenses? Specially brokers. In the light of doing their duty (brokers), minsan nag aadvance muna ng
pera yan, for them to be able to attend to their transaction and later they have their expenses reimbursed,
and sabi ditto for brokers, reimbursement for expenses are not subject to VAT if the receipts or invoices
issued by the supplier of goods is in the name of the principal, not in the name of the broker. Naturally,
walang VAT dun sa principal, kasi ang VATable ditto ay yung broker. Sale of medicines by hospital
pharmacy to inpatient is exempt from VAT but sale to outpatient is subject to outpatient. Held in the St.
Lukes Medical Center case. Yung inpatient yung naconfine. How about toll fees? Toll fees received by
the hotel from PLDT is not part of its gross receipts. Payment of VAT by the hotel for providing limousine
services to its client is correct, it is not subject to 3% common carrier tax. Right now , it is not subject to
VAT. Theater owners, SM Prime holdings. Gross receipts of theater owner or operator for sale of tickets
from movie goers are exempt from VAT. Theaers and movie houses are not included in the enumeration
of taxable services.
nd
2 half
[TAXI NOTES] 51
Limited for sale of… Sale of goods and services.. to include selling of bids (??) in public…. So ang
nakalagay jan ay yung liable na ung nag benta ng lupa (??) edi ung amusement tax sa Internal Revenue
Code (??). So this is CIR v. SMPH. Under BP 8069, PAGCOR is exempt from VAT pursuing from its
charter. So this is a special law. The special law, BP 8069, has grant PAGCOR exception from VAT. It will
prevail over RA 7716, okay, this is the general law. Okay, so that is CIR v. Acesite (??) Corporation.
Okay, sale of services, oh itong gross receipts and its definition ah. Memorize this ah. Gross receipts
means the total amount of money or its equivalent representing the contract price, the compensation, the
service fee, the rental, the royalty, the amount of charged for materials supply, oh pati ung mga materials
ah, together with services and deposits and advances payment, actually or constructively received. So it
looks to be really good it’s all in. Okay, during the taxable year, performed (??) services excluding ….
VAT ah. Parang hindi ko naintindihan. Except those amounts earmarked for payment of unrelated third
party reimbursement shall not be included in this gross receipt. Eh shempre dahil hindi naman part of
gross receipts, hindi naman earmarked iyon for other purposes, ha?
For sale of services, the test is not whether the services in the Philippines have been performed or not but
whether the compensation or pay is received, or actually or constructively received. The rule is no receipt
of payment, no VAT liability. Oh maganda iyon. No receipt of payment, no VAT liability.
Okay, anyway, itong mga VAT exempt transaction na ito, siguro ito importante ito no? A sale or
importation of agricultural and marine food products in their original state. Oh ayan. Eh kaya. Kaya
sinasabi this VAT exempt transaction is a way to offset the regressive nature of the VAT law. Kasi itong
mga, kagaya nito sale or importation of agricultural and marine food products in their original state;
livestock, poultry ah. At pag sinabing original state, simple processes of preservation ah. Processes are
no longer simple if it involves a chemical process that change the texture of the substance ah. Iba na yon,
Pero kung it is original state, ni-smoke mo lang, eh kung smoked tinapa, e okay lang un. Okay, the
texture is the same. Okay, sale or importation of fertilizer oh ayan kelangan ng mga farmers yan. Seeds.
Oh na eexempt yan. Importation of personal and household effects belonging to the resident of the
Philippines returning from abroad, and want to reside in the Philippines permanently, oh wala un. VAT
exempt iyon. Importation of professional instruments and implements for those who are exercising
profession here ah. Eh kailangan mo iyon sa trabaho mo no?
Services subject to percentage tax under Title 5, Oh kaya ung mga nasa Title 5 na iyon e hindi iyon
kasama sa VAT, otherwise magiging obnoxious double taxation iyon ah. Okay, tapos ung mga ayan
services by agricultural contract growers ah and milling for others of palay into rice, corn into grits. And
you will agree that this is something that offset the radical nature, the regressive nature of VAT.
Medical, dental, hospital and veterinary services except those rendered by professional, okay. Kaya tong
sale of medicines by hospitals in patients are exempt from VAT okay. Hindi ung in-patient, ung ano. (??)
the professional institutions are exempted from VAT whether it is registered with the CHED or the TESDA
okay, DECS, exempted from VAT yan.
[TAXI NOTES] 52
Okay, what are the other exemption from VAT? Transaction exempt under international agreements to
which the Philippines is a signatory. Sales by agricultural cooperatives registered with the Cooperative
Development Authority okay. Gross receipts from lending activities under credit or multi-purpose
cooperatives. Okay, and then uhhh ito nalang, ito ung dulo. Sale of real property not primarily held for
sale to customers or for lease in the ordinary course of trade of business, they are in fact of socialized
housing --- exempted from VAT yan. Okay, residential lot valued at 1.5 M, because beginning 2012
1,919, 500 and below; house and lot, and other residential dwellings 2.5M kasi nga this is not for
business purposes but purely for personal purposes, they are VAT exempt. Okay? Anyways, so let’s so
much to do with that ha. Oh basta yung 109, you will find all of those in 109 ha? Yan pati ung mga
importation of fuel nandidito because these are very important for our – fuel will always be an added cost
that is passed to the public kaya exempted ito. And services of course of banks and nonbank financial
intermediaries kasi sinasubject na yan sa uhhhhhh gross receipts tax.
Okay. Now let’s go to Section 111 kasi ito naman ang mga kaso na dapat pag – aralan niyo dito ah.
These are cases uhh 2016 January. Oh kelan ang cut off ng examination niyo? June 30, 2016, ito
January 2016. Ano ang uhhh ang dinidiscuss nito. Edi iyon ung mga input taxes attributable to zero-rated
sales. At saka maraming klase ng input tax ah. Pag-aralan niyo ah. Ano ibig sabihin ng transitional input
tax? Ano ibig sabihin ng presumptive input tax? Hanapin– Makikita niyo dun sa 105 -115 ha. Hindi
pwedeng lecture iyon kasi sabi ko nga yun basahin ninyo ung provision e. 105 -115. Sasampo lang
section yon. Okay, so basta clear tayo. Pag input tax, iyan ang pumapasok kasi bumibili ka. Pag bumili
ka, kasama na ng babayaran mo is the input tax. Kaya kung ikaw ay VATable person, record mo kaagad
un. Pangalawa, tignan mo ung input tax receipt kung iyon ay nagcocomply sa regulation ha? Kelangan
nakaspecify jan clearly uhhh VATable sale ha, Zero-Rated sale or VAT-Exempt sale. Okay? Kasi may
peculiarities ung nature ng resibo sa VAT ha? At parating concern ng purchaser lalo na’t kung VATable
ka is to look at the nature of the input VAT. Okay! So remember this, input tax credit and importation of
goods and current local purchases and services. Okay ang klase niya yung normal input tax—ung normal
na pinapasa sa iyo. Meron namang transitional input tax, nung ikaw ay o bago kang VATable entity at the
outset simula ka palang binibigyan ka na nung transitional input tax. Yung presumptive input tax naman
kung meron kang mga product kagaya ng sale of hmm tulad ng mackerel ganyan meron incentive iyon
ha. Okay? So, transitional input tax, a person who becomes liable to VAT or any person who elects to be
VAT registered. Ano ibig sabihin ng elects to be VAT registered? Kahit siya ay hindi kailangan mag
paregister, e magpaparegister ka. Ang tawag mo doon ay Optional Registration. So tanong sa Bar, May a
person who is not really VAT registered because he has not reached the requirement for mandatory
registration, may he register for VAT? Yes under the Optional Registration. What do you think is the
reason nagpaparegister siya sa Optional? E baka naman madami siyang pinamili na goods na subject to
input tax. Oh e kung hinid siya registered? Hindi niya magagamit ung input tax na iyon. Okay, Iyon ang
purpose nun. Meron mga taong nagpaparegister talaga kahit hindi sila required –optional all because
they have so many input taxes.
Okay, person who becomes liable to VAT or any person who elects to be VAT registered (??) subject to
the filing of an inventory be allowed an input tax at this beginning inventory goods and materials
equivalent to 2% of the value of such inventory. Nakita niyo ito dito sa kaso ng Fort Bonifacio
Development Corp. v. CIR January 22, 2013.So I repeat that, so itong transitional input tax, this was
enunciated by the SC in the case of Fort Bonifacio Development Corp. v. CIR, G.R. 173425, January 22,
2013. Okay, additional notes, goods that are exempt from VAT forming part of the inventory are excluded.
Okay, tax payer is not allowed to claim full (??) transitionally of such inventory goods without VAT
components –oh fair lang yon. Okay, transitional input tax is allowed not only on land improvements but
also on the land itself sabi doon sa kaso ng CIR v. Fort Bonifacio Development Corporation. Okay, I
repeat that ah, transitional input tax is allowed not only on the land improvements but also on the land
[TAXI NOTES] 53
itself. Okay so iyon ang mga transitional input tax. Very important kasi may jurisprudence iyan. Okay, e
yung presumptive input tax. Ano ibig sabihin nun? Presumptive input tax are given to persons or firms
engaged in the processing of sardines, mackerel and milk, or those who are selling packed noodles,
instant noodles, and cooking oil. Siguro kasi ito ang mga binibili malimit ng mga tao ano? Okay, So
binibigyan ka kaagad ng presumptive input tax. Ano bang advantage na bigyan ka ng presumptive input
tax. E pambawas mo iyon sa output tax mo. Okay, eh kung binili mo ay capital goods. Ano ba ung mga
capital goods? Mga fixed assets. Okay, binibigyan ka na ng input tax doon ha. Kasi gagamitin mo iyon sa
business mo. So capital goods are fixed assets with estimated useful life of more than one year, used in
the trade or business of the taxpayer. If the aggregate of the acquisition cost of the capital goods exceeds
1M and the estimated useful life of the asset is 5 years or more the total input tax shall be amortized over
the period of 60 months. Okay, iyan ang holding sa Bonifacio Water Corporation. Okay, the aggregate
acquisition cost does not exceed 1M, the total input tax shall be allowed as credit against the output tax in
the month of purchase. Okay, anyway, so at least that gives you the idea what the classes of input taxes.
Okay before we go to the Section 110 and 111. Now, subsidiary records for capital goods so this is
compliance requirement ah. A subsidiary record in ledger forms shall be maintained for the acquisition, or
importation of capital goods such as input tax—uuhh andun yung caption doon, monthly input tax claim
for VAT declaration, purchase amount, date of purchase, description of goods. Okay, for capital goods
that are covered by the BOT Scheme uhhh ……. IBP will Amortized over life of the asset for the
remaining five years. Okay, revenue filing of claim for refund of tax credit in unused input tax arising from
purchase of capital goods estimated in Republic Act 9337. Okay, so now let’s go to this Section…. Okay,
so malinaw tayo ah, Kapag ikaw ay zero-rated sale taxpayer , ang lahat ng input tax mo, you can claim it
as a refund. Okay, precisely that is what segregates a zero-rated sale from exempt sale. Ngayon, ano
itong ang mga titignan niyong cases jan. itong kaso ng Mirant Pagbilao Corporation January 20, 2016.
Okay, anong facts nito? Mirant Pagbilao Corporation is a VAT registered Philippine Corporation located
in Pagbilao engaged in the generation of electricity for NAPOCOR. O dahil jan shempre zero-rated sale
siya. Under the Build - Operate – Transfer Scheme, BIR is going to approve its application for effectively
zero-rated rating. O diba sabi ko kapag automatic zero-rated ka, wala na ung kailangang approval
because automatic iyon. But kung ikaw ay effectively zero-rated sale, kailangan mo ng registration with
the BIR. So ito inapprove na ng BIR. For taxable year 2000, the quarterly VAT returns filed by Mirant
Pagbilao Corporation showed an excess input tax paid on domestic purchases of goods, services and
importation of goods in the amount 127M. Okay, so ano ngayon ang gusto niya mangyari. E ung binayad
niya na input tax shempre gusto niya mairefund niya. Okay what are the rules? Okay, additional facts, on
March 11, 2002, Mirant Pagbilao filed before the BIR an administrative claim for refund of the input VAT
for the year 2000. O bakit sinabing for refund? E kasi this is a Zero-Rated sale. Kaya pag Zero-Rated sale
ka, pwede ka magclaim ng refund ng input VAT. Okay, ano basis? Section 112 (D) of the Tax Code.
Fearing that the period to file a refund is about to expire, Mirant Pagbilao filed a petition for review before
the CTA on March 26, 2002 wihtout waiting for the decision of the CIR. So ano connotation nun? Edi
inaction. Hindi sumasagot ang BIR, inaction. So that you will not lose your right, you will file with the CTA.
Okay? Kasi kapag pinabayaan mo ung inaction – you don’t do anything, you will only be yourself to blame
by the time na nag final. Okay anong issue dito? Does the Court of Tax Appeals set (??) jurisdiction to
entertain Mirant Pagbilao Corporation to decide claim? Ano ang claim niya? Edi refund nung excess input
tax and related to zero-rated sale, okay. Ngayon sabi ng Supreme Court dito, on a similar case which is
CIR v. San Roque Power Corporation, the Supreme Court ruled that the 120 day waiting period – ito
pakinggan niyo to ah para pag binasa niyo ung Section 120 – iyon lahat nung nasa Section 112,
babasahin niyo maigi un kasi tungkol lahat iyon sa pag rerefund ng input tax and zero-rated attributable
sale ah. Eh uh ang daming kaso dinicide ng Supreme Court na ganito kaya it’s worth for you to closely
look at it ah. So in a simalar case of CIR v. San Roque Power Corporation, Supreme Court ruled that the
120 day waiting period under Section 120 of the Tax Code is mandatory provision and it is jurisdictional
ha, okay. Hence, an appeal to the CTA by the taxpayer without waiting for the deicision of the CIR is
[TAXI NOTES] 54
definitely premature. So anong message? Iyon daw pag nagfile ka ng claim for refund ay kailangan
antayan mo muna ung decision ng Commissioner which is the 120-day period. Eh ngayon nagakyat na
kaagad siya sa CTA without waiting for that 120 – day period. Okay, ano sabi ng Supreme Court? Strict
compliance with the 120 plus 30. Ano 120 plus 30? Eh kasi the Commissioner is given 120 days within
which to act a new petition for refund. Ito naman masyadong excited hindi pa natatapos ung 120 inakyat
niya sa Court of Tax Appeals. Kaya ang sabi ng Court of Tax Appeals is premature. So ano message?
120 plus 30. Bakit 120 plus 30? Kasi pag 120 na at wala pang action ung decision, then that’s the time
you go to the CTA within 30 days. Kaya ang famous number jan 120 plus 30. Okay. What is the reason?
A claim for refund is a tax exemption and therefore strict compliance against -- any doubt is construed
strictly against the taxpayer.
________
So we will taken up this case of Mirant Pagbilao Corporation something to do with uuhh zero-rated
taxpayer claims into taxes refund no. So again, an ordinary taxpayer - so whenever there are input taxes I
can use that just as a credit for future output taxes no? But since uhh this zero-rated taxpayer uuhh
special class of taxpayer –preferred taxpayer under the Tax Code because zero-rated is always source of
a foreign exchange discourse of the banking system of the Philippines. So again, the rule under Section
112 (A),(B), (C),(D), especially (D) is whenever there is an excess of input taxes that is directly
attributable to zero-rated sale, the sale can be refunded. Okay, the sale can be refunded. So therefore,
the rule is that the of course you give the Commissioner first the chance to rule on your refund and if you
do not get a favorable result then you go to the CTA no? Okay, so as usual the CTA has exclusive
appellate jurisdiction over the filed claims. Okay.
So again, in this Mirant Pagbilao case, the rule which is also the same as the San Roque Power
Corporation in 2013, has ruled that the 120-day waiting period. Ano ung waiting period na iyon? When a
claim for refund is filed under Section 120 of the Tax Code, then you wait for the Commissioner to act on
it no? Okay, but in this case is Mirant Pagbilao was too anxious and filed immediately to the CTA without
waiting for the decision of the Commissioner. So therefore that famous 120 day plus 30 day application
ha. Strict compliance is required about that. So in other words, you wait for the final decision of the
Commissioner before you can go to the Court of Tax Appeals all because claim for tax refund is a tax
exemption by nature which is strictly construed against a taxpayer ano. Okay. So you notice that the
Mirant Pagbilao is zero-rated because it is engaged in the generation and distribution of electricity to
NAPOCOR. Okay. So that gives it an incentive as a zero-rated tax payer. Of course it involves in big
amounts ah 127 M no. Okay. So, After that, the fact shows that the MPC filed before the BIR – to whom
you file an administrative claim. The filing with the BIR is an administrative claim. So in a claim for refund ,
dalawang klase yan. The one is an administrative claim the other one is a judicial claim? And as usual
you go there to the judiciary after you are not satisfied with the decision of the administrative body. So
here, MPC filed an administrative claim with the BIR for the refund of the excess input VAT. So that is
under Section 112 (D). Iyan ah. So 112 is very important but you have to distinguish that from other
sections, like Section 204 saka ung Section 229.
Kasi ung 204 that pertains to errorneously or illegally paid tax. Ito namang nasa 112, hindi naman ito
erroneous. So how do you trace(??) Section 112 (D) and Section 204. Sa Section 204 ung the power of
the Commissioner to refund. Eh ang premise nun ay eh is the taxpayer can errorneously paid taxes. So in
the tax errorneously paid for as long as the requirement is within two years from the date of errorneous
payment, a refund claim has been filed –irregardless of the a supervening event. So when it comes to a
refund of creditable excess input tax by zero-rated taxpayer, you do not base this at the same level as
errorneously filed taxes. Because this is a matter of right. When a zero-rated taxpayer is a recipient of an
[TAXI NOTES] 55
Input tax, it is matter of right for him to claim the sale, so long as he provide the mandatory regulatory
requirement which is the 120 day plus 30 no. So in this case, the claim was filed but fearing that the
period in filing the refund was about to expire, MPC filed a petition for review before the CTA without
waiting for the decision of the Commissioner. And the Supreme Court said that is not allowed because
that is premature. They should have waited for the decision of the Commissioner. So again, I just want to
reiterate, the strict compliance with the 120 plus 30 day application is necessary for the claim to prosper.
Now, there are other cases or jurisprudence that follows the Mirant Pagbilao case. So, in fact, I have the
list of these cases – all of these cases are almost the same. There are 13 cases no. So in other words,
this Mirant Pagbilao case was applied to cases like, San Roque Power Corporation, Taganito Mining
Corporation, Philex Mining Corporation, Cargill Philippines, CBK Power Company, Aichi Forging
Company, Rohm Apollo, Nippon Express, Powe of Operations Silicon, Eastside Telecom, Air Liquide Phil,
Inc.
So if you try to summarize what are the rules. I think these are the things that you need to do no. What
are the rules in claim for tax refund credit of an untilized input VAT on the administrative side. So una
muna, administrative claim –when the claim is filed with the BIR. What is the rule? Under Section 112 (A),
within two years from the close of the taxable – so inote niyo ung counting ah. So from two years from the
close of the taxable quarter when the sale was made. So again, I just want to reiterate, when you are
counting for a period, very important is the starting point for counting. Kasi pag nagkamali ung starting
point mo edi mali rin ung prescriptive period mo when you apply no. So ang counting dito is 2 years from
the close of the taxable quarter when the sales were made. So ano makukuha mo dun? When I say the
sales were made, dun ka pinasahan ng input tax. Okay. Although, nagkakaroon ito ng parang ng dissent
of BIR kasi ginugulo dito mga process --- ung Atlas. Atlas case. Pero parang ayoko na kayo guluhin dito
no ah. Within two years from the payment of the output VAT un ang ginamit na starting point but that will
apply only for a certain period ano. From June 8, 2007 -2008 so wag na nating pakielam un Atlas –
academic na iyon. So talagang nag aapply ngayon, ito na ung 120 plus 30. So again, administrative claim
with the Commissioner must be filed within 2 years from the close of the taxable quarter when the sales
were made. And ung judicial claim, eh within 30 days from -- ito na ah within 20 days. So ang pagfifile is
with Section 112 (A) ah. Andun ung two years ah. Sa 112 (D) naman, within 30 days from the full, partial
denial of the administrative claim with the Commissioner. You are mandated to file it to the CTA within the
next 30 days. Okay. Or if there is any inaction within 30 days from expiration of the 120 day period given
to the Commissioner to decide. Okay. Again, this is mandatory. Kaya ung 120 plus 30, unang una ung
pagbilang sa pagfifile ng claim sa BIR, two years from the closing of the taxable quarter when the sales
were made. Pag akyat mo naman sa CTA is within 30 days from the full or partial denial of the
administrative claim by the Commissioner. Whether it is full or patial denial, official iyon kasi may letter
iyon. Eh kung hindi nag action, inaction – within 30 days from the expiration of the 120 day period given
to the Commissioner to decide the filed claim. So iyon un ah. So that is regarding refund of excess input
tax attributable to zero-rated sale. Now in another case, ito naman ung Silicon Philippines. This has
something to do also with a zero-rated sale through Silicon. This is March 2, 2016. Oh very close ito sa
inyong cut-off itong 2016, Silicon.
Silicon Philippines is a preferred pioneer enterprise registered with the BOI. Oh ayan ung status….(??)
zero-rated status. So Silicon sought to recover VAT paid. This time it is VAT paid an importad capital
good. Etong kanina sa Mirant, is a sales, zero-rated sales. Ito namang Silicon, is recovering a VAT pay
on imported capital goods for second quarter of 2001. Ang section naman na nag aapply dito ay 112 (B).
Kaya ung Section 112 na iyon, napaka importante iyon – ung A sa pagfifile ng claims sa BIR, ung D sa
CTA pero pag capital goods e 112 (B). Since the BIR denied its claim, it appealed to the Court of Tax
Appeals. The CTA mentioned compliance with the following requirements. Okay, first Silicon is VAT
registered entity. Second, Silicon proved that it paid input VAT on capital goods purchased. Number 3,
[TAXI NOTES] 56
VAT payments duly supported by VAT invoices. Number four input VAT was not offset against any VAT
output. Kasi pag inoffset mo pa ung isang output, hindi considered un na refund kasi ginamit mo na e.
And administrative and judicial claim were filed within the prescriptive period. Okay, So ano ang sinabi ng
Supreme Court dito? The Supreme Court said that the Court of Tax Appeals found that Silicon was able
to prove only the first and fifth requisite. So 1 to 5 ito. Ano ung first and fifth requisite? That it is a VAT
registered entity and administrative and judicial claim for refund were filed within the prescriptive period.
But Silicon failed to prove the second and third requisites. Ano ung second and third requisite? That it
failed to proved input VAT and capital good purchase and saka ung three – VAT payments shall be duly
supported by VAT invoices. Ah eh kulang sa substantiation. It also failed to prove that the capital good
purchases were capital goods. Okay. So Silicon appealed to the CTA En Banc which appealed the
decision of the CTA. ((??)kis ang ginamit na processo ah. Tandaan niyo pag Court of Tax Appeals acts --
-- in any of the division, there are three divisions. Appeal is to the CTA En Banc. Okay. And if it does not
able to get the necessary vote in the CTA En Banc, then you appeal it to the Supreme Court. Okay. So
what was the decision here. Rule. Supreme Court said that the issue on the refund claim of Silicon was
not decided based on the merit of the case but for failure of Silicon to comply with the procedural rules.
Okay. Oh kaya sa mga claim for refund, kasi this is in the nature of a tax exemption, very important ang
compliance with the procedural rules. Tatandaan niyo iyon. Basta tax refund is in the nature of a tax
exemption. In case of doubt, you solve the doubt against the taxpayer.
In this case, Silicon failed. So in other words, this refunding was not decided based on merits but on
technicalities – For failure of Silicon to comply with the procedural rules in claiming tax refund or credit
pursuant to 112 (B) and 112 (D). It was mentioned that the 120 day period under Section 112 (D) stops to
run only from the date of the submission of the complete documents supporting the administrative claim.
Since this rule was not complied with, the Court of Tax Appeal has no jurisdiction to take cognizance of
the case. The decision of the CTA and the CTA En Banc was total nullity. Ayon. So there is no reason for
the Supreme Court to rule upon the issue raised by the Silicon. Okay. Kasi dito naging fatal ung hindi nila
pag comply sa mga --- shempre every thing is dependent on the supporting documents. Eh kung ung
supporting documents eh wala doon. Ang sabi ng Supreme Court eh ano idedecide ko jan. Okay. So
that’s one also, remember that Silicon case. So what have you learned from there? In cases of tax
exemption, all substantiating receipts must be present. Because in tax refund, it is always ruled against
the claimnant.
Okay, tignan mo naman ang isang ito. Iyong Kepco. KEPCO Ilijan Corp. v. CIR. KEPCO ilijan Corp. filed
a claim for refund of input tax for the first and second quarter of 2000 from its importation and domestic
purchases of capital goods preparatory to its production to its production and sales of electrivity to
NAPOCOR. Okay. Due to inaction of the BIR of its claim, it filed a petition for review with the CTA.
Despite the notice to the BIR, Kepco did not file a memorandum on the case so the case was submitted
for decision. Okay what was the deicison? Court of Tax Appeal ruled that KEPCO is entitled to the refund
and (set its decision for a writ of execution). BIR filed a petition for annulment of the judgment with the
CTA En Banc (but the same was issued)… So ito ung BIR quinestion ung decision ng CTA in petition.
Kaya siya nag file ng annulment of judgment with the CTA En Banc. Oh ayan ah. Kita mo yan. CTA ruled
that KEPCO is entitled to the refund and said decision became final and executory. But the BIR acted
otherwise. So it filed a petition for the annulment of judgment with the CTA En Banc but the same was
dismissed. So nung nadismiss iyon, BIR elevated the case to the Supreme Court. Okay. Does the Court
of Tax Appeal En Banc has jurisdiction to take cognizance of the petition for the annulment of judgment
filed by the BIR? So ang nangyari dito, e claim for refund ito, pinagbigyan ng CTA in Division but the BIR
does not agree. Ang ginawa ng BIR e nagfile ng petition for annulment of the judgment of the CTA in
Division sa CTA En Banc. But it was dismissed. So it was dismissed nag appeal sa Supreme Court.
Question. Does the CTA En Banc has jurisdiction to take cognizance of the petition for annulment of
[TAXI NOTES] 57
judgment filed by the BIR? Okay ano na ung rule? Sabi ng Supreme Court the revised rules of the Court
of Tax Appeals and even the Rules of Court which applied suppletorily thereto provide for no instance in
which the En Banc may reverse, annul or void a final decision of a division. Okay. Maganda ding
matutunan iyon at least under the CTA procedural rules. However, BIR may file a petition for certiorari to
the Supreme Court under Rule 65 of the Rules of Court. So mali ung ginawa nilang action na finile nila is
petition for annulment with the CTA En Banc. So the revised rules of the CTA and even the Rules of
Court which applied suppletorily thereto provide no instance in which an En Banc may reverse or void the
final decision of a division. Instead, BIR may file a petition for certiorari to Supreme Court under Rule 65
of the Rules of Court. In any event, BIR’s failure to avail of this remedy, rendered CTA First Division’s
decision as final and executory. Na late na kasi mali ang remedy. So BIR’s failure to avail of this remedy
within 60 days from the discovery of its loss of the case due to the negligence of his counsel was fatal. So
KEPCO wins the case based on technicality. Kasi mali ung ginamit na remedy. Okay. So tandaan ninyo
ung input taxes ung mga refund na iyan ah. Section 112 A,B,C,D. Okay, so let’s proceed.
So in this input taxes under Section 112, the tax reliefs of VAT taxpayer in that excess input tax
attributable to zero-rated sale carry over in the excess input tax in the next quarter under the excess is
utilized. Ibig sabihin ung input tax mo kung meron ka naman pagtatapatan na output tax i-carry over mo.
Pero when it comes to a point na wala ka ng tatapatan nun, may excess ka. Then you file a claim for
refund. A claim for refund must be filed within 2 years after the close of the taxable quarter when the sale
were made. Okay. How about for non zero-rate sale? A Non-zero rated sale the remedy available only is
to carry over the excess input tax for the next quarter. So kung tatanungin sa Bar. Kelan mag oout (??)
ung mga input taxes ng mga ordinary corporation? Na hindi naman attributable to zero-rated sale. Kasi
ang pwede mo lang irefund, are those input tax and zero-rated sale sa Section 112. E for non-zero-rated
sale what is the remedy available to a vatable taxpayer who has an excess of input tax. Well according to
this, for non-zero-rated sales, the remedy available for a VAT taxpayer is to carry over the excess input
tax to the next quarters or to dissolve the corporation or cease operation of the business subject to VAT
within two years of dissolution or cessation of the business. Ayun nalang talaga ung remedyo mo. Okay,
so years after that the BIR will … that these unutilized creditable input tax. Okay, anyway –tignan natin
itong mga requisites of filing a valid claim. Okay . Importante ito. Kasi dito sa mga VAT - related
transaction itong a claim for refund are very important. So let’s proceed, BIR Ruling 123-2013, ununtilized
creditable input tax attributable to zero-rated sale can be recovered through the application of filing of a
tax credit. Okay, unapplied input taxes after the expiration of the two year prescriptive period may not be
expense outright. Okay, what is the reason? VAT exemptions are strictly construed against the taxpayer.
Since an expense is an item by legislative grace that’s given to taxpayer, you apply the rule of tax
exmptions doon. Kaya the rule on unapplied input taxes after the expiration of the two year period – kung
hindi mo nagamit iyon, you cannot expense it outright. What is the reason? Deductions are in the nature
of tax exemptions. And very clearly, when you talk of deductions, specially income tax, -- remember
deductions are items which by the legislative grace allowed to be deducted on the income because they
are necessary to generate income. So to be able to deduct a deductions, the very important thing is
compliance with all of the requisites of a valid deductions. Kasi kaya in all your books, in all your notes,
you will find in case of deductions there are what we call pertinent requirements to be complied with in
order that will be deductible. Failure to comply with the requisites, the deductions can be disallowed.
Okay. So remember that ah. Deduction is in the nature of a tax exemption. That’s why you call it with
legislative grace. So now what are the requisites of a valid claim for VAT? Okay so let’s recap no. 1. For a
valid claim for VAT, the claimnant should be a VAT registered person. 2. Claim for refund or tax credit is
filed with the BIR within two years after the close of a taxable quarter when the sales were made. And 3.
With the CTA withint 30 days after the date of the receipt of the denial of the claim. Kung meron formal na
sulat ung Commissioner or kung wala from the lapse of the 120 day period from the date of submission of
the complete documents in support of the claim. So remember ah. Complete dcouments ah. Dito natali
ung KEPCO no. Kasi ang documents niya ay complete. 4. The claim of excess input tax were not applied
[TAXI NOTES] 58
against any output tax. 5. And claim must deduct from its quarterly VAT return or amended quarterly VAT
return any excess input tax dineclaim as a tax refund or tax credit. Okay, kasi pag nag claim ka na ng
excess input tax, hindi mo na dapat ideduct sa output tax pag gagawa ka ng return. Double whammy
naman un. Okay. 6. The claim of excess input tax are directly and entirely attributable to zero-rated or
effectively zero-rated sales. So ung zero-rated dito ung automatically zero-rated. Ung effectively zero-
rated ito ung mga transaction wherein the counter party is an entity of which the Philippines has an
agreement. Ung automatic, wala na un, give away. Basta pag pumatak ka roon, exporter , you are
automatically zero-rated sale. Ung effectively zero-rated sale, nagpaparegister ka pa sa BIR ano. Okay,
And for zero-rated sale, the acceptable foreign currency proceeds thereof have been duly accounted for
in accordance with rules and regulations of the BSP kasi dapat jan papasok sa foreign exchange channel
ng Banko Sentral ng Pilipinas. 7. And a claim for excess input VAT are supported by relevant VAT
invoices or official receipts. So the VAT invoices must be in compliance with the regulation because we
know that the VAT invoices and receipts kailangan strictly in compliance with the regulations in which is
16-2005. 8. And the VAT return for the succeeding quarters covered by the claim for refund must be
submitted with the CTA.
Ok, now, let’s look at how different is this with Section 229. Kasi uulitin ko ung Section 112 kasi normally
ang connotation nun ay pag sinabing credit, magcclaim ka ng refund parang ang usual connotation nun
ay mali ang binayaran mo. Kaya ka nagcclaim ng refund. But I used to correct that kapag ang claim for
refund mo is pursuant to 112 –that is the claim not of erroneous payment but it is a matter of right.
Ngayon, kung ito ay errorneously paid tax, then you look at Section 204 or Section 229 of the Tax Code.
Because Section 229 has something to do with the recovery of tax errorneuosly or illegally collected. So
hindi mo ito iaaply sa refund of excess input tax. Ulitin ko, ito para lang sa errorneously or illegally
collected tax in which case, it is stated there that no suit or proceedings shall be maintained in any court
for the recovery of any national internal revenue tax except VAT. O kaya nakalagay jan except VAT. Kasi
ung VAT is under 112 (D). Without there alleged there been errorneously or illegally assessment until a
claim for refund has been duly filed with the Commissioner. Okay. So what is the reason there? You have
to exhaust all administrative remedies first to file a claim of refund to the Commissioner . You give the
Commissioner a chance to rule on your refund. In any case, no such suit or proceedings shall be filed
after the expiration of 2 years from the date of the payment of tax, regardless of any supervening event.
So that what makes it different from the LGC under Section 196. Kasi doon ung supervening event is
given consideration. Okay, so un ang – wag niyo icoconfuse Section 112 sa Section 229 ah.
Okay. So anyway, let’s look at other things about Value –Added Tax. So registration requirement. So
when you look at itong Implementing Regulation ng RR 16- 2005. So again, I urge you to read this one
kasi andito ung RR 16 – 2005 was issued on October 19, 2005 to implement RA 9337. They called this
the Consolidated Value-Added Tax Regulation. So it is in implementation of RA 9337. Okay. Ngayong,
itong maraming mga nadagdag na regulation dito, kagaya ng RR 16-2011 inincrease niya ung 1.5
benchmark for registration to 1,919,500. Okay, now ung Value-Added Tax Administrative requirements
, focus on the registration. So what are the requirements for registration? Eh shempre ung
registration sa VAT eh ang unang unang criteria ay ung of the type of VAT person na reach mo ung
annual gross receipts na benchmark for registration. In which case, this is a mandatory registration. Less
than 1,919,500, you may opt not to register. So ang tawag sa iyo ay non-VAT. Okay. And if you are
required to register and did not register, VAT registrable. So that is the first administrative requirement
that makes the VAT a very very effective way of collecting taxes. The registration. Why? Because this
registration are imputed in the database of the BIR. Kaya – you should know this. I have a client na
nagparegister sa VAT. So once he was registered sa VAT, inencode agad ng BIR ung VAT registration
number mo sa computer nila. VAT registered ka eh shempre. And he intended to engage in the buy and
sell of garments. So after registration, eh nagbago ang isip. Hindi na niya tinuloy but he did not do
[TAXI NOTES] 59
anything. So after 18 months, the BIR was sending notice to this taxpayer. And the BIR are asking for
copies of the returns. What returns? Input VAT returns. Kasi kung nakaencode ka sa kanilang computer
na ikaw ay VAT registered, you are expected to be filing a monthly VAT return. Eh pano kung wala ka
pang operation? Edi magfifile ka parin and ilalagay mo dun sa VAT return mo, not yet operational. Ififile
mo iyon monthly. Hindi niya ginawa iyon. For 18 months. Ang tawag ng BIR doon ay stop filing. Stop filing
because you are registered as VAT taxpayer and yet no return was filed by you. So hindi malaman ng
BIR kung nag operate ka. Basta ang presumption doon pag nakaregister ka, ang presumption doon ay
nag ooperate ka. Eh bakit ka magfifile ng return? E kasi nga di naman siya nagooperate. Akala niya
basta ganun nalang, hindi siya nag file ng return. So after 18 months, here comes the BIR writing him and
penalizing him for non -stop filing for failure to file a return . Ang sabi niya kasi hindi naman ako nag
business. OO nga hindi ka nga nag business, but you should have filed a monthly VAT return and
indicate there non-operational. So that was the – he was penalized for 3,000 a month per return. Eh 18
months iyon. Oh so nag bayd siya ng kwan. So un gang ruel sa pagfifile – ang rule mo ay kapag ikaw ay
nag paregister at ang naging desisyon mo ay hindi ka pala tutuloy, you should have filed a request for
cancellation of your VAT registration. Na andidito ung mga grounds for cancellation of VAT registration.
Sa 16 - 2005. You try to look at that ha. Kasi those are very important things. This VAT is very --- the
requirements under registration are very stringent no. Okay, kapag natipuhan ka pa ng BIR e
imprisonment pa ang katapat mo e no.
Okay, so in other words, if you are not anymore operating, you take the initiative of filing a Cancellation of
the VAT registration. What else are the other administrative requirements -- Invoicing. Tapos book
keeping. Okay so iyong invoicing mo, kailangan ung mga invoice mo very prominent ang naka printed
doon na nakalagay sa resibo “this is vatable sale/ zero-rated sale/ vat-exempt”. So ang lahat ng
transaction mo ay VAT-exempt, iyon ang iisue mo na resibo. So kung ikaw naman ang bumili at ikaw ay
VATable, dapat titignan mo ung iisue sa kung VATable. Kasi pagka may deect iyon, you cannot use that
as input tax. Kaya the BIR Examiner who is examining VATable taxpayer, shempre iyan ung mga
tinitignan nila – mga input VAT receipts. Kasi simpleng simple ang buhay nila. Pag nakakita sila ng
defect, disallowed. E pag na disallowed un, ung output tax mo ay tataas. Pag tumaas iyon, may
deficiency VAT assessment ka. Okay, so that is the importance of that.
Book keeping, of course, is required that the VATable taxpayers should have separate books. Separate
and distinct from accounting books where you record all your transactions. Hindi siya pwede magka
consolidate o magkasama. And of course the filing of the tax return. Filing of the tax return of VAT
taxpayer is very stringent ah. Every month you have to file a VAT return within the first 10 days after the
end of each month. And after every quarter you have to file within the first 25 days from the date of the
end of the quarter , you file a quarterly VAT return. Sinasummarize mo lahat doon ang transactions mo.
Okay, so there are also instances where there is also withholding VAT. When a VATable taxpayer is
transacting with the government entity. Kapag katransact mo is government entity, the government is
required to withhold 5% VAT. Also, strict requirement in the inventory of goods, material, and supply, and
proper accounting of unused non VAT invoices or receipts. Okay. Now, what are the requirements for
optional VAT registration for exempt persons? I tell you even if a person is not required to registers, he
may opt to register in an optional basis. Okay. Section 236. Any person who is not required to register for
VAT under Subsection (B) may elect to register for VAT purposes. Election is irrevocable for three years.
So pag nag opt ka hindi mo macacancell iyon for the next 3 years. From the quarter election was made.
So that was Section 236 (F), RA 9337. Any person who is VAT-exempt under Sec. 4.109-1 (B) not
required to register for VAT may, in relation to Sec. 4.109-2, elect to be VAT-registered. Once VAT
[TAXI NOTES] 60
registered, he cannot cancel his registration for the next few years. So in the next three years, you are
bound by your registration. So itong mga compliance requirements na ito ay very important things that
you need to know.
Now these are summarized—and isummarized this -- in the basis of course of RR 16-2005. Kasi ung 16-
2005 ang haba haba ng babasahin dito noh. So I picked up pertinent materials. And for your information I
will give this to the Bar Operations so will have a copy of this. Para pag nagbabasa na kayo matatandaan
niyo lahat ito.
Okay, what is the significance of VAT registration? Only VAT registered persons are entitled to credit
input tax against their output tax. Eh kung hindi ka VAT registered, what do you do to your input tax? Ah
that is part of your cost, simple as that. Pag pinasahan ka ng VAT, e kasama na un sa presyo na binili
mong goods or services. Kaya kung VAT registered ka, magagamit mo ung input tax na pinapasa sa iyo.
Kaya ung ibang tao kahit hindi ka na mag paregister, kung marami siyang pinapamili na pinapasahan
siya ng VAT, ipaparegister na lang siya – optional. Bakit? E para magamit niya ung input tax. Eh kung
hindi siya registered edi tapon nalang un. Okay, Now, one registration as a VAT taxpayer does not
exempt you from VAT output tax liability. Oh this is what I am saying. Kapag ikaw ay dapat mag
paregister sa VAT and you opt not to register, it does not exempt you from output tax liability. But any
input tax na natatanggap mo hindi mo naman na magagamit na pangbawas mo sa output tax. So it is a
very onerous thing for you. So that will really compel you to register. Masakit iyon pag hindi mo
magagamit ung mga input tax ah. Okay. Errorneous registration as a VAT person and consequently the
issuance by sale of VAT invoice or receipt makes the person liable to VAT. Okay. Errorneous registration,
ito ung hindi ka dapat nagparegister pero naregister ka sa VAT –eh liable ka sa VAT. The buyer of
exempt goods or services who is in possession of a VAT invoice is entitled to input tax. Okay. So let’s
proceed.
When you register as a VAT person whether you are a large taxpayer or a non - large taxpayer. Okay, so
ung large taxpayer, merong criteria doon ang BIR in when you will fall as a large taxpayer. Whenever you
are required to cancel your registration, then you are required to surrender the original certificates of
registration. Okay. What is the penalty for non-registration? Input tax credit. You are liable to pay output
tax but you are not entitled to input tax credit. Okay, what are the required information in an invoice and
receipt? Name and address of the seller, okay. Statement that the seller is VAT registered person plus
TIN. Kaya ‘yung TIN mo, which is the TIN that you have all throughout your lifetime, eh ‘yun pa rin ang
gagamitin mo, dinadagdagan lang ‘yun ng letter V before, para to indicate that you are a vatable
taxpayer, kung non-vat ka NV plus the TIN number. Pero ‘yung TIN number mo, ‘yun pa rin ‘yun, hindi
nababago ‘yun, okay.
The date, the quantity, the unit cost, the description of goods or nature of service, kasi nga ang resibo is a
very important, vital document in VAT; it’s very detailed.
Total amount, separate indication of VAT, invoice price plus 12% VAT, ngayon kung VAT exempt sale
naka-indicate ‘yun sa invoice or receipt. Kung zero rated sale, naka-indicate doon.
And always the name, the business style, the address, the TIN of the VAT registered buyer if amount is
1000 or more.
What else?
[TAXI NOTES] 61
Separate invoice or receipt, subject to VAT.
12% beginning February 1, 2006, kasi dati 10% ‘yun.

Kalian naging 12%?
Edi beginning February 1, 2006.
Noong lumabas na ‘yung RA 9337
Exemption may refer to a transaction or a person.

*** 47:16 Amount receipt is not it’s income but for another entity
Is it for reimbursement of advances?
Okay, if VAT invoice or receipt is issued by the seller, for a VAT exempt transaction, he is liable to VAT
out of tax as a penalty but the buyer is entitled to claim VAT input tax.
How about if it is combined VAT and non-VAT invoice receipt, in other words, kung ang transaction mo ay
both vatable at ang iba naman ay VAT exempt, oh what is the requirement?
** 47:50 There is a PA breakdown of the same’s price, so that you can calculate, what is the VAT taxable
portion and what is tax exempt.
Kasi may mga instances na mga VAT taxpayer, engaged in the transaction that are vatable and they
engage also in the transaction na vat exempt so kailangan meron silang allocation.
So what’s sale’s invoice receipt in case of sales 1000 or more, when the sale is made to a VAT registered
person, the name, the business style, the address and the TIN of the purchaser shall be indicated.
If the purchaser would not voluntarily disclose the above information;
Eto gasoline dealer, the gasoline dealer has no valid excuse for not knowing the status of his customer
whether VAT or non-VAT. And he shall be liable for any omission of the information in the invoice receipt.
So liable ngayon ang purchaser, para tignan niya talaga ang kailangan under the regulation.
However, for sales to non-regular customer they would not be entitled to input tax.
What else?
Eto puro ito mga compliance requirement. Because compliance requirement is very important.
Separate invoices or receipt for VAT and non-VAT transaction may be issued provided that the term VAT
exempt or VAT zero rated shall be written or printed prominently in the invoice receipt. Kapag nakakita
kayo ng VAT receipt nakasulat talaga doon ‘yan “VAT EXEMPT; VATABLE; OR ZERO RATED” kapag
hindi ganyan ang resibo niyo disallowed ‘yun. For tax purposes.
How about the use of a single invoice or receipt involving a VAT and non-VAT transaction? Sabi dito, the
seller has the option to use a single invoice or receipt, provided that the breakdown of the sale’s price
between taxable, exempt and zero rated sale and calculation of the VAT and each portion of the sale is
shown in the invoice or receipt.
So ‘yun tandaan niyo ha, talagang dito sa VAT talaga kailangan ‘yung resibo ang talagang vital dito. Kasi
kapag nag-eexamine ang BIR ng VAT taxpayer resibo agad ang tinitignan niyan, tinitgnan kaagad niyan
ang depekto ha tapos babanatan ka ng assessment.
For this purpose the printed invoice receipt must reflect TAXABLE, EXEMPT AND ZERO-RATED SALE,
either in a separate column or separate rows.
** 51:01 Ito pag-use ng C at M; paano ‘yung sa mga supermarket ‘yung gumagamit ng mga sales
machine
Taxpayers who uses or is permitted to use (sales?) machine are required to reconfigure their machines in
conformity with RA 9337. Kasi alam niyo ‘yang mga point of sale machine na ‘yan ginagamit ng mga
[TAXI NOTES] 62
supermarket, monitored ng BIR ‘yan, kasi kapag nag-request ka ng pag gamit niyan, naka-monitor sa BIR
‘yan, kaya kahit na ‘yun sa shoemart, kapag lumabas ‘yung stamp doon sa isang transaction sa shoemart
ang nakalagay na, and records na tumatakbo doon sa loob ng machine, meron isa sa merchandiser, isa
sa purchaser, isa sa BIR at ang isa sa shoemart. Because shoemart usually charges rental on the basis
of total sales mo, kaya ganun ang automation ng mga point of sale machine.
The BIR has also a way of monitoring transaction especially ‘yung mga supermarket na ‘yan, kasi through
point of sale machine ‘yan.
They are not required to apply for rehabilitation but they have the responsibility to reconfigure the
machines. However, the BIR reserves the right to check randomly their compliance and if found non-
compliant the BIR shall withdraw the accreditation plus penalties.
Invoicing requirement set forth under revenue regulation 795, particularly the printing of the word ZERO-
RATED an invoice or receipt, doon na expressly provided by law, was recognized as a reasonable in
accord with the efficient collection of VAT so when RA 9337 took effect under 2005 it included the voicing
requirement under revenue regulation 795.
So ‘yung 795 ‘yun ang regulation ng RA 7716, ‘yun ‘yung Expanded VAT law. Eto namang RA 9337 ito
naman ‘yung R-VAT, reform VAT law. ang regulation nito is 16-2005. Ngayon ‘yung rule doon sa 795 na
sinasabi na “the word zero-rated in invoice receipt’ doon na expressly provided by law was recognized as
reasonable and in accord with efficient collection of VAT. So sinunod nila, ng 9337 ‘yun din nasa 795.
The conversion from regulation to law did not diminish the binding force of such regulation with respect to
act committed prior to the enactment of the law. This is a supreme court decision, Panasonic
communication corporation vs Commissioner.
** 54:45 And in the case of Global historians technology Philippines; the absence of the word zero-rated
in the invoices or receipt is fatal to the claim for refund or credit of input tax. Because after all a claim for
refund is a tax exemption provision.
The period involved in this remark refers to taxable quarters of ** non-compliance with the requirement
under 795 is fatal to the claim for refund.
The Supreme Court denied the taxpayers claim for refund for failure to comply with the substantiation
requirement under 795 particularly the imprinting of the word ** B TIN VAT in the invoice or receipt
Supreme Court reiterated that this provision under revenue regulation 795 neither expanded nor
supplanted the tax code but merely supplemented what the tax law already defined and discussed.
A VAT registered taxpayer is required to comply with all the VAT invoicing requirement to be able to ** file
explain input taxes and domestic purchases for goods or services attributable to zero-rated sale. ‘yung
atin mga diniscuss na cases ay kailangang kailangan ‘yung invoicing requirement are duly complied with.
A VAT invoice is an invoice that meets the requirement of revenue regulation 795. All purchases covered
by invoices other than a VAT invoice shall not give rise to any input tax.
So if it does not give rise to any input tax what is the repercussion? ‘yung buong output tax babayaran
mo. kaya ka nag-aassess sa BIR para hindi sasabihin ng BIR there is deficiency but because the input
taxes are defective the receipts are defective and are therefore disallowed.
So in the case of Microsoft Philippines vs Commissioner, Microsoft invoice lacking the words ‘Zero-rated’
is not in the VAT invoice and thus cannot give rise to any input tax. Eh kung Malaki ‘yun, napakalaki ng
exposure mo, failure to indicate in the sales invoice or receipt the authority to print, ah itong authority to
print naman ito ‘yung sa mga printer, kasi kapag bad receipt meron kasi ang mga BIR ng mga accredited
printers kaya doon ka magpapaprint ng mga bad receipts.
[TAXI NOTES] 63
Nakalagay dito sa kaso ng Silicon Philippines; failure to indicate in the sales invoice or receipts the
authority to print is not fatal to the claim kasi ‘yung resibo sa ilalim noon may nakalagay na BIR permit
tapos ‘yung pangalan ng printing press na nag-print nun. Kaya para malalaman moa ng resibo, sa inyo
kung may mga transacation kayo, sapat titignan mo kapag bumili ka ‘yung pinadala sa’yo na purchase
invoice, titignan mo kung very prominent ‘yung Vatable, Vat-Exempt, zero-rated.
What is important is the authority to print has been secured by the taxpayer and invoices and receipts are
registered. So pakita mo nalang ‘yung authority to print.
** 59:27 cases
Sales invoice as an official receipt;
Petitioner offered in evidence a VAT invoice to substantiate it’s zero rated sale, CTA en banc denied
petitioner’s claim stating that since it is engaged in the sale of services ** receipts should have been
presented
Section 113 of the tax code does not create a distinction between a sales invoice and an official receipt.
Sales invoice a recognized as commercial documents to facilitate transaction which proves that a
business transaction has been concluded. Thus, an invoice would suffice provided that substantiation
requirements are met.
There is a fine distinction between a VAT invoice and a VAT OR.

VAT invoice and VAT receipt should not be confused as referring to one and the same thing certainly
neither does the law intend it to be used alternatively.
I think there is one decision, differentiate an invoice from a receipt.
** 1:01:49
BIR allows the input taxes to be credited from output tax where an advertising agency issues VAT receipt
to advertiser for the entire amount received even if the agency recognizes only 15% share in the total
amount bid.
So what do you mean by relevant supporting documents?

In this case of CIR vs Jimenez advertising relevant supporting documents are documents necessary to
support the legal basis in disputing a tax assessment as determined by the taxpayer. Otherwise the
taxpayer would be at the mercy of the BIR which may require production of documents that taxpayers
cannot submit. Revenue regulation 795 does not require original to be submitted to the BIR.
Regarding the VAT returns, when claiming a tax refund or tax credit the VAT registered taxpayer must be
able to establish that it does set a refundable ore creditable input VAT, indicate mo doon and the same
must not be applied against the output VAT. Kasi kung gumawa ka ng VAT return ah nag-file ka pala ng
claim for the refund of an input VAT, eh indicate mo doon na ang i-o-offset mo lang sa output VAT mo,
‘yung hindi mo i-cclaim.
And the same must have been applied against the *** information that is supposed to be reflected in the
taxpayers VAT return. Thus, the information must be accompanied by copies of the Taxpayers VAT return
for the quarters concerned (Atlas consolidated mining company)
What about final withholding tax and payments to non-resident persons.

Parties which are required to withhold VAT is the payor, bakit? Kasi ang Payee is a non-resident person.
So the ** 1:04:26 of withholding the VAT is on the payor. Kaya nga withholding ‘to no.
So if the counter party is a non-resident person, the party required to withhold VAT is the payor
regardless of whether or not he is VAT registered.
[TAXI NOTES] 64
If it is a non-VAT person but becomes part of the cost of the asset or expense, VAT is passed onto the
resident withholding agent; siya na ang liable doon. Payor shall claim input tax upon filing the VAT return
subject to allocation of input tax. ** 01:05:14Duly filed from 1600 is the proof of documentary
substantiation from documentary.
Actually this was capsulized from what appears in 162005, kasi itong 162005 masyadong magulong
basahin kaya they had to dissect it and present it in a more understandable way.
The withholding tax shall be submitted 10 days following the end of the month.
What about a sale with a government?

This is the case of *** mining corporation
Sale of coal to the national power corporation by a holder of coal operating contract is exempt from final
withholding VAT
RA 9337 neither expressly nor impliedly repealed RA1897, so that is a special law. a special cannot be
repealed, amended or altered by a subsequent general law by mere implication.
Sinabi ko nga sa inyo sa local government code, iba naman doon, a general law supersede a special law
sa section 193 pero dito a special law cannot be repealed, amended or altered by a subsequent general
law which is the usual thing.
So the applicable provision of section 204 and 229, so kapag ang claim mo is erroneously paid taxes, ano
ang section na applicable? 204 at 229
Pag ang claim mo is input taxes attributable to zero rated sales you look at section 112
Ang 224, 209 at 204 ay for erroneously paid taxes, which gives the taxpayer a period of 2 years from the
date of payment with which to file an administrative and judicial claim for refund. At dito supervening
event doesn’t matter.
Revenue regulation 2011 reportorial requirement for establishment leasing spaces for commercial
activities is indeed the responsibility of all owners or sub-lessors of commercial establishment or building
to ensure that leasee is a BIR registered taxpayer , so they may present the tax identification number they
may register in invoices tax receipt every January 31, all owners or sub-lessors of commercial
establishment or building who are leasing out commercial space to any person doing business therein are
required to submit with the BIR district office and give the space layout, a copy of the receipt contract and
the leasee information statement
How about a joint venture?

A joint venture or consortium is formed for the purpose of undertaking construction project, you will notice
that in the definition of corporation under section 22(B) a joint venture for construction purposes are
exempted from corporate tax, dito naman a joint venture or consortium is formed for the purpose of
undertaking construction projects, it involves joining or pulling of resources by licensed local contractors
that is licensed as a general contractor by the Philippine Contractors accreditation board or PCAB by the
DTI, local contractors are engaged in construction business and the JV itself is likewise licensed as such
by the PCAB, if any requirement above is absent then the JV or construction is a taxable corporation.
And therefore in your understanding of a joint venture to be exempted from corporate tax remember
according to this rule that JV must be duly licensed by the PCAB.
Tax exempt Joint Venture must not include mere supplier of goods or services or capital to a construction
project, ‘yung mismong engaged in construction.
Let’s go now to some specific question;

Some of this are from some previous bar examination
Remember ha, I want to reiterate again that VAT is an indirect tax but the law imposes the tax on the
seller the law allows it to shift it to the buyer, it is a percentage tax.
Suppose one sells his car for 1.5 Million will this be subject to VAT?
[TAXI NOTES] 65
No. because the transaction must be in the course of business. Oh simple lang ‘yun. You sell your car, it
is no different nung bago pa ‘yung VAT in 1994, nung ma-approve na ‘yung sales of real property is
already vatable. Ang unang-unang question doon in 1997 was if I sell my house am I liable to VAT,
ofcourse it is not subject to VAT because VAT is a tax imposable to any person who is engaged in
business and business means you are regularly undertaking that activity, but you only sell your car that is
not subject to VAT because it is not in the course of business.
One is engaged in the business of selling second hand cars, he buys a second hand car and
subsequently sells it, will this be subject to VAT?
Yes. because he is in the business of selling second hand cars because bebenta siya, bibili siya, unless
the car he bought is not part of his business. Matter of proof ‘yun. And at the time he bought it from
another person he had no intention to make the car part of his business, ofcourse that is a matter of
proof. So, in other words, if you are doing an activity regularly, you will be construed to be engaged in
business.
Now I remember an old old case, how do you construe a person to be engaged in the trade or business?
Eh kasi nga nakalagay doon sa local government code na ‘yung section 131 business is an activity
characterized by regularly engaged therein for livelihood. Eh paano ‘yung if you are regularly engaged,
there is an old old case and I remember this kasi nabasa ko nga itong ‘regularly engaged’ this is the case
of Yatco, he is a lending investor and a lending investor in times passed is something to a lending
investor tax, ofcourse ngayon wala na. who is a lending investor? He is a person who lends money for a
fee except a bank because a bank is an entity talaga lending money for a fee and that is registered in the
BIR so you pay for gross receipts tax and the bank ofcourse is expected to be in the business because
day to day ‘yan. Eh kung ikaw lending investor and sabi when you lend money for a fee you are a lending
investor but supposing you lend only one time are you already a lending investor? Of course you are not.
But supposing 3 months later you again lent money for a fee so second na. are you already a lending
investor? So the government can run after you for lending business tax? Sinisingil na nga siya, ayaw niya
magbayad, this is just the second time I lent money for a fee. So subsequently after 2 months nag-lend
nanaman siya so 3 na. sinisingil na talaga siya ng munisipyo. No, I only lent 3 times. Nung pinipilit na
talaga siyang singgilin, eh lumapit na siya sa SC.
How many times do I need to lend money for a fee in order for me to be considered to be engaged in the
regular trade or business. The SC said if you lend money for 6 times within a year you are considered to
be engaged in regular trade or business. Okay. Ano ung basis ng six times? Eh the Supreme Court yun
eeehh it’s the course of law. In other words, to be regularly engaged, sabi ng Supreme Court pag six
times ka nagpahiram for a fee, you are already considered a lending in the stores. Okay. And that is the
decision of the Supreme Court. That reminds me of the case of Yatco kasi ito ung issue rito no. Why is he
engaged in the business of selling second hand car. Diba ung secondhand car ……… yes e sinabi mo na
sa mga creditors engaged in business for buying secondhand cars or selling it. So if you are in engaged
in the business naturally your will be subject to VAT. Okay. Unless you can prove that the car was not
part of your business. Because you are using that for your personal purposes and you have no intention
to make that car part of the business. Okay.
Will a non-profit organization be subject to VAT? What is your answers there? How do you look at the
ordinary course of business? Okay. Kasi nga dito uhh including transaction incidental thereto. So dapat
iintindihin niyo jan ung “indicental thereto” regardless of whether or not the person is engaged therein is a
non-stock or non-profit organization, irrespective of the disposition of his income. Whether or not its
exclusive members or guests are government entity. Now, I know of the Homeowners Association where
– what they did is to get old clothes and sold it in a garage sale. Okay, now the Homeonwers Association
… under exempt entity for corporate tax because that is Section 30 – will it still be subjected to VAT?
Yes. What is the reason? Because what is sought to be taxed there is the act of selling. The fact that it is
a Homeowners Association, kaya nga “in the ordinary course of business” it doesn’t look to the entity.
Pwede ngang government entity, pwede ngang stock and profit association – kasi ang tinitignan sa VAT
is the act of selling. Because it is a percentage tax. You remember that.
[TAXI NOTES] 66
Bakit kaya in the ordinary course of business – encompasses so many many activities pati ung incidental
thereto. Ang tingin ko pag Supreme Court ay nag iinterpret ng incidental thereto, talagang pinipilit nila i-tie
up doon sa business kagaya nung Mindanao Geothermal. E ung trabaho ng Mindanao Geothermal is
energy, geothermal tapos pinagbili ng kotse secondhand – eh bakit iyon incidental parin? Eh kasi ang
analysis ko ay baka kasi ginagamit iyan dati sa business e. Oh e ibebenta ko na ngayon, business parin
ba iyon? Incidental? Eh siguro because … that is incidental because there is a link to the main business
of the taxpayer. Because for a long long time that vehicle is being used in the business and now it is
being sold – eh continuous parin ung pag treat niya as an incidental trransaction.
A non-profit organization as seen in the previous provision of the law, profit is immaterial for purposes of
being subject to VAT. Why? Kasi nga ang tinatax dito is the act itself. Kung ikaw nalulugi ka magbebenta
ka. Nalulugi ka. Mag babayad ka pa ba ng VAT? Yes. Bakit? Kasi ang tinatax dito is the act itself eh. Eh
kung tumubo ka, edi mag babayd ka ng income tax. Dalawa bale ang babayaran mo income tax saka
VAT. E kung hindi ka kumita? Bayad ka parin ng VAT. Why? What is sought to be tax is the act itself.
Kaya – will a non-profit organization be subject to VAT? Yes. What is important is that the organization is
in pursuit of an economic or commercial activity. Remember that VAT is a tax on the sale. It is not a tax
on the profit. Oh tandaan niyo yan. Napaka important mga rules iyan.
Ang double taxation sasama rin jan kasi kung may income ka babayad ka ng income tax, kung meron
kang sale babayad ka ng VAT – is that double taxation? Yes but that is allowed.
Can the Government be subject to VAT? Supposing the DOJ renders an opinion upon the request of the
DENR. Later, the DENR paid the lawyers of DOJ due to this opinion. Will this be subject to VAT? Can the
Government be subject to VAT? No. This is not in pursuit of an economic or commercial activity but
simply a performance of a government function. So iba naman. So ung pagtatanong niya is not in pursuit
of a commecrcial or economic activity but of a government function.
What is the meaning of the term “goods” and “property” for the purposes of the VAT Law? Any goods and
any property capable of pecuniary estimation. So you will notice that the enumeration ng 16- 2005 as to
the sale of goods and services ay mahahaba yan. Ang haba nito… But if you try to look at this everything
has something to do with the sale of service. Bakit enumerate dito? Para sigurado sila ay masusubject sa
Bar. So the regulation tried to be very very expanded to be sure that there will be a wide coverage for the
imposition and taxability under the VAT Law. Kaya exchange or sale and services for a fee or
consideration whether in kind or in cash will be subject to VAT including those performed by – at saka
ung wordings pa niya ay hindi exclusive – including those performed by the following. So if ever there are
other pdps(??) similar to this – pwede ipasok jan. Kasi hindi naman sinabing only the following.
Nakalagay dito including the following. So madami pang pwede pumasok jan no.
Supposing X sends to Y goods for 1M. As a way for promotion and because Y purchase from X, the latter
gave an extra 200K worth of goods. What will be subject to VAT? The answer is the 1M because the
transaction is really just for 1M. Because Y paid for 1M. Eh paano ung 200K na binigay sa kanya? Ah
baka masubject sa donor’s tax ganun. So ang kanilang talagang transaction is 1M lang. E nagbigay siya
ng 200k na worth of goods. Pag ikaw ay tinatanong sa Bar, sabihin mo but as far as the 200k worth of
[TAXI NOTES] 67
goods given to him as a promotion, I would like to believe that is it subject to donor’s tax. Because it was
given to him out of generosity without any consideration. But for purposes of the VAT Law, kung magkano
lang ang understanding nila sa bilihan e un lang ang dapat niyang bayaran. Iyon ang meaning ng gross
selling price. Kung magkano ang goods na binigay mo, ung presyong tinanggap mo, iyon ang gross
selling price.
Supposing X sends to Y goods for 1M. 3 days after X gives Y 200K worth of goods as a gift. What will be
subject to VAT? Only 1M because the 200k is not part of the sale. It is considered as a gift. What is taxed
is a sale. And when you talk of sale, your gross selling price is the amount that you give, that is given by
the buyer to the seller in consideration for the goods that were relinquished to the buyer. The fact that
nagbigay siya ng gift you do not include that to the gross selling price because that is not part of the sale
transaction. So therefore, in this connection, what are the requisites for the sale of real property to be
subject to tax. 1. There must be a sale. 2. It must be made in the ordinary course of business. 3. The
gross annual receipts for VATable sale exceed 1,919,500. As per RR 16-2011. 4. The goods being
offered are primarily for sale. The taxable event dito sa VAT is a sale, barter, exchange. Kung sale,
whether it is a sale of property or sale of services.
X sells his house and lot in order for him to buy another house and lot. Will this subject to VAT? Of course
no. The house and lot were not sold in the ordinary course of business. So dito nag apply ung Capital
Gains. So it is not for business. You sell your house not for business, definitely. Therefore, it is not subject
to VAT.
X has 5 M of goods. X exchanges this with Y for 5M worth of property. Will this subject to VAT? Yes.
Because the law includes sale, barter or exchange as long as it is done in the ordinary course of
business. Simple problems but that will show annotation to be able to analyze the VAT easily.
If you sell your house and you are a real estate dealer, is it subject to VAT? No. Because even when you
are a real estate dealer and you are selling your house. That house is still Capital Asset. Unless you
house is part of your inventory. Because a real estate dealer are persons who have an inventory of the
properties that is for sale. So kung ikaw a real estate dealer, you sell this houe. E ung house niya that is
Capital Asset. Kahit real property estate dealer ka, the usual connotation is that if you have a real estate
dealer automatically you are considered VATable. The BIR will consider you VATable because you are
the real estate dealer. A dealer is a person who keeps inventory of the goods for sale or properties for
sale. Kaya minsan pag nag betna ka ng property mo, e ang BIR lagi niyang iniisip na dealer ka kaya
kailangan lagi mo ipagtatanggol iyon. What is the lesson you have learned from there? Exercise your
burden of proof. What I’m selling is not part of my inventory. What I’m selling is my house which is my
dwelling. So this is a capital asset.
Suppose X sold a lot for a right way. Is the sale covered by VAT? No. Selling a lot for a right of way is
primarily not for sale. It is a forced sale. Because ang totoong sale meron talangan intention to part with
the property for consideration. But you are forced into it, parang expropriation –eh hindi ka naman dapat
ma VAT doon. Because that act is not considered business. Because you have no choice except to
comply with it. If you have a property and you lease it with the Government for 100K a year, will you be
subject to VAT? Yes. Even it is paid by a foreign currency because it is not the foreign currency
denominated sale. Oh that bring us to the meaning of foreign currency denominated sale. Sa 206 a
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foregin currency denominated sale are those sale which are given zero-rated tax status. Because these
are sale of properties wherein the payment is a foregin currency that goes through the banking system of
the PH. Ito naman foreigner ang bumili, nakatanggap siya ng foreign currency. Is this subject to VAT?
Yes. Is it zero-rated? No. Why? Its because the payment of foreign currency is the consideration for the
sale. It doesn’t go the BSP channel like those goes to the country. This is regarding an incidental and an
isolated transaction.
What is the concept of incidental and isolated transaction to the business? It is when the transaction is
not the main purposes of the business but somehow related to it. Kaya kung iaanalyze mo ung sa
Mindanao Geothermal. Dati ginagamit ung kotse sa business which is energy and geothermal, and then
after a while they decided to sell the car. Kaya ung decision ng Supreme Court is that ung sale of the
motor vehicle is incidental. What is the concept of incidental to the business? It is when the transaction is
not the main purpose of the business but somehow related to it. Pag inapply mo iyon sa Mindanao
Geothermal, e related to it iyon kasi ginagamit iyan sa business nila, pinagbili mo na ngayon, e business
parin iyon. Kumita ka kasi, business parin iyon. Kaya continuous parin ung pag gain mo ng business
assets mo. And therefore, it is considered an incidental transaction. So what are the difference of
incidental transaction and isolated transaction? Isolated transaction are not subject to VAT, all because it
is not for business which is a casual transaction. Ung incidental iyon ay somehow related to business,
somehow mapipile up mo sa business, therefore it is subject to VAT. Kaya iyan ang mga gray area jan.
Pag binigyan kayo sa Bar ng question tungkol sa isolated and incidental transaction.
E bakit ung Magsaysay Lines in 2006, ung barko na ginagamit sa business ng Magsaysay Lines, e may
bumili na isang enterprising businessman, second hand. Sabi ng Supreme Court noon ay ung
pagkakabenta ng Magsaysay ng boat na iyon is isolated transaction.
Eh ano pinagkakaiba nun sa Geothermal? Nung binenta ung motor vehicle na secondhand. Bakit iyon
incidental? So anyway, just in case it comes out in the Bar, ang pinaka importante is kung mabasa mo
ung kaso. Kasi pag sinabi mo ung kaso is almost related to Mindanao Geothermal, dapat incidental ung
answer mo because iyon ang sinabi ng Supreme Court.
Suppose a real estate dealer sold a parcel of land which is not a part of the bundle of property he is
selling. Is it subject to VAT? Remember that a real estate dealer has an inventory of the properties. Kaya
pag may bibili na buyer – kung saang lugar, meron siyang istock niyan. Suppose a real estate dealer sold
a parcel of land which is not a part of the bundle of property he is selling. Is it subject to VAT? No. This is
not a perception that it is incidental to the business. But rather an isolated one because the property was
not held for sale to the customers. Kaya Ianalyze niyo un. Kaya ung incidental and isolated transaction
napaka importante iyon sa persons liable under Section 105. I would like to believe that very gray area
ung portion na iyon because you have to use your imagination. Siguro in case of doubt , sabihin mo
nalang incidental para VATable. Kaya ito malinaw naman. Suppose a real estate dealer sold a parcel of
land which is not a part of the bundle of property he is selling. Is it subject to VAT? No. Because it is an
isolated transaction as the property was not ready for sale to customers. Eh kasi hindi naman kasama sa
mga imbentaryo ng mga property na pinagbibili niya.
MWSS ito ung sewerage authority. Entered into a contract with a concessionaire where the latter would
operate the former’s waterworks –parang ito ung mga Maynilad. The contract provides that at the end of
the stipulated term, the concessionaires are required to sell the operation to MWSS. Kaya ung
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concessionaire ginagamit lang nila ung facilities nun. After the term of the contract, ibabalik din nila iyon.
Entered into a contract with a concessionaire where the latter would operate the former’s waterworks.
The contract provides that at the end of the term, the concessionaire are required to sell the operation to
MWSS. BIR argues that it was an incidental sale. MWSS argued that it is an isolated sale. What is your
decision? It is an isolated sale because the concessionaire are not in the business of selling business
operations. It may not be incidental because the operations have already ceased. This was an actual
case no. It is an isolated sale because the concessionaires are not in the business of selling business
operations because precisely the job of the concessionaire is just to tha concession by the MWSS. So if
they sell it back, it is not part of their business. It may not be incidental because the operations has
already ceased. So itong isolated and incidental transaction na ito. Siguro gamitin niyo narin ung
imagination niyo kung talagang napaka layo nung business –ito ay isolated. Pero siguro kung merong
relation sa business -- kagaya ng thinking ng Supreme Court, kagaya sa Mindanao Geothermal – masabi
mong nastretch nila un. Siguro kasi ginagamit namin dati sa business yan, e may bumibili ngayon. Kaya
ibebenta naming, business parin iyon. So that is incidental to our business. So that is subject to VAT.
So let’s go to transactions deemed sale. So what are deemed sale? These are sale transfer, use or
consumption, not in the course of business, of goods or properties originally intended for sale or for use in
the course of business. Distribution or transfer to Shareholders or investors as share in the profits of the
VAT-registered person; Creditors in payment of debt. So ang binibigay dito instead of money is actually
goods, in kind. Consignment of goods if actual sale is not made within sixty (60) days following the date
such goods were consigned. Retirement from or cessation of business, with respect to all goods on
hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or
cessation. Why is the law making it VATable event though there is no sale. Why is the law making it
VATable even though there is no sale? Iyan ung mga minsan tinanong sa Bar –iyong may perculiarity or
unique. Tulad nung Disguise Dividends or Vanishing Deductions, na tinanong last year sa Bar.
Eh ano ngayon ung transaction deemed sale? Transaction deemed sale. Why is the law making it
VATable even though there is no sale? Kasi walang sale dito no. Transfer, use or consumption, not in the
course of business, of goods or properties originally intended for sale or for use in the course of business.
Such as when the owner of the business gets goods from the business and consume it and use it for
personal purposes. Distribution to Shareholders or investors of share in the profits of the corporation,
instead of giving them cash, you give them goods. Creditors in payment of debt instead of giving
payment, you give them goods. Or in consignment of goods if actual sale is not made within sixty (60)
days following the date such goods were consigned that is considered as deemed sale. Retirement from
business, with respect to inventories of goods as of the date of such retirement or cessation. Okay. So
what is the reason for the law for making it VATable even though there is no sale? Ang answer is to be
able to recoup the input tax that had been shifted to the VATable entity when it was purchased. Kasi
noong bilhin niya iyong goods na iyon, e pinasahan siya ng input tax. Ngayon, kung itong transaction
deemed sale ay hindi siya mag pprovide ng output tax – nadaya ang gobyerno kasi walang output tax
pero ung input tax mababwas. Pag binawas mo ung input tax, edi mababawasan ung babayran niyang
tax. So dapat may katapat na output tax iyon. Pilay kasi. So the purpose of a transaction deemed sale is
to be able to recoup the input tax that has been shifted when the goods were purchased. Kasi pag bumili
ka ng goods papasahan ka nila ng input tax. Pag bayad mo sa BIR, dapat may katapat na output tax
iyon. E kung hindi mo icoconsider na sale iyon, walang katapat na output tax doon – oh nadaya mo ung
BIR. Kasi ung input tax binabawas mo iyon. Makakabawas ka ng output tax. Iooffset mo iyon sa ibang
output tax mo. That’s the reason. How does it lessen the impact of input tax becase without it there will
only be input tax and therefore, no output tax. So ano disadvantage sa government kung puro input tax,
walang output tax? Dinadaya mo ung gobyerno kasi ung input tax pambawas ng tax iyon e. So how does
it lessen? Without treating it as a deemed sale, there will only be input tax and no output tax. Example. X
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sells household furniture. He removed from his store a living room set for use in his residential house. E
ang business niya ay furniture store. E nagustuhan niya ung set doon, dinala niya sa living room niya.
Deemed sale ba iyon? Yes. X company is indebted to Y company for raw materials when X cannot pay in
money, X company agreed to received the finished goods of X in payment. Kasi dapat pambayad money,
e wala siyang money kaya bibigay niya nalang goods. This is a transaction deemed sale. X company
declared and paid dividend out of its inventory. Is this a deemed sale? Yes. Okay. X E company is a
manufacturer made sale as follows: Mr. F in credit is entitled to the goods. To Mr. D in consignement is
entitled to the goods to pass only upon actual sale of the confined goods. Thegoods consigned to Mr. D is
still in shelf of Mr. E. The sale of goods to Mr. F. is subject to VAT. Because title to the goods has been
passed to Mr. F . So consignment to Mr. D, although title to the goods has not been passed, it is already
subject to VAT. Because it is already 60 days. Ang sinasabi dito consignment of the goods if actual sale
is not made within 60 days following of the date of which it is subject to consign – e that is alsready a
deemed sale. Favored on your 60 days.
Since there is really no sale. What would be the tax base? Edi the current fair market value of the goods
will be considered as the gross selling price. How do you define the fair market value? The standard
meaning of the fair market value is the price which the willing seller and the willing buyer both agree and
not both under compulsion. Actually that is under Section 199 of the LGC. So fair market value is the
value which the willing seller and the willing buyer will mutally agree, both are not under compulsion.
X is in engaged in the business of auctioning cars. A,B, and C deliver cars to X for it to be sold by X on
consignment. When it was sold, it was sold in the name of X. Oh ito maganda, X is in engaged in the
business of auctioning cars. A,B, and C deliver cars to X for it to be sold by X on consignment. When it
was sold in the name of X, who is liable of the VAT? Eh syempre si X. X is deemed to be the seller if not
sold within 60 days, X is lliable. If it is sold within 60 days, X is still liable as the seller.
Is it proper to say that zero-rated sales are vatable? Yes, of course. Yung zero-rated sales are really
vatable. Except that the factor that you use is really zero. Pareho 'yun nang 12, yung zero-rated vatable
talaga 'yun. Okay, the tax is 0% of the gross selling price if it pertains to an export sale. Foreign currency
denominated sale. Iyan ang nasa Section 206, 'yan ang babasahin niyo. Basahin niyo kung ano ibig
sabihin ng Foreign currency denominated sale, basahin niyo kung ano ang mga zero rated sale. Basahin
niyo yung mga transaction deeemed sale. Kaya kung babasahin niyo yung section, sasampung sections
lang naman 'yang mga 'yan. 105-115 madami na kayong matutunan diyan. Matutunan ninyo ano ibig
sabihin ng Input tax, ano ibig sabihin ng output tax, ano ibig sabihin ng mga presumptive input tax,
transitional input tax, andiyan.
Lalo na basahin ninyo maige yung Section 112 ha! Kasi yan ang very relevant for many many cases
decided by the Supreme Court in 2016. Yung section na ‘yun kaya ‘yung mga kaso ng mga Miran
Pagbilao na ‘yun. Anyway, I will give this to the bar operations para at least meron naman kayong
reference. Tagal tagal ko ng nireresearch ng mga ito. Okay.
And then, sales to persons or entities whose exception under the special laws or international
agreements to which the Philippines is a signatory effectively subjects that sale to zero rate. ‘Yun ang
distinction mo sa effectively zero-rated sale kaya and automatically zero-rated sale. So what is the
difference between the two? Automatically zero-rated sale are by law considered really zero-rated sale,
[TAXI NOTES] 71
such as the exporters, such as sale of the exporters, sale of gold to the BSP. Eh pero ‘yung mga
effectively zero-rated sale eh that is pursuant to an agreement signed by the Philippines to another
country like a sale to a VP, itong mga sale sa customs zone. Effectively zero-rated sale ‘yun. Kailangan
mo ng BIR approval doon. So again, sale to persons or entities whose exception under special laws or
international agreement to which the Philippines is a signatory, effectively subjects such sale to zerorate.
What if export sale is delivered to a resident here in the Philippines, the buyer is a non-resident but it was
delivered to a resident, would this be zero-rated? Yes, under Sec. 106. Okay. Sale to an export oriented
enterprise, is this an export sale? Yes. Sale of fuel and other supplies to international carrier, will this be
zero-rated? Yes. This is one of the amendments under the new VAT law. So again, what are the
distinctions between zero-rated and exempt transactions? In case of zero-rated transactions, it is
completely free form VAT. Exemption only removes the VAT at the exempt stage. Oh magkaiba ‘yun ha!
It only removes the product from the VAT stage, exempt lang talaga siya. Number two, a VAT payer
engaged in zero-rated transaction, can pay and enjoy refund for input tax invoiced to him on his
purchase. So ayan ang i-aapply mo sa Sec. 112. How about exempt transactions? Not applicable.
Because the VAT is part of the cost of the goods he is buying. And of course, a zero-rated sale is a
vatable sale. Therefore, if it is a vatable sale, registration is needed. On the other hand, VAT entity with a
non-taxable sale, it may not register. Kasi kung ikaw naman ay non-VAT, at exempt ka, gaya ng mga
school, exempt ka, o edi ka na magpapa-register sa VAT. Pero kung ikaw ay zero-rated, pa-register ka sa
VAT. Kaya lahat nang mga exempt entity, sa Sec. 109, ayun hindi nagpapa-register sa VAT kasi they are
out of the coverage of the VAT compliance requirement. Kasi VAT exempt.
So, let’s go to importation. Importation naman. Remember, importation, whether it is for personal or for
business, the same is vatable. Y imports printing equipment for 400k. It will be for his personal use. This
is the only transaction he made for the taxable year. Will this be subject to VAT? Yes. Kasi whether for
personal or business, the importation will be subject to VAT because when it comes to importation, the
law does not distinguish whether or not the transaction was done in the course of trade or business. So in
fine, that is the only transaction in the VAT law where although not for business will be subject to VAT.
Something unique because VAT is a business tax but you are importing items not for business purposes
but for personal purposes. But since the law does not distinguish, you should not distinguish.
Okay, what is the use if that it is below the 1.5M but now is 1,915,000 requirement as provided in the new
VAT law. When it comes to importation, remember, the law dispenses with the threshold. Remember that
ha. ‘Yung mga 1,919, 500 hindi ‘yan ina-apply sa mga importation. When it comes to importation, the law
dispenses with the threshold requirement ha, okay? What is the basis for saying that the law dispenses
with the threshold requirement when it comes to importation? Now, if you take a look at the new law, the
threshold requirement only applies to sale of goods and not to importation. Kaya tandaan ninyo,
babasahin niyo ‘yung mga portion na ‘yun. Mga fineprints yan. So, regardless of the amount or purpose of
the importation, it would always be subject to VAT. Eh kung 1B ‘yung importation mo subject sa VAT ‘yun.
Kailangan mo ba magpa-register? Hindi, kasi ‘di nag-aapply ‘yung threshold requirements.
X imports a computer worth 1M. He is not in the of business of selling computers. Subsequently, he sells
it for 1M. Would this be subject to VAT? The importation will be subject to VAT because when it comes to
importation, the law does not distinguish whether or not the transaction was done in the course of trade or
business. Subsequent sale will not be subject to VAT because it is not done in the course of trade or
business. Kung binenta din niya ‘yung kaniyang inimport and that is just a one time transaction or casual
transaction, of course it is ah, isang item lang ‘yun, it is not subject to VAT because it is just a one time
sale. However, if X was a tax-exempt person, ito another view, another question, and he subsequently
sells, transfers, or exchanges in the Philippines such imported article to a non-exempt person, what is the
liability of the purchaser? He would be the one required to pay the VAT. So, it is not different from a bar
exam question regarding that ADB executive who enjoys exemption for taxes and tariffs for all the things
[TAXI NOTES] 72
that he brought in the Philippines given his status as an ADB Executive. So, when he leaves and sells the
car to a resident, to a Filipino national, the Filipino national would be deemed to be the importer. The
Filipino national would have to pay the duties and taxes that should have been paid by the tax-exempt
person when it was brought into the Philippines. Remember, that is part of the law, okay?
Who is subject to the VAT in importation? The importer. Supposing a foreign corporation is engaged in
selling machineries and it has a branch in the Philippines, so this is a resident foreign corporation. Buyer
told the branch that he would buy. Branch told the parent. Parent delivered the machineries. Who is the
importer? Ito magandang question ‘yan ha! Supposing a foreign corporation is engaged in selling
machineries and it has a branch in the Philippines, so this is a resident foreign corporation. Buyer told the
branch that he would buy and branch told the parent and parent delivered the machineries. Ang answer,
consider the invoice. Whoever is stated there are the importer, he will be the one liable. So, it depends
upon the document. Kung ano ang nakalagay doon sa invoice as name of the importer eh s’ya ang ma-
coconsider na liable sa VAT. Consider also that the branch and the parent are one and the same juridical
person under the so-called single entity concept. There is such a thing between a parent corporation and
a branch under the single entity concept. The fact that the parent and the branch are one and the same
juridical person and that it made the importation possible, so kung ano nag-aappear sa invoice.
Sale of services. So, ano ang kailangan sa sale of services? Kailangan alam niyo kung magakano o ano
ibig sabihin ng gross selling price, eh gross receipts pala. ‘Pag sale of goods, gross selling price, kapag
sale of services, gross receipts. Okay, what are the requirements for sale of services be subject to VAT?
In all instances, gross annual receipts should exceed 1,919,500. Number 1, there is a service rendered
for others and this is a fee. And of course, the service is done in the Philippines. After all, situs of the
VAT law is in the Philippines, ‘yun talaga, where the transaction happened.
NAPOCOR engaged the services of Y for 1M to do a feasibility study for a geothermal project. They
entered into a contract in the Philippines. Y is asked to do research work in Japan. Is he subject to VAT?
NO! The service was performed outside of the Philippines. Short at least you would remember the things.
X is an economist. He was asked by a friend to do research work. He was paid 300k. But since he was a
very good friend, after receiving the 300k, he went back returned the 300k. Ayun! Na-guilty sya. Kasi una
binayaran sya ng 300k, e kaibigan naman niya ‘yun binalik naman niya ‘yung 300k. Question, will this be
subject to VAT? You can argue that it is not subject to VAT because there was no consideration that was
given to the person who rendered the services because the money was returned. Para namang kwan
‘yun ano. But it is the tax on the act itself, eh ano na magiging basis mo kung sinoli mo ‘yung 300k?
Are franchises subject to VAT? What is again a franchise? A franchise is a privilege granted to a private
person or entity to do an activity vested with public interest. A franchise, of course, is a personal
prerogative, a unilateral grant which can be abrogated anytime if public interest so requires. Remember
our rules on non-impairment of contract which does not apply to franchise. A franchise is subject to VAT.
Some franchise grantees may opt to be subject to VAT while others may opt to be subject to percentage
tax. Oh, bakit ganoon? Kasi ang mga franchise holders doon ninyo makikita sa Title V—other percentage
tax. Eh bakit nga nagkaroon ng other percentage tax? Kasi nga siyempre may mga activity na hindi
pwede i-force fit sa VAT. Kasi ang VAT eh peculiar ‘yung mga rules dito, kasi may mga input, may output,
mga deemed sale, eh hindi pwede mag-apply ‘yun doon sa mga businesses na nasa Title V. Kaya ‘yung
nasa Title V kaya ‘yun hiniwalay para at least they are in a different tax system gaya ng bangko, GRT,
non-bank financial intermediaries, financing companies, GRT ‘yan, insurance, premium tax…‘Yung mga
franchise ayan ‘yung mga franchise tax. So, kaya ‘yung mga franchise grantees may opt to be subject to
VAT while others may be subject to percentage tax. After all, being subject to VAT, there is an occasion
for optional registration. There is mandatory registration and it is mandatory and you are within the
requirements nang mandatory, then you are really required to register. But if you are not really required to
register but you opt to register, the law allows it. Kaya itong franchise grantee na ito may opt to be subject
to VAT, others are subject to percentage tax. So franchise grantees may opt to subject to VAT and the
[TAXI NOTES] 73
franchise grantees that may opt to be subject to VAT are radio and television broadcasting companies
whose annual gross receipts from the preceding year did not exceed 10M. Once option is exercised, the
option is irrevocable for such year. In other words, that is an option but that is not a compulsion. So,
probably they have input tax to avail of, eh mas maganda ‘yun pag VAT registered ka kaysa ‘yung
percentage tax ka. Kasi sa percentage tax, ah wala doong input, output ha. Whatever the amount is
computed, kung magkano man ang rate eh ayun ang babayaran mo, eh ayun an percentage tax. Kaya
minsan gusto nila sa VAT because of the facility of using input taxes.
X wanted to lease his ship containers to be used in the Philippines. His business is based in Hong Kong.
The contract of lease was executed in Hong Kong. Will the lease be subject to VAT? Yes, why? You
apply the requirements of sales and services because the requirement of taxability of sale of service also
applies to the lease on property if the leased property is in the Philippines. So lease of property shall be
subject to VAT irrespective of the place where the contract of lease or licensing agreement was executed
if the property leased or used is in the Philippines. So since the property is in the Philippines, even if the
contract was signed in Hong Kong and everything, that provides the situs for purposes of vatability.
What is this so-called destination principle otherwise known as the cross border doctrine? This can be
found in the Sea Gate Case. The principle provides that if it is destined to be consumed here, then here in
the Philippines, then it is taxable in the Philippines. If it is destined to be consumed abroad, then it is not
taxable in the Philippines. So, yung cross border doctrine, ang tanong saan mo gagamitin ‘yung, saan mo
i-coconsume ‘yung goods. Kaya if it cross borders, cross to another country, kagaya nung abogado,
hinire siya ng isang client sa Hong Kong. All services to be done in Hong Kong, ah zero-rated ‘yun,
outside the Philippines ‘yun ha. Cross border doctrine…all the services are rendered in the Philippines.
Kaya kapag nag-import ka ng goods under the cross border doctrine kasi na-import kasi it will be used in
the Philippines, it is vatable in the Philippines. Kaya destination kung saan mo gagamitin ang goods, kung
sa Philippines or outside the Philippines, so ayun ang destination principle.
A Inc. enters into a contract of service with B Inc. The actual cost incurred by A is 300k. B Inc. just
reimbursed A Inc. from the cost. So, reimbursement naman ito. Would this be vatable? Yes, because the
payment A made to B was not only a reimbursement but was also considered a fee. There was a valid
consideration involved in the contract of service. Kasi in another case, yung Pomaserco case, tignan
ninyo ‘yung Pomasero case. Pomaserco is actually an affiliate of Philam Life, one of the service providers
of Philam life, at ang arrangement nito kapag may na-rerender ng service, ang bayad nito is just
reimbursement of expenses. So, in the Pomaserco case, it was held that it was immaterial whether the
profit is derived from rendering service as even a non-profit institution and the government may be
subject to it. But for VAT purposes, I have told you profit is not important. Kasi meron kasing rule sa
income tax, if an expense is reimbursed, ito para ma-relate nyo sa VAT. Kagaya noong mga retail man or
field representative, by nature a field representative or a retail man, the nature of their work is to go
around to hospitals, to clinics, seek the doctor for representation, travel. Ang ginagawa ng mga drug
companies is to give allowance for these field representatives. Kaya minsan tinatanong sa bar, X is a
retail man of Glaxo, and as a retail man, he is given in addition to his salary transportation allowance
worth 50k,or representation allowance worth 50k. And the question in the bar is, are those salary subject
to withholding tax? Because salary is subject to tax. How about those allowances? Ang magandang
sagot doon, first of all the nature of this job is a field representative, a retail man, so by the nature of his
work, he is expected to go around. He uses car or spends for travelling expenses and seeks doctors, of
course, for representation. So, that will not form part of taxable income, so long as at the end of the
month probably, that amount is liquidated by that person. ‘Pag sinabing liquidate, ‘yung binigay sa kaniya
‘yung allowance na 50k for transportation, representation, 50k, at the end of the month, babalik siya doon
sa company, eh ‘yung mga ginastos niya pakikita niya ‘yung mga resibo. ‘Yun ang liquidation. ‘Yung mga
transportation expense, pakita niya ‘yung mga ticket nya sa airplane, pakita niya mga gastos niya sa
gasoline, fuel and everything…that is not subject to tax. Why? Because that is for the convenience of the
employer. Meron namang mga iba na hindi binibigyan ng allowance. Siya muna ang nagastos tapos
[TAXI NOTES] 74
pagdating sa opisina, ipapa-reimburse niya sa opisina. ‘Yun bang reimbursement, ayun ba ay subject sa
tax? No. Because that is a reimbursement of business expenses that they incurred on behalf the
company. Eh sa VAT, ganoon din ba ang treatment? Eh sa VAT reimbursement is subject to VAT.
Because in case of reimbursement , ang tinatax mo dito ay hindi ‘yung income eh. Ang tinatax mo dito is
the act of doing the thing. Eh kaya ka nila nire-reimburse e that’s something. Kaya vina-VAT nila ang
reimbursement. Kaya iba ‘yung income tax approach, iba din ‘yung VAT approach. So, remember that.
Suppose that a contractor advanced cost of labor, sa mga contractor naman ito. Suppose a contractor
advanced cost of labor and materials. Then, the contractor bills the owner 1.6M including the advance
payment. Is the total amount of payment subject to VAT? Even if there is just a mere reimbursement of
the cost or return of capital. Oh iba naman ang kwan dito. Sabi dito NO! Sa isa pwede eh. Sabi dito, No!
The mere reimbursement, of course, is not subject to VAT. Pomaserco case does not apply because
when the contractor adds the advanced cost in the total amount of payment, the contractor is not
charging you but it was a mere reimbursement. It is not for a fee but only for reimbursement. So, iba
naman ang rule dito. There is no VAT to the advances of the contractor. Kasi advances are really like a
deposit.
So, that is where you have to look at reimbursement—Pomaserco case sa income tax ‘yun. Dito
contractor advanced costs for labor and materials tapos ‘pag the contractor bills it to the last payment
‘yun sa total amount of payment subject to VAT even if there is just a mere reimbursement or return of
capital? Sabi dito, No! Because it is not a fee but only for reimbursement. So, therefore, it is
reimbursement of a fee, it will be subject to VAT. Eh kapag reimbursement lang ‘to ng materials, that is
not a fee. That is just for goods or materials that were bought. How do you distinguish the concept of
reimbursement from the concept of a fee? Kaya idi-distinguish mo. Yung reimbursement ba is, para sa
reimbursement for a fee. ‘Pag sinabing fee, it is the payment for services actually rendered while material
is merely a return of capital. So, titignan mo kung ano nire-reimburse sa kaniya. Is it only the materials
that they bought, total capital lang ‘yun. So, not all reimbursable item are strictly considered as fees. So,
you have to identify. Is it vatable reimbursement for a fee or reimbursable for material by the contractor.
Pomaserco case should be applied strictly.
So, what is the new VAT law regarding common carriers? Regarding common carriers, it involves transfer
of passengers as well as cargoes. The old law, only included transport of goods and cargo. Ngayon,
transport of passengers and cargoes. So, even passengers. So, would this mean common carriers
involving transport of passengers by land are now vatable? The law mentions only transport of
passengers by sea or by air.
How about lawyers and doctors? Yes. Lawyers and doctors are considered vatable. They are all vatable.
So, to refresh everything, what is an input tax? What is an output tax? Input tax is VAT on purchases as
compared to output tax, it is vat on sales. So para madaling intindihin, for example A is engaged in the
construction business. Whenever he buys cement he uses for his business he pays input tax which he
included in the price given to him by the supplier. Whenever he sells the output tax is included in the price
to his customers. Coming in purchases, going out, sales.
Can any person claim input tax? The buyer and the seller must be both registered. Because input tax is
credit based on VAT invoice use issued. That is the relevance of registration. You cannot have a VAT
invoice, if you are not VAT registered. In addition, the VAT registered person must show the TIN, that is in
the invoice.
Then, what are tax credit certificates? It is a certificate applied to claim the input tax credit. Ah kapag ito
na-issue, diba under Sec 112. You file a claim, which should be decided by the Commissioner within 120
days, then after appeal to CTA after 30 days. Kung successful, iissuehan ka ng BIR ng tax credit
certificates. What are the tax credit certificates? Ang tawag diyan TCC. It is a certificate applied to claim
the input tax credit; a certificate where a tax payer may settle his other tax deficiencies except withholding
[TAXI NOTES] 75
tax. Ayan sinasabi ko sa inyo, you can use your TCC for the next 5 years, within that 5-year period except
withholding tax. Ano ang reason bakit ang withholding tax ay hindi kasama? Because a withholding tax is
just a scheme to get the tax. The recipient there is the one who is really taxable. Your withholding agent is
just the agent of the government para makolekta ‘yung tax. He has no legal personality to claim and use
the TCC because he is just a mere withholding agent. He is not a proper party in interest. The Supreme
Court come up with certain section gaya nung pinayagan ‘yung withholding agent is simply for
convenience kasi pinayagan ‘yun talagang payor kasi outside of the country for convenient purposes. But
that is not the general rule.
In order to claim input tax credit must it always be related to business? Yes, of course. It must be related
to the business. Supposing A is a VAT-registered person who rents his house to B. B use the house
partly for business and partly for residential purposes. What may be claimed as input tax credit? Kasi
babasahan sya nung lessor ng input taxes. It will claim only that portion that he uses for business for
input tax. Because input tax must be related to the transaction in order to claim input tax credit. You may
not claim input VAT for personal purposes. Because VAT is for business. When will you have excess
input tax credit? When at the end of a taxable quarter, your input tax exceeds the output tax. Okay that is
understood.
[TAXI NOTES] 76
TAX ADMINISTRATION AND ENFORCEMENT (by Atty. Nicasio Cabaneiro)
ORGANIZATIONAL STRUCTURE OF THE BIR: National Office and the Regional Offices
[NATIONAL OFFICE]
In the National Office (which is in Quezon City), you can find there the Commissioner and the Deputy
Commissioners.
In the time of Kim Henares, there are 7 Deputy Commissioners.
[Officers:]
Commissioner
Deputy Commissioners (In the Tax Code, only 4, but it depends upon the needs)
Assistant Commissioners
Division Chiefs
If you look at Section 7 (NIRC) of the Tax Code whereupon the Commissioner can delegate its duties to
any person who is high ranking, meaning the Deputy Commissioners, Assistant Commissioners and the
Division Chiefs, except those [powers] that are stated there. (MEMORIZE SECTION 7).
[Powers that cannot be delegated]

1. Power to promulgate rules and regulations
2. Power to issue rulings of first impression.
3. Power to compromise. (This however may be delegated if the amount is P500,000 and below.)
Going to the Organization of the Bureau:

In the Bureau, [the most important] is the LARGE TAXPAYERS OFFICE because 70% of the revenue of
the government is expected from the Large Taxpayers Office.
Large Taxpayers are those paying at least P1,000,000 tax (sometimes per quarter, sometimes per year).
So there’s a roster of large taxpayers. (Includes TOP 100 Corporations)
In the BIR they group taxpayers in accordance to the industry (eg. Financial institutions, manufacturers).
That’s why when they adopt the benchmarking method, that’s one way of conducting investigation, they
can easily do benchmarking because all industries are grouped into one big group.
[REGIONAL OFFICE]
Head: Regional Director
Assistant Regional Director
Division Chief
[ASSESSMENT]
SEC. 2 of the NIRC: Major duty of the BIR is to assess.
To assess means to fix the liability.
It could be self-assessment: You feel that you are liable to pay tax because you know very well your
transactions, so you assess yourself and determine how much are you going to pay.
If you tend to look at how a person comes to the jurisdiction of the BIR:
Best example: Businessman
[COMPENSATION EARNER]
If employee ka, you will accomplish a tax exemption certificate. Anong data ang hinihingi ng HR?
If you are single, or if you are married, and how many dependents? Purpose: For Withholding taxes
purposes. (Withholding: Collecting tax at source.)
[TAXI NOTES] 77
WITHHOLDING TAX SYSTEM: Payor (Employer) is mandated to hold the money in trust of the
Government. If the payor misappropriates the money, the crime is MALVERSATION.
Withholding wages is the most antiquated form of withholding tax because at least going back to
Commonwealth Act 466, income tax is one of the most sought tax. (Very first case in income tax is
Madrigal v. Rafferty regarding government debts)
Withholding tax table

If you look at the withholding tax table, the amount of withholding tax depends on what is your status
whether you’re single or married, or how many dependents do you have and the manner of your
compensation, whether it is monthly, or semi-monthly, or weekly, so iba-iba din ang withholding non.
Employer is mandated to withhold the tax at source and remit them to the BIR. That’s the way how a
compensation earner is being taxed. Kaya ang problema ay nasa employer.
Substituted Filing
The amount withheld by the employer every month, every salary [payment], if you compute them at the
end of the year, yun talaga ang tax mo. At the end of the year, the employer will ask you to sign BIR Form
2316 and the employer is the one charged to file it with the BIR. But that applies only if you have one
employer (during the taxable year). If you have other source of income, you have to file separately on
your own the tax return (BIR Form 1701 or 1701-A) depending upon your other sources of income.
Compensation earner is not entitled to any deduction, because pursuant to the case of Sison v. Ancheta,
compensation earner needs no deduction in order to earn his income xxxx
[Back to Businessman]
*Let’s look at the Businessman: What is the first rule if you want to engage in business?
1. Go to the barangay, because a businessman is required to get a BARANGAY CLEARANCE.

(It is in the Local Government Code. One of the powers vested under the Local Government Code on
barangay is the issuance of a barangay clearance. There is a payment for that, around P550 or what. And
if that is not acted within 7 days, considered already as valid,)
2. Go to the City Hall or Municipal Hall for you to get a BUSINESS PERMIT.
What are the rules on the business permit? (Makikita mo yan sa Local Government Code. Between
Sections 143 to 150, and’yan yung mga rules how do you get a business permit, what are the
requirements if you close your business, situs rules.)
This business permit, under the local level, yung titignan nila is yung ORDINANCE kasi yung Local
Government Code of 1991 is just the basis of all the rights and powers of the Sanggunian. Kaya in every
locality, wherever you are, you have to look at the ordinance if you want to set up your business in it.
In Lipa, you have to get the ordinance of Lipa City. You see what kind of business you decide to
establish, makikita mo sa Ordinance, “magkano ang kailangang babayaran ko?” Initial (capital)
investment usually kapag wala ka pang earnings, kasi sa LGC the basis ng pagbabayad ng business tax
is the receipts of the preceding year, tapos you have to renew it on or before January 20 of each year.
Kaya yung mga business permits ng mga nag-bi-business, dati parang license na every year, ngayon
parang hinabaan na nila yung limit.
3. Go to the BIR – requires you to register your name.

Kung wala ka pang TIN e bibigyan ka ng TIN. If meron ka ng TIN, okay lang yon because you are
expected to have only one TIN all through out your lifetime.
WHAT IS A TIN (Tax Identification Number)?

It is the access control number of a person whereby the BIR is able to trace your whereabouts.
[TAXI NOTES] 78
The moment they input your TIN number in the computer, they will know everything about you, what
earnings do you have? What transactions you contract with the BIR. That’s why when you are receiving
money on account of rendering services, they would ask for you TIN number because that is the control
number of the BIR to trace your whereabouts. And the TIN could be the basis for all your transactions.
When you register for VAT, that will be the TIN number you use. Non-VAT, same.
Kasi alam mo naman yung VAT, generally it’s the level of P1,919,500 annual, of course yung registration
non, mandatory. If you are required to register and you do not register, ang tawag sayo, VAT-Registrable,
and kapag VAT-Registrable ka, ano’ng penalty? You are liable to pay your output tax but all of your input
tax are disallowed.
NOTE: Your TIN dies with you.

And since a person does not die for tax purposes—
Pag buhay ka, you’re JUAN DELA CRUZ. Pag namatay si JUAN DELA CRUZ, buhay ka na naman.
Anong tawag sayo? ESTATE OF JUAN DELA CRUZ. Is that a person? YES. Look at Chapter 10 of the
Tax Code. It is entitled to exemption. Why? It is an extension of the personality of the person who died.
So what is the conclusion? A person never dies for tax purposes. Ang tawag mo lang sa kanya, ESTATE
OF JUAN DELA CRUZ. E sinong pumipirma para sa kanya? E di yung asawa nya or any of his
successors-in-interest. Estate is actually an interim personality of the person who dies in the meantime
that the estate is distributed to the heirs.
– E yung TIN nya, anong gagawin mo kay ESTATE? Ikukuha mo ng bagong TIN yon. Kaya pag nag file
ka ng Estate Tax Return, ang gagamitin mong TIN, hindi na yung TIN ni Juan Dela Cruz. Patay na sya e,
kuha ka ng bago for ESTATE OF JUAN DELA CRUZ. Dun ka kukuha sa ONET (One-Time TIN) kasi di
naman magtatagal yon. Pag nadistribute na yung estate sa heirs, mawawala na yung ESTATE.
REQUIREMENTS OF BIR OTHER THAN TIN?

Books of Accounts
[Anyway, yung malalaking company, computerized na. The BIR is not far behind, so far as information
technology is concerned because they also hire people who knows about IT. Kaya ngayon, uso na yung
mga E-filing o kaya yung mga online reporting of transaction.]
Ordinary Business:
Books of accounts are the records where you record your transactions. Simplified bookkeeping record
tayo: Cash Receipts Book
Cash Disbursements Book
Sales Journal
Purchase Journal
General Journal
[General Ledger]
-so these are the accounting books where you record transactions.
-and that is registered under the BIR’s Bookkeeping regulation, these books are monitored by the BIR.
Even the pages of these books, it must be registered. Kaya may tatak yan sa first page, “This is the
General Journal consisting of Pages 1 to 50.” Pag napuno yon, papa-validate ka uli ng bago. Irerecord ng
BIR yon. Pag nagta-tax mapping ang BIR, yun ang hinahanap.
What is tax-mapping?
Tax-mapping is the method where the BIR investigate tax compliance by going to establishments and
asking for their records. Do they need a search warrant to do that? NO. The BIR is [a] very powerful
[person], all they need is ID. Kaya ang ID ng BIR, anlaki. They can enter any establishment.
As soon as you have records, kung ma-alam ka ng accounting, ikaw ang nagrerecord. Kung di ka ma-
alam, yung accountant mo. But I always say, even if you don’t know accounting, know what your
accountant is doing. At least you know some basic things about accounting. Kasi there’s always a rule
that assuming a return is filed and you signed the return, and it turned out na yung accountant is yung
may kasalanan, can you also prosecute the accountant? HINDI. IKAW YON. Because ikaw ang
[TAXI NOTES] 79
nakapirma sa return, and nakalagay sa return “I hereby declare under the penalties of perjury that the
abovestatement is true and correct.” Ikaw yung nakapirma doon, di naman yung accountant yung
nakapirma doon.
E accounting yan e. Di ko alam ang accounting. PAG-ARALAN MO! Kasi pag ang accountant mo ay di
mo sinuswelduhan o minumura-mura mo, irereport ka sa National Investigation Division sa tax fraud.
Anong purpose nyan. Pag naka-assess yon, may INFORMER’S REWARD (5% of the assessment not
exceeding P1,000,000)
Receipts
- Registered dapat yan.
Pag kumpleto ka na, yan na ang basis mo to record transactions. Irecord mo yung sales, irecord mo yung
purchases, kung meron kang mga binibiling capital expenditure, machines, basta nakalista lahat.
Basically, accounting is the way of tying the record, transaction, so that when you prepare your return,
then you have sourcing of all the data.
So ano ngayon ang job mo? Let’s proceed now to the—
TAX COMPLIANCE
The power of the BIR is to assess and collect tax.
What is the job of the taxpayer?
Kung di ka subject to withholding tax, e yung income mo is passive income lang, wala kang ginagawa sa
buhay kundi bantayan yung interest ng deposit mo, e wala kang gagawing return.
Pero kung ikaw ay nagbi-business, or compensation earner ka naman, nagfifile ka ng return kung di ka
subject sa substituted filing. So ang pinakamagandang example dito sa tax administration is a
businessman.
[Again]
1. Barangay Clearance
2. Business permit
3. Register your business name (get your TIN)
4. Books of Accounts
5. Receipts
Simula ka na ng transaction. Time comes when you have to file a return. Ang tawag mo sa pagfile ng tax
return, that is a TAX PERIOD. And generally, the BIR accounts for the transactions of a taxpayer on a
calendar year or fiscal year basis.
How do you distinguish calendar year from fiscal year? For

Calendar Year – is a 12-month period that begins January 1 and ends at December 31.
Fiscal Year – is a 12-month period that begins at any date other than January 1 and ends at any date
other than December 31.
Dati, April 15 ang filing for all nung konti pa lang ang taxpayers. Nung dumami na, ginawa meron ng April
15, yung mga salary, March 15. Ngayon yung mga nagfifile na lang ng April 15 is yung mga
compensation earner na di under sa substituted filing (may extra income ka or dalawa employers mo.
E.g. UBER driver).
Pag businessman ka, you file quarterly. Yan ang job mo, SELF-ASSESSING.
Alam mo yung mga transactions mo. So pag gumawa ka ng return mo, anong makikita mo sa return?
Andun ang iyong Gross Receipts or Gross Sales. Kung yan ay merchandise, less Cost of Sales. Yung
other expenses mo, e di kukunin mo sa libro. Kaya mandatory ang keeping of books of accounts because
you cannot retain anything through memory. That’s the purpose of books of accounts. The books of
[TAXI NOTES] 80
accounts contains your record of transactions. What is a transaction? A transaction is an event which
must be recorded because it has a tax implication.
Here comes the time when you file a return. How do you define a return for tax purposes?
- A return is a sworn declaration of a taxpayer where he inputs all data necessary for him to compute his
tax liability and for the government to validate the same.
Wala na ngayong IMPRESCRIPTIBLE TAX. Because a return is a necessity, a vital document that
triggers the running of prescriptive period.
*Before (1970) – Documentary Stamp Taxes are imprescriptible.

*Now: BIR Form 2000 – DST Return
You begin to be under the jurisdiction of the BIR the moment you file a return, although under
Section 5, even if you did not file a return, the BIR can assess you. Why? Because the BIR can access
information from other persons, and this is an assessment on Best Evidence Obtainable.
Again, this is the application of everything:

1. Barangay Clearance (under Local Government Code)
2. Business permit (under Local Government Code)
3. BIR Registration (to get your TIN)
4. Books of Accounts
5. Receipts
Transactions, Return.
What do you do?
First, ayusin mo yung libro mo, and then get a copy of the return, because at the back of the return,
andun yung instructions on how to accomplish the same. Andyan yung when to file, where to file, what
will be included. Sa Estate Tax Return, nakalagay pa doon, attachments that must be attached are as
follows: xxx.
Again, what is a return? A return is a sworn declaration. Why is it a sworn declaration? Kasi nakalagay na
doon in printed words na “I hereby declare under the penalties of perjury that the above statements are
true and correct.” Pipirmahan mo yon so you admit it’s your sworn declaration, it’s under oath.
It is a sworn declaration of a taxpayer where he inputs all data necessary for him to compute his tax
liability and for the government to validate the same. - So, anong gagawin mo? Susundin mo lahat ng
instruction doon, you get the cash receipts book, disbursements book, expenses, yung mga resibo—“teka
pwede bang ideduct ito?”
In self-assessing, you are the one determining what to do. It’s an honor system. If you say self-assessing,
you fix the liability all by yourself. You compute, then you pay.
What is the usual mode to comply? PAY AS YOU FILE SYSTEM.
What is a Pay-As-You-File System? It is the system of tax compliance where upon filing of the return,
they will pay. Of course, payment now is coursed through a bank.
There’s only one instance of FILE NOW, PAY LATER. Where do you find that?
In case of estate tax (Section 91), pwede kang mag file now and pay later. Ano’ng ibig sabihin non?
Estate tax is a tax on big ticket items because it is a tax on the aggregate value of net estate of a person,
and the net estate of a person is usually big. It turns out that while the estate tax return is due to be filed
within 6 months from the date of death, there is a privilege on the part of an administrator to file now and
pay later as for extension for 2 years if the estate is under extra-judicial settlement or 5 years if the estate
is under judicial settlement. Of course, you have to write a letter for that purpose.
[TAXI NOTES] 81
If the BIR finds that your request is meritorious, it will allow you to file the estate tax return now and pay it
2 years or 5 years later. But remember, when you do that, there is imposition of 20% interest per annum
because according to the Supreme Court, when you ask for extension, it’s like you’re borrowing money
from the Government.
The duty of the BIR is to assess and collect taxes.

The moment you file your return, then the BIR now will assess your return. Kaya nga ang definition ng
return is a sworn declaration of a taxpayer where you input all the data necessary for you to compute your
tax liability and for the BIR to validate the same. So ang job now of the BIR is to assess.
Kaya sa Section 6, ang makita mo dyan, yung letter A: Examine the Return.
When the BIR examines the return, what the BIR do is to assess and find out if your self-assessment is
correct. So yan ang purpose ng assessment. And when that starts, remember there is a presumption that
the BIR is always presumed correct.
So what is that presumption that says the Government is always presumed correct whenever a
return is being assessed? What do you mean by that?
Ang answer mo, it means that the burden of proof is on the part of the taxpayer to disprove that
presumption. Susundin natin yung mga step sa [R.R. No.] 18-2013. Of course you are given all the
chances to protect yourself. Due process is always observed.
So, assess and collect tax. In other words, the step to assess is an important step before collection
because collection is just the mechanical act of getting the money. But you can’t collect something that
was not assessed because kailangang ma-fix muna ang liability.
OTHER DUTIES OF THE BIR:

To enforce forfeiture, fines and penalties.
Forfeiture: You look at Sec. 215, whenever in any public auction, where there are no bidders, because
under Sec. 205, mag-iissue ng warrant of distraint, warrant of levy. Kapag na-issue, it means they take
possession of your property, and when that is taken possession, it is sold for public auction. That’s from
Section 207 down to 214, puro mga step-by-step process yon na kailangan i-observe for due process of
law, like posting of notices on conspicuous places, and the taxpayer is being informed that the property is
open for bidding to as many bidders as possible to be able to generate the full market value of the
property.
So all publication is necessary, as it’s part of due process of law—It’s the manifestation of due process of
law in taxation. Whenever a government exercise this right to levy a property and offer the same for
public auction, then procedural due process demands that all processes of postings should be observed
and also to give the taxpayer to bid for his property. Now in Section 215, if there is no bidder, that’s an
instance of forfeiture.
How do you distinguish forfeiture from tax lien?

Tax lien (Section 219) is an attachment to the res or the property. So wherever the property goes, the tax
lien is in it. So any person who buys the property will be subject to that liability. That’s what the BIR do
whenever a real property is attached, they annotate the lien in the OCT of the owner in the Register of
Deeds. So the BIR is very fast in annotating a tax lien on the property of the delinquent taxpayer.
It is always the job of a person who buys a property to always check the OCT to see to it that it is clean. If
you see a tax lien, it would be a warning to you that if you buy the same, you’ll be the one assuming the
liability.
Forfeiture, on the other hand, is when a property is up for sale in a public auction and nobody bids.
Can the BIR also execute judgment in all cases decided by the courts. Remember again when a person
is assessed, when you look at [R.R. No.] 18-2013, you are given ample chances to contest the same.
[TAXI NOTES] 82
Why does the BIR enjoys the presumption of correctness? Because ang job mo is to comply with
everything that is required of you.
In the bird’s eye view, pag nag bayad ka ba ng return, sigurado bang maa-assess ka? NOT REALLY.
Sometimes di ka maaassess because the ratio between the taxpayer and examiner is not 1:1. So merong
di ka na maa-assess. E kung na-assess ka, that’s the time you need to be prepared.
How do you know that you are assessed?

Papadalhan ka muna ng LETTER OF AUTHORITY or LETTER NOTICE.
Usually, letter notice pag individual. Pag letter of authority, sa mga corporation yon. A letter notice is
actually a notification that “your return has been chosen for investigation, and in this line, you are
requested to submit the following: xxxx” Usually, and ipapasubmit sayo, yung ginamit mo pag gawa mo
ng return. “Submit to us your certificate of registration, your books of accounts, your ledger, your receipts,
cash receipts [book], cash disbursements [book].” May checklist yan.
Usually, they are very kind. May first notice ka muna. Then nakalagay sa ilalim nyan, if you want to ask
for more information, please call the following person or telephone number. Pag in-ignore mo yun, they
send a second notice. Pag nakalimutan mo but still you do not respond, they send you a final notice.
Yung mga ganon is very critical because if you don’t respond to the BIR, remember the BIR enjoys the
benefit of the period, kasi pag di ka nagrerespond, that conclusion, that presumption of correctness, e
baka maging conclusive. If di ka nag-respond, it might prompt the BIR to issue you an assessment. Being
subject of an assessment can happen at anytime when you do not comply with what is mandated to you
by the BIR. Remember under Section 254 and 255, willful refusal to submit anything to the BIR is a
criminal violation.
So pag binasa mo yung [R.R. No.] 18-2013, andaming step-by-step non. Kung ikaw ay tax-compliant,
isubmit mo yung mga records mo. Anong gagawin ng BIR? The BIR will start the assessment process.
Pano assessment process nila? E depende na yan. The objective of the BIR is to find out whether your
return was correctly done. That’s why the BIR is under constant training on how to make an audit, and
they should be versed in Tax Code so they can make a proper assessment.
After the table audit and they found out that there is deficiency assessment or delinquency assessment,
they will send you a PRE-ASSESSMENT NOTICE or PAN. Pag may PAN ka, you should reply within 15
days. If you don’t comply, the BIR may opt to declare you in default, and since the BIR enjoys the benefit
of the period, they may consider it that because of your failure to reply, that presumption of correctness
becomes conclusive. The moment an assessment becomes final and executory, then that gives the BIR
the right of [Section] 205, which is the warrant of distraint or warrant of levy.
Pero di naman kaagad ganon. Kasi minsan humihingi pa ng records yan. Pag may records kang di
sinusubmit, the BIR may issue SUBPOENA DUCES TECUM. Or when they want somebody to appear,
they will issue a SUMMON.
Execute judgment in all cases decided by courts.

If ever a case reaches the Supreme Court, and the Supreme Court validates and affirms the decision of
the BIR (that is to say the taxpayer loses the case), the SC will bring or endorse the case to the BIR for
collection. So since there is a decision of the SC, the job of the BIR is to execute judgment of the courts.
You may lose the case on the CIR or the CTA, and when you failed to appeal, the decision becomes final
and executory.
In other words, in the BIR, at any point in time, the assessment may become final and executory the
moment you failed to appeal, or you failed to comply with what is required under the regulation to appeal
to the CTA.
It is only under the NIRC where you can protest without payment. So you keep on protesting up to the
court, up to the Supreme Court. But if the Supreme Court already says that the BIR is correct, then the
[TAXI NOTES] 83
case will already be executed by the BIR. So the BIR now will enforce collection, except that for
collection, if you failed to pay despite repeated demands, then it will be endorsed to the Delinquent
Accounts Department of the BIR. The Delinquent Accounts Department of the BIR issues the warrant of
distraint and levy.
[TAXI NOTES] 84
NIRC REMEDIES (by Atty. Nicasio Cabaneiro)
Remedies are allowed by the Government because the main idea is the prompt payment of tax is an
imperious need of the Government. Note the word IMPERIOUS. Magandang isagot yan with anything
that demands the application of the lifeblood theory, or that tax is a necessity. Pag sinabing prompt, it
means on time, because all payments of tax under the Code are time-bound. So if you failed to pay on
the set deadline date, that exposes you to delinquency assessment.
What is a delinquency assessment? – You paid correctly but you did not pay on time. So anong
gagawin ng BIR? Magiimpose sila ng SURCHARGE.
How do you define a surcharge? It is a mandatory, non-waivable imposition to the tax in order to
compensate the government for lost revenue. Because that payment of yours is expected to address the
budget. So once you did not pay on time, that will prejudice the government. That’s 25%, or 50% in case
of fraud.
Interest – is the cost of money. 20%. Because the moment you delay your payment, ang interpretation
ng Supreme Court d’yan is you are borrowing money from the Government. Kaya nagcha-charge ng
interest. Kasi ang babayaran mo, P100,000, ang binayad mo is P50,000 lang. May deficiency ka. Parang
nangutang ka sa Government nyan ng P50,000 kaya mag impose ng surcharge at mag-impose ng
interest.
So ang tanong sa bar: What are the incremental penalties under the Tax Code?
- Surcharge, Interest, Compromise Penalty.
Surchage, either 25% or 50%. Yung 25%, ordinary yan kung walang fraud. Pag may fraud, 50%.
Interest is cost of money, because you borrow from the Government.
Compromise Penalty – in lieu of imprisonment. May table naman yan depende sa violation.
The remedies are there because taxes are the lifeblood of the Government. It is a matter of necessity. But
when you say remedies, it does not pertain to the Government side alone because a taxpayer should be
given remedies in case of redress for grievances because the Government may also abuse the taxpayer.
E kung merong taxpayer abuse, what is the remedy of the taxpayer? The taxpayer may, kung merong
erroneous payment, also claim for refund. So it works both sides.
But on the Government’s side, it is because of necessity. Prompt payment. Dapat on time. Kaya ang
mangyari, kapag inassess ang return mo in case of self-assessment, ang pwedeng exposure mo is
pwedeng DELINQUENCY or DEFICIENCY assessment. In either case, there’s always incremental
penalties and if you do not comply, then it goes to the attachment of properties.
In the Philippines, what are the modes of tax compliance?

1. Self-assessment. It is the most common. Makikita mo kapag filing season, nacocompel silang magfile
either because of conscience or because of the fear factor na baka mahuli sila. Whether mandaya sila,
they comply, because failure to comply or failure to file is TAX EVASION.
2. Withholding Tax Method
3. Best Evidence Obtainable Rule
Question: Is it possible for the BIR to make an assessment even if you did not file a return? Would
the BIR be able to trace you?
YES. That is what you call the ASSESSMENT BASED ON THE BEST EVIDENCE OBTAINABLE.
The pertinent section there is SEC. 5 which gives the BIR the right to obtain information from third
persons, either from government offices or from private persons, and since they are a quasi-judicial body,
they don’t need any court intervention.
What are the classes of withholding in the Philippines?
[TAXI NOTES] 85
Ang pinaka-popular is the withholding tax on compensation which you call withholding tax on wages.
That’s the most antiquated withholding tax, sa mga employer-employee relationships.
The other one is the so-called Expanded Withholding Tax or sometimes you call this as Creditable
Withholding Tax.
Creditable Withholding Tax as distinguished from Final Withholding Tax.

If you look at Regulation 2-98 (the main repository of all the withholding taxes in the Philippines):
Final Withholding Tax is that kind of withholding tax which is withheld from any income which already
represents the final tax due to the BIR. That’s why you call them as TAX PAID INCOME.
Creditable Withholding Tax is only partial, or represent a partial payment of tax. It varies, minsan 1%, 5%.
Meron dyan, sa management consultants, brokers,

10% - if annual income is not more than P720,000
15% - if annual income is more than P720,000
Rental Income – 5%
Pag lessee ka, magbayad ka sa lessor, bawasan mo ng 5% and give the lessor BIR Form 2307. At the
end of the year, icompute ni lessor yung total tax liability nya, ibawas nya yung creditable withholding
taxes sa Form 2307. Parang nag-aadvance payment ka na.
Pero kapag interests, dividends, royalties, yung mga payment sa non-resident foreign corporation. Final
withholding tax na yon. Di na sila magfifile ng return.
BASIC FEATURES OF WITHHOLDING TAX SYSTEM.

1. Advanced payment of tax, in case of CWT whereupon the withholding agent is the payor.
The withholding agent is actually the agent of the BIR to enforce collection against the actual recipient of
the income.
Kapag nag-aapply ng compromise or ng amnesty payment, may nakalagay na it does not include
payment of withholding tax. Why? Because the real payor there is not the withholding agent but the
income earner.
Under Regulation 02-98 and any other regulations, yung sa Top 20,000 Corporations, mandated to
deduct 1% CWT pag manufacturing, pag services 2%. Basta kahit anong bilhin mo kung may withholding.
Unfair naman yon pano kung later wala kang babayarang tax? Sabi ng SC, e di i-refund mo sya. E
nagreklamo yung CREBA, violative daw of due process of law kasi mahirap magclaim ng refund. Sabi ng
SC, kung mahirap magclaim ng refund that’s beyond the law.
The moment there is an erroneous payment, the remedy for you is to claim for tax refund or tax credit.
The fact that it’s hard to get it from the BIR, yan ang nangyayari talaga sa Philippines.
2. Exclusivity of all items included therein (R.R. 02-98)

Kung alin lang yung naka-enumerate doon, yun lang ang subject to withholding tax. Pag di kasama dyan,
di ka kailangang mag-withhold.
However, those belonging to the Top 20,000 Corporations are mandated to withhold. Kapag ka goods,
1%, kapag ka services, 2%. Anong tawag mo don? Creditable withholding tax. BIR Form 2307, pang
offset mo yon pag nagfile ka ng tax return.
3. Consequences of failure to withhold

1. You cannot deduct the expense. Eto ang pinakamabigat na sanction, esp. if it’s big. Like yung rental
expense mo if sa BGC ka nagrerent, anlaki ng expense mo tapos ididisallow yon. That is very, very
onerous kasi kung di mo mabawas expense mo, anlaki ng income mo.
There is also surcharge of 25%, interest of 20% and also a criminal prosecution if there is fraud.
[TAXI NOTES] 86
BEST EVIDENCE OBTAINABLE RULE

BIR is duty-bound to assess the proper tax based on best evidence obtainable by sourcing information
from third parties. That is Section 5. Kaya yung Section 5, they can source information from government
offices or private person. Given is the fact that in any transaction, it would always involve two or more
parties. If may counter-party ka sa isang transaction and ang ini-examine is yung buyer, the BIR has the
authority to get information from the seller to validate whether it tallies. Kaya nga yung sa VAT law, in
case namili ka ng goods, may input tax yan, pag ikaw naman ang nagbenta, may output tax yan. And
requirement ng BIR is you submit all data in DISKETTE form. Ikaw ang purchaser, naka diskette form,
pag ikaw supermarket, naka diskette form. Pag ni-run sa machine, makakakita ng discrepancy kung may
discrepancy. Pag nakakita, papadalhan ka ng BIR, please explain within 30 days why is there a
discrepancy with the transaction (e.g.) with San Miguel Corporation. Pag di ka nag-explain, papadalhan
ka ng PAN, you have 30 days. Punta ka na agad sa BIR to explain why is there a discrepancy.
What’s the lesson there? The BIR enjoys the presumption of correctness. So whenever you do not reply
to ANY request of the BIR, at any stage of the tax assessment process, that will result to the assessment
becoming final and executory. In case there is a final decision on the disputed assessment and di ka nag-
appeal, assessment becomes final and executory.
What is the jurisdiction of the CTA on matters coming from the BIR?
Matters involving FINAL DECISION ON A DISPUTED ASSESSMENT, etc.
Final decision on a disputed assessment meaning may assessment na, pinrotestahan mo.
Assessment v. Disputed Assessment

Assessment – final notice to the taxpayer that the taxpayer is guilty of deficiency or delinquency
assessment.
Disputed assessment – once the taxpayer protests to the assessment, it is called a disputed
assessment.
(Sec. 228, dito ginagamit yung [R.R.] 18-2013)

The taxpayer is given 30 days to protest an assessment, and an additional 60 days to submit additional
documents to support the protest. If within a period of 180 days, there is no decision on the protest, then
the taxpayer MAY appeal to the CTA. (May = directory)
Protest is a letter formally controverting the assessment of the BIR. Pag dineny ng BIR yung protest,
susulatan ka, “we regret to inform you that your protest is hereby denied. Should you want to pursue
further remedy, you may opt to go to the CTA.”
- Anong tawag sa reply ng BIR, that is the FINAL DECISION ON THE DISPUTED ASSESSMENT.
If di sumagot ang BIR?

Sec. 228, there is 180 days. Pano mo bibilangin yon? 30 days (+60 days, optional) + 180 days. Pag di ka
nakatanggap sa BIR ng letter, consider it as denied. Antawag don, INACTION.
Within 30 days (from denial or from the lapse of 180-days in case of inaction), akyat ka sa CTA (appeal).
(Relevant cases: LASCUNA Case, RCBC Case)
After the lapse of 180 days, akyat ka na sa CTA OR pwedeng di ka umakyat, antayin mo yung sagot ng
BIR na dine-deny ka, o baka naman baguhin ng BIR yung assessment, babaan yung assessment,
hintayin mo. But this rule is MUTUALLY EXCLUSIVE.
[Back to] Best Evidence Obtainable Rule

Example: Operation RIP in estate tax.
The BIR is privileged to get information about persons who died within the last 5 years from funeral
parlors, crematorium, insurance companies, so anywhere, or from the obituary.
[TAXI NOTES] 87
What is the exposure of the person who dies for tax purposes? Syempre Estate Tax because dying is a
tax event because it would trigger the transmission of property from the testator to the heirs.
(Tax Event – it is any event that result in change of ownership)
Under Sec. 84 of the Tax Code, e kailangan magbayad ng estate tax nung administrator. E maraming di
nagbabayad non so ang ginagawa ng BIR is issue Revenue Memorandum Order containing Operation
RIP to get information and in actual practice, they look into big ticket items of the person which is real
property.
For real property, the best source is the Register of Deeds. xxx If nakita ng BIR na hindi nagbayad ng tax,
they would file a tax evasion case against the Estate.
Example: Information from Private Persons

Lessor-lessee, inaasess mo yung lessor, e di kukuha ng information sa lessee. How do you get
information from the lessee? Una muna, sinusulatan muna yan to get information about the transaction,
‘because according to the record of the lessor, you paid the amount of xxx. Please give us the records of
this.’ Pag di ka nagcomply, tatawag ang BIR and they will issue Subpoena Duces Tecum, they will force
you to submit the document, or else you will be guilty of contempt.
Banks:
BIR gets financial statements from the BSP, because banks aside from filing tax returns, they are
mandated by the Manual of Regulation of the BSP to submit financial reports to the BSP and this time,
the examiner is trying to validate the bad debts deduction of the banks. And to validate its authenticity and
amount, the BIR gets information from the financial statements submitted to the BSP if the amount jives,
because bad debts record is the also required by the Manual of Regulation.
What BIR does in securing best evidence?

That is usually through the subpoena duces tecum. Of course there are also letters, because subpoena
duces tecum, ultimatum na yun e. Minsan tatawag lang muna yan.
Court Ruling on Best Evidence Obtainable Rule.

- CIR v. Hantex Trading
Includes the corporate and accounting records of the taxpayer, as well as all the accounting record that
has something to do with the gross profit or sale. This includes all information regarding the personal
transactions from whom the taxpayer is deriving any income.
It places no limit on the type of medium by which the record is subject to, because the purpose is for the
BIR to get ALL the necessary information in whatever form.
REVENUE MEMORANDUM CIRCULAR 23-2000: In the absence of proof of any irregularity in the
performance of an official duty, an assessment cannot be made.
Q: One of the BIR examiners, e nagpunta dun sa controller of a corporation. While examining the records,
he asked the controller if he can place a call to the office. While tumatawag sya sa telepono, nakakita sya
sa mesa ng controller ng mga records na parang this could be source of assessment. Is that considered
best evidence obtainable?
Atty. Cabaneiro: Ang tingin ko, NO. Pagalingan na kayo ng pag-explain.
Second school of thought: YES, because taxes are the lifeblood of the government.
Q: May hearsay evidence be considered best evidence? (Hantex)

A: Administrative agencies like the BIR are bound by the technical rules of evidence in judicial
proceedings. Therefore, the best evidence may consist of hearsay evidence which may be oral or written
testimonies. Anyway, this is inconsonance with the presumption that the government is always presumed
correct. Ang iingatan mo don is for you to sleep on your rights. If you do not correct the best evidence,
tapos ka na since the burden of proof is on the taxpayer to disprove the presumption.
[TAXI NOTES] 88
E.g.: Transfer in contemplation of death

Under Sec. 85, one of the part of the gross estate is the transfer in contemplation of death (actually this is
a transfer where the motivating factor for the transfer is the fact of imminent death). Presumption of
transfer made close to the death of the person is that it is a transfer in contemplation of death.
BIR assessed for deficiency estate tax. Administrator said it is a bona fide sale for a bona fide
consideration.
LESSON: If the administrator sleeps on his right to dispute that presumption, kukuhan sya ng BIR ng
deficiency estate tax.
CTA ruled that the taxpayer’s audited financial statements constitute deep data which may be
relevant or material on issuing assessment on the taxpayer.
REVENUE MEMORANDUM CIRCULAR 34-2014:

Clarifies the rule on whether or not an assessment resulting from jeopardy assessment.
Jeopardy assessment
When you file a return, there is a prescriptive period. Sec. 203, 3 years is the period within which the
return is subject to examination. So when you file a return on April 15, 2013, the prescriptive period
(applying Section 203 on the assumption that the return is not defective.
In CIR v. YUSAY-GONZALES: If your return is defective, as if you did not file a return and what applies is
Sec. 222, prescriptive period is 10 years.)
Fraudulent return, siguradong defective yon. Pag false return, does it really mean that it falls
[automatically] under Sec. 222? No. Because merong falsity due to honest mistake.
AZNAR case distinguished false return from fraudulent return

Are all fraudulent return false? YES
Are all false return fraudulent? NO.
Sa case in Aznar, honest mistake. E kung honest mistake yon, no fraud yon. Ang mag-aapply na
prescriptive period, under Sec. 203 pa rin.
[COUNTING OF PRESCRIPTIVE PERIOD] Anong nakalagay sa Sec. 203?

When you file a return, the counting of the 3-year prescriptive period is the due date OR the actual filing,
whichever is later.
Kaya kung ang deadline is April 15, 2013, ang prescriptive period non is upto April 15, 2016. (3 years)
Kung nag-file ka ng January 2, 2013, ano’ng prescriptive period? April 15, 2016 pa rin kasi ang counting
is from due date.
Kung nag-file ka later, August 15, 2013, kelan ang deadline? August 15, 2016.
Now, itong return mo na fi-nile mo ng April 15, 2013, na mag-eexpire ng April 15, 2016 e dapat maissue-
han ng assessment bago dumating ang period na yon. Alin ngayon yung jeopardy assessment?
Jeopardy assessment is a situation wherein the BIR examiner runs out of time, at ang nangyari,
halimbawa, ang deadline na maissue ang final assessment is April 15, 2016, e bago mo makumpleto
yung assessment process, it may take about 3 to 4 months. E nung napuna ng BIR, ang natitira na lang
is 1 month, it’s already March 2016.
So ang problema ngayon, what should the examiner do?

Makakalusot ang examiner kung sya ay makikiusap sa taxpayer na mag-execute sya ng WAIVER kasi
under Sec. 222, the prescriptive period would not run out when there is an agreement between the
taxpayer and the Commissioner to extend the prescriptive period. – WAIVER OF PRESCRIPTIVE
PERIOD. May guidelines dito.
[TAXI NOTES] 89
Kung pumayag ang taxpayer, walang problema don kasi maeextend. Legal basis: Sec. 222, 223
Kapag di pumayag ang taxpayer, ang examiner mapipilitang gawin for 1 month what should he have
done for 3 months. If eventually nakagawa sya ng assessment, I don’t know how he did it, probably he
based it only on formula, di na nya natignan yung ibang records, ang tawag mo don is a JEOPARDY
ASSESSMENT. It is an assessment that is being done by the BIR which is not backed up by a full audit
but only for purposes of beating the prescriptive period.
RMC 34-2014: Clarifies the rule on whether or not an assessment resulting from jeopardy assessment or
which was based on best evidence obtainable could be considered as doubtful assessment under Sec.
204 of the Tax Code.
- Sabi ng Circular, NO. Scrutiny of the surrounding circumstances that lead to the assessment should be
only evaluated, and that cannot be done if it is a jeopardy assessment because of want of material time,
because you cannot do in one month what you should be doing for 3 or 4 months.
Further question: if a taxpayer is the recipient of a jeopardy assessment, and you are the council
of the taxpayer, what should you advice to the taxpayer?
-I will advice the taxpayer to invoke the right to the Commissioner under Section 204 of the Tax Code
which is to abate the assessment. Abate means cancel. And what are the grounds for the cancellation of
the assessment? When the jeopardy assessment is an unjust assessment.
[Back to Tax Compliance:]

Why is self-assessment the most common form of tax compliance? - Because the taxpayer is the
one who is in control of all the documents, all the evidence, for the preparation of the return.
NOTE: You must keep your accounting records. It’s punishable by law if you do not maintain your books
of accounts. Bookkeeping requirement is mandatory for all taxpayers for simple reason that these are the
source of all the data that you input on the tax return. The retention period for records is 10 years (-RMC
by Comm. Kim Henares).
[Assessment]
Basic is the rule in the 1962 Benipayo Case. Can tax assessment be based on presumption?
Because some examiners have the tendency to just look at the financial statements and use a formula.
They have some ways on how to extract data why your expenses are so big, etc. You can always
question that because SC ruled that assessments cannot be based on presumption because assessment
must be based on facts.
After all, what the examiner is doing is trying to find out whether the taxpayer complied with his obligation
to pay the right amount of tax on time. That’s a basic thing. If all the taxpayers are honest and they pay
their tax on time, the BIR has nothing to do. But then, payment of tax is a burden and again the Supreme
Court recognizes the fact that there is a natural reluctance on the part of the taxpayer to part with his hard
earned money so given is the rule that in all probability, the taxpayer may try to do some tax optimization
or tax minimization (avoidance), or tax dodging (evasion).
To be sure that due process of law is observed, the assessment of BIR must be based on facts. And how
is this going to be done? The BIR should really look into the records. That’s what an auditor does. An
auditor will have to look into the records. If there are so many records, especially if you’re auditing a big
corporation. Well you don’t need to check everything, you may just vouch expenses at a random basis
and try to see if it jives with what is recorded. It’s also acceptable because you can still decide whether or
not there’s something fishy based on what you have seen, even on a random basis. Because if you try to
look on all the records, it will also entail more time.
In practice, sometimes the BIR, although the prescriptive period is still very far, they are already trying to
ask the taxpayer to sign a waiver of prescriptive period.
[TAXI NOTES] 90
Now, when you are the taxpayer, sometimes also try to cooperate with the tax authorities because after
all, they are the one who will be responsible in examining the return. So must establish also good rapport
with them. So anyway, as far as the records are concerned, one of the most important things in the
preparation of the assessment, it must be based on facts. It cannot be based on mere presumption.
In the case of Commissioner v. Agri-Nurture Inc. (2015), decided by the CTA en Banc, it emphasized
how 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. The rule that the assessment must be
based on presumption, and you find it as arbitrary and capricious, ang tawag d’yan ay NAKED
ASSESSMENT. When the BIR comes out with a naked assessment, that is an assessment without any
foundation, the determination of the tax due is without rational basis. Hence, it is not always true that the
burden of proof is on the part of the taxpayer. Taxpayer: “What else do I need to prove when your
assessment is naked? It’s capricious!” THE BIR CANNOT FEIGN IGNORANCE OF TAXPAYER’S
RECORDS. It’s a well-settled principle that the BIR are vested with all ample power to know the records
of all taxpayers and assess the correct amount. So now the burden is shifted to the BIR to prove that it’s
assessment is not arbitrary.
In this case, what is assessed is UNDERDECLARATION OF PURCHASE because it failed to submit the
required invoices, schedule of purchases. E nag contest until it reached the CTA. CTA en banc does not
agree with the assessment of the Commissioner because Commissioner should know the records of all
taxpayers as it has power to know the same under Sec. 5 of the Tax Code. They can source information
from anywhere.
So the court likewise ruled that even granting that there was underdeclaration of purchase on the part of
the petitioner, there has no consequence because it does not affect income (NOT
UNDERDECLARATION OF INCOME). It does not by itself result in the imposition of income tax. There
must be realization of income and this was not declared.
WHO BEARS THE BURDEN OF PROOF?

In many cases, this burden makes taxpayer decide to settle their assessment rather than go to the ordeal
of tax litigation. This goes to the power of compromise, because usually tax litigation will be protracted
and expensive because of the onerous incremental penalties. Therefore, it is also not farfetched.
Sometimes the questions in the bar examination are not really so bookish, they also include questions
that are more on the practical side.
Rather than going to the ordeal of tax litigation, the taxpayer may opt to negotiate. This negotiation is
legal. Because when you negotiate, the legal way of negotiation is, of course, that one which appears on
Sec. 204.
Before a taxpayer write a settlement check, note that the burden is on the part of the taxpayer because
there is a need a free negotiation for that and see to it that all the due paid to the BIR is duly receipted.
And when it is receipted, it goes to the coffers of the government.
WHEN IS AN ASSESSMENT GENERALLY NOT REQUIRED?

This is in reference to tax which are self-assessing by nature.
What is a Pay-As-You-File System?

It is the way whereby you compute the tax, you prepare the tax return, and now when you file the return,
and then you pay the tax.
When an assessment is required, it is important that it must be in compliance with the taxable
period. Why? Because in Sec. 6, one of the powers of the Commissioner is the termination of the tax
period. Under Sec. 6, the tax period is normally terminated when the taxpayer is retiring, or trying to
abscond, or hide his property.
[TAXI NOTES] 91
*An assessment is required when the tax period is terminated.
ALSO a short period return is required if a corporation is dissolved.

The best way to dissolve the corporation is to shorten the life in the Articles and have it approved by the
SEC. The SEC will not approve unless there is a tax clearance. What is the purpose of a tax clearance?
Because the subsidiary you are dissolving may have tax obligations.
The moment a subsidiary is dissolved, that is when you should file a SHORT PERIOD RETURN. The tax
period is terminated because the subsidiary is dissolved.
RMO 19-2015: PRIORITY TAXPAYER in the BIR’s Audit Program (Mandatory Audit)
1. Those enjoying tax exemption
2. Those deriving revenue exclusively from parent company, subsidiaries or affiliates
(Multinational companies—Resident Foreign Corp) MARUBENI Case: Branch profits remittance tax
3. Those with shared expenses imputed by parent company
4. Those which have been subject to audit with respect to transfer pricing.
5. Those companies which have been subject of merger and consolidation or reorganization.
6. Those which are claiming refund or credit from the BIR.
HIERARCHY after the law itself:

1. Revenue Regulation
2. Tax Rulings (Numbered/for circulation) – may be considered as precedent
Sec. 7. Delegated powers. (EXCEPT:) xxxx 2. Powers to issue rulings of first impression
Rulings of First Impression – being rendered by the Bureau for the first time, it has no precedent yet.
Rulings of Established Precedent – if may precedent na, so pwedeng idelegate.
(*not continued)
[RMO 19-2015: ELECTRONIC LETTER OF AUTHORITY (ELA)]

ELA – issued for a taxable period to include all the internal revenue tax liabilities of a taxpayer, except
those that have been previously investigated.
LA – advice to the taxpayer that his return is chosen for investigation.
RULES: How often can the books of accounts of the taxpayer be examined by the BIR?
G.R.: According to the law, ONLY ONCE.
Exceptions:
1. Commissioner determines that fraud, irregularities, are committed by the taxpayer
2. Taxpayer himself requests for reinvestigation
3. When there is a need to verify if the taxpayer complies with withholding
4. Verification of Capital Gains Tax liabilities
If you look at R.R. 12-99, which is the original bill of rights of the taxpayer, one of the most
important stage there is the NOTICE OF INFORMAL CONFERENCE. What is that stage?
Yan yung stage na kapag napadalhan ka ng notice, and sabi ng BIR you come to the Office and bring the
following records. So dala-dala mo lahat ng records mo na ginamit mo sa paggawa mo ng return mo,
yung Certificate of Registration mo, What does the BIR do? E di mag-table audit. So tinitignan ni
examiner yung return mo, kung pano mo kinompute, and tinitignan yung documents mo, “Bakit eto
dineduct nya? Di naman deductible.” So ang mangyari after table audit, the BIR would say “Can we have
an informal conference?” (Notice of Informal Conference)
What happens in an informal conference? Taxpayer talks to the examiner, and sasabihin ni Examiner,
“eto di ko sinasama tong expense na ‘to kasi personal yan, ito di acceptable as VAT receipt, etc.” Things
such as those. So what do they achieve in an informal conference? Pwedeng magkaroon kayo ng “sige,
tatanggalin na lang natin to” o imbes na ang assessment mo is P50,000, magiging P30,000 na lang.
[TAXI NOTES] 92
When Henares comes, inamend nya. Inissue nya yung 18-2013, tinanggal nya ang informal conference.
Sabi nya kasi, yung informal conference is a very tempting stage where the taxpayer can make the
examiner lose his mind.
If ang examiner, dumating ng 9am, pagod na pagod galing pang Montalban, niyaya mo ng breakfast.
Bribery ba yon? HINDI. GOOD MANNERS AND RIGHT CONDUCT. Now, after ng table audit, wala ng
informal conference. I-issue-han ka na ng PAN. (Nakatipid ka na ng pam-breakfast).
WHEN DOES THE AUDIT PROCESS BEGIN?

LETTER OF AUTHORITY AND LETTER NOTICE
Basis is Sec. 6(a) all the things that the Commissioner may do to make an assessment.
1. Examine the return. (This is the normal way.)
2. Pag wala kang return, the BIR can still find a way on how to assess you because it can assess from
best evidence obtainable. It can avail of Sec. 5 – Third party verification.
The BIR also enjoy [the powers of] physical inventory counting;
It can have surveillance of your premises. [Those are things that you cannot do if you’re an ordinary
mortal];
Terminating a tax period;
Providing values for real property;
Zonal value – predetermined value as agreed upon by the Commissioner and the Assessor’s Office.
Under Section 6, there are instances wherein secrecy of bank deposits are waived by operation of law,
and that is when the subject matter is the net estate, or when there is compromise under Sec. 204 due to
financial incapacity.
The audit process begins the moment the BIR advices you that your return is chosen for examination,
either by LN (for individual taxpayer) or LA (for corporate taxpayer).
How do you define a letter of authority?

(Sometimes letter of authority is known as “tax verification notice”, sometimes, “initial order”.)
It is an official document which empowers a revenue officer to examine and scrutinize the taxpayer’s
books of accounts and other documents to determine taxpayer’s correct internal revenue tax liabilities.
*Official document = it is an accountable form.

What is the most prudent way to do is to have the LA validated and check with the office where it came
from kung talagang nasa kanilang logbook yon. Kasi it can be fake.
Who issues the letter of authority?

Letter of Authority is issued under the name of the Commissioner of Internal Revenue.
For taxpayers under the jurisdiction of REGIONAL OFFICES: issued by the REGIONAL DIRECTOR. He
is the “Mini-Commissioner” in every region.
ELECTRONIC LETTER OF AUTHORITY (ELA)

The start of the taxpayer’s tax examination is when an electronic letter of authority is issued to a particular
taxpayer, whether it is an individual, a single proprietor or a corporation, authorizing the BIR to go over
the records of taxpayer’s books of accounts.
ELA must be served by the BIR within 30 days from the date of its issuance, otherwise do not accept
such ELA. It is valid only for the next 30 days.
How should the ELA be served? (Remember: In the olden process, due process of law requires that the
taxpayer himself must be PERSONALLY informed that his records shall be examined. Therefore, service
is very important.)
- It may be by PERSONAL SERVICE (somebody delivers it to you at your known address), or
- It can be SUBSTITUTED SERVICE (when nobody can be found at the place you stated in your return).
[TAXI NOTES] 93
- or by MAIL
Basilan State Case: Supposing you sent a notice of assessment by mail on April 15, deadline is April 15,
pero syempre, malayo ang mail, matatanggap yon a week later, yun ba is valid? Nagprescribed ba yon?
SC: NO. THE RELEASE OF THE LETTER FROM THE MAIL IS THE RECKONING PERIOD, and
therefore it is within the prescriptive period. The fact that it was received a week later is of no moment.
WHEN IS LETTER OF AUTHORITY REQUIRED TO BE REVALIDATED?

The taxpayer has the right to refuse the service of the letter of authority if served beyond 30 days. An LA
is revalidated through the issuance of a new LA. So kung di nya napadala ito within 30 days, it should be
revalidated.
WHAT IS REQUIRED TO A TAXPAYER WHO IS BEING AUDITED?

A taxpayer should acknowledge the receipt of the letter of authority. And the BIR personnel will be serving
the taxpayer an initial release of requirements. The examiner will also look at pertinent records. The
taxpayer will be given 10 days to submit the documents based on the FIRST NOTICE that is being
sent. Pag di naka-comply doon sa first notice, he’s given another 10 days to submit. If the taxpayer still
fails to comply with the SECOND NOTICE, there will be a FINAL NOTICE. The taxpayer is given 10 more
days to comply with this requirement to submit the document.
WHAT IS THE RECOURSE OF THE BIR IF THE DOCUMENTS COULD NOT BE SUBMITTED?
(For reasons that is beyond the control of the taxpayer)
- The BIR would ask for a WAIVER OF PRESCRIPTIVE PERIOD. Kasi ang epekto non, kung hindi mo pa
nasusubmit yung documents, e tumatakbo yung prescriptive period. The waiver is the security of the BIR
in the meantime that you are looking for your records.
WAIVER OF STATUTE OF LIMITATION (PRESCRIPTIVE PERIOD)

It is the saving grace of the BIR, kasi pag naubusan ka ng prescriptive period [without assessment],
dereliction of duties yon, punishes BIR for being remiss of their duties.
- It is a signed statement whereby the taxpayer conveys his agreement to extend the period within which
the Bureau may validly issue an assessment.
If the taxpayer opts to execute a waiver of statute of limitation, he shall be in effect waiving his right to
invoke the defense of prescription.
It must be accepted by a duly authorized BIR official, because it is in the nature of a contract.
Requisites of a Valid Waiver

1. It must be in the prescribed form
2. It must contain the expiry date of the period agreed upon.
3. It must be signed by the taxpayer himself or his duly authorized representative.
4. The Commissioner or his duly authorized Revenue official should sign the waiver, indicating
acceptance.
5. The date of the execution of the waiver and the date of acceptance should be prior to the expiry date.
WHAT IS THE EFFECT OF THE FAILURE TO COMPLY WITH AN ELA?

(which is requiring the taxpayer to submit documents for examination)
- the taxpayer will soon receive a subpoena duces tecum
- so therefore, the taxpayer is advised for prudence’s sake not to ignore this ELA.
RULES ON THE ISSUANCE OF SUBPOENA DUCES TECUM

Search warrant may be issued only by a court judge.
Non-paymen and Evasion of taxes is a criminal offense.
Theoretically, the BIR may apply for a search warrant to search the books of accounts.
THEORETICALLY.
[TAXI NOTES] 94
Note that the issuance of a search warrant presupposes that an offense has been committed in contrast
to a subpoena duces tecum which the BIR may issue even when it is merely auditing the taxpayer
without any finding of the commission of an offense.
So normally, ang pagkuha ng search warrant ay may presumption na agad na merong offense
committed, pero ang BIR pag nag subpoena duces tecum, ang purpose non is to conduct table audit
because it is only a table audit that will disclose whatever findings that the taxpayer did. Kung makakita
sya don ng deficiency assessment, or delinquency assessment, or a prima facie case of tax evasion, that
will be uncovered only the moment the documents are submitted.
CONCLUSION: Search warrant is not resorted to by the BIR since the issuance of a subpoena duces
tecum is sufficient for the BIR to exercise its power to gather information.
WHAT IS THE PERIOD WITHIN WHICH AN AUDIT MAY BE CONDUCTED?

A Revenue Officer is only allowed 120 days from the date of the receipt by the taxpayer of the LA to
conduct and audit and submit the required report of investigation.
If the Revenue Officer was not able to file his report within 120 days, he should submit a progress report
with the Head Office and surrender the LA for revalidation.
[R.R. No.] 18-2013 – Bill of Rights of taxpayers

PAN – Pre-Assessment Notice – PROPOSED Assessment Notice
- Bakit proposed? Initial findings show that based on audit, your self-assessment was not correct.
After a table audit, they may find a discrepancy. Most often sa expense, some of the expenses are
disallowed under Sec. 34 of the Tax Code. So kapag nakakita sa table audit ng discrepancy, immediately
the taxpayer receives a PAN.
What does PAN show?

Detail of facts and legal basis where the proposed assessment is based.
Now it is important that under regulation, the taxpayer is required to respond to the PAN within 15 days
(REPLY). You raise all your arguments why the expense should be allowed, etc. The taxpayer should
ensure that all the documents that you have to argue your case in the reply should be complete.
The PAN must also show that if you are subject to assessment, the cause for the assessment must be
clearly explained. *So you know what to counter or argue with the BIR
Sec. 228. (MEMORIZE) When a PAN is no longer required.

1. Mathematical error
2. Discrepancy between tax withheld and tax remitted
3. Taxpayer opted to claim a refund or tax credit
4. Excise tax is involved (under Title VI, e.g. tax on luxurious goods)
5. Articles sold to an exempt person is sold to a non-exempt person.
CASE:
ADB Executives (Note that under the law, ADB is exempt from taxes, also under the Vienna Convention)
were given luxurious vehicles as part of their fringe benefits. After a 3-year stay in the Philippines, they
are being transferred to another station but di naman nila dadalhin yung kotse. So before they left the
country, they sold the cars to enterprising Filipino aficionados.
Ang tanong sa bar, WHAT IF A FILIPINO NATIONAL BUYS A SECONDHAND CAR FROM AN ADB
EXECUTIVE WHO IS ABOUT TO TRANSPORTED TO ANOTHER COUNTRY, WHAT IS THE TAX
LIABILITY OF THE FILIPINO NATIONAL?
ANS: According to the Tariff Code, the Filipino national is considered to be an importer and he must pay
the tariff due when the car was entered into the country. HINDI NA KAILANGAN NG PAN.
[TAXI NOTES] 95
The job of the taxpayer as soon as he receives the PAN is to reply within 15 days, and if he fails to do so,
he is considered in default. And if he is in default, the assessment becomes FINAL and EXECUTORY.
Being final and executory means that it may trigger the BIR of availing Sec. 205 of the Tax Code, yun
yung mga drastic actions, summary remedies.
Now, in the event that the reply is denied, i-issue-han ka na ngayon ng FORMAL LETTER OF DEMAND
(FLD) OR FINAL ASSESSMENT NOTICE (FAN). Yun na yung within the contemplation of Sec. 228.
Ngayon, ang sinasabi dito sa [R.R. No.] 18-2013, once a FAN is issued, the taxpayer has 30 days to file
his protest EITHER by request for reconsideration OR by request for reinvestigation, otherwise the
assessment becomes final and executory.
Difference of Request for Reconsideration and Request for Reinvestigation

Request for Reconsideration – is a plea for reevaluation of an assessment on the basis of existing
records which are already presented before. In other words, nung nagfile ka ng protest, kumpleto na yung
records na sinubmit mo. Kaya ang request mo na lang, “Sana naman, liberal naman ang pagtingin nyo sa
records na sinubmit ko.”
- Since there are no need for additional evidence kasi nabigay mo na lahat nung nagfile ka within the
30-day period, the 60-day rule does not apply anymore.
Request for Reinvestigation – is a plea for reevaluation of assessment on matters of the newly-
discovered evidence that the taxpayer intends to present on the reinvestigation.
- Bakit newly-discovered? Kasi hindi ito nakita ng BIR nung una siyang nag-examine. Kaya i-examine mo
uli. The taxpayer can avail of the 60-day period para isubmit itong mga evidence na ito.
WHAT ARE THE RULES IF THERE ARE SEVERAL FINDING IN A FINAL ASSESSMENT NOTICE?
Several finding, ang inaassess sayo, baka meron deficiency income tax, deficiency value-added tax,
deficiency withholding tax, deficiency documentary stamp tax. Apat yon. E, ina-admit mo na di ka
nagbayad ng doc stamp tax, inaadmit mo rin na di ka nakapagwithhold ng tax, anong sabi dito:
Kung inaassess ka at talagang mia culpa ka kasi di mo naman talaga ginawa, e babayaran mo na yon.
Pag di mo binayaran yon, [the BIR] will not give in on your request for reinvestigation.
So in this case, pag-inamin mong di mo binayaran yon, the BIR will issue you a collection letter para
bayaran mo yon. Kapag nabayaran mo yon, that’s the time the BIR will give in sa request mo for
reconsideration or reinvestigation on other matters, like yung income tax kung kino-contest mo yon.
Collection letter is with regard to those deficiency taxes the taxpayer does not contest. The collection
letter shall include the amount of deficiency tax, inclusive of applicable surcharge and interest.
Incidentally, since a protest is a very important document in tax investigation, what are the requisites of
a valid protest?
According to the regulation, a valid protest must contain an information on:
1. The name of taxpayer and his address for the immediate past three taxable years;
2. What is the nature of the tax protest (whether it is for reinvestigation or for reconsideration);
3. What is the taxable period covered
4. Assessment number (that is the control number)
5. Date of receipt of the assessment (to know if your protest is filed on time, because the reckoning of the
30-day period is from the receipt of the assessment)
6. In addition to that (the protest), the taxpayer should include an itemized statement of findings to
which the taxpayer agrees as the basis for computing the correct tax.
[TAXI NOTES] 96
For this purpose, the protest shall not be deemed validly filed unless the payment of the agreed portion of
the tax is paid. Parang condition precedent yung pagbabayad mo bago action-an yung protest mo.
7. Of course, the statement of facts and law in support of your protest.
A protest is the final manifestation of the taxpayer contesting the assessment. So it’s very important
that when you file a protest, prudence dictates that all the supporting documents should be submitted.
Why? Kasi pag ang protest na ito, denied, ang tawag mo FINAL DECISION ON A DISPUTED
ASSESSMENT, that’s already a matter that could be elevated to the CTA, because the CTA has an
exclusive appellate jurisdiction on final decisions on disputed assessments. Ngayon pag yan hini-hear na
sa CTA and all of a sudden, may nakitang evidence na hindi mo naisama, antawag don (in one case
[Amskor Devt. case] that is a FORGOTTEN EVIDENCE.
BAR: Can you present an evidence for the first time on appeal when it is not presented during the
administrative stage? ANS: NO. Evidence which was not included by the taxpayer when it was protested
cannot be accepted for the first time on appeal because that is tantamount of giving premium to
negligence. Not only that, the taxpayer is also estopped from presenting it for the first time on appeal.
ABRA VALLEY Case: NPNS institution enjoying exemption under the Constitution, but it was found out
that yung government naman yung nakalimot to present during the protest that Abra Valley is renting a
portion of their land to National Marketing Corporation, a private entity, of course that is a proprietary
objective which is not within the exemption. But the government was not able to present it. Now will it be
admitted since it is presented only for the first time on appeal?
The SC allowed it despite the fact that it is a forgotten evidence because not allowing it should amount to
substantial injustice to the government because one of the big mortal sin of a NPNS institution is when
it generates money out of proprietorship activities, like renting a property.
When you protest, you are trying to exempt yourself from tax, kasi pinoprotestahan mo kaya dapat very
concrete yung mga arguments mo. So don’t leave any room for doubt.
RMC 39-2013 (READ) it outlines the procedure, for the request for reconsideration and request for
reinvestigation must be complying with the guidelines provided by the BIR.
The procedure must be strictly followed by the taxpayer and failure to do so would render the protest
letter void and without force and effect. All protest filed by the taxpayer not found within the database
shall be deemed not officially accepted.
INCREMENTAL PENALTIES
Under the Tax Code, the failure of the taxpayer to file a return shall result to the imposition of a 25%
surcharge to compensate the government for the lost revenue because of deficiency or delinquency. In
case of false or fraudulent return, 50% surcharge is imposable.
Moreover, a deficiency interest of 20% per annum from the date prescribed for payment is imposed on
the amount of the basic tax.
There is also a compromise penalty depending upon the amount of penalty prescribed by the BIR. Nasa
table na yon already prescribed by the BIR.
DEFICIENCY IN CONTRAST WITH DELINQUENCY

Deficiency – shortage of payment
Delinquency – when there is late payment
The next course of action of the taxpayer is to elevate the final decision on the disputed assessment to
the COURT OF TAX APPEALS.
[TAXI NOTES] 97
Within what period? 30 days from the receipt of the decision. So, in other words, what is appealable to the
Court of Tax Appeals is a final decision, or in the absence of a final decision, that is inaction on the part of
the Commissioner. So the final decision could be in a letter form, or if not in a letter form, because of
inaction. That’s why if you look at RA 9282, the Court of Tax Appeals has exclusive appellate jurisdiction
– basta matters coming from the BIR. First one is final decision on the disputed assessment, and second
is inaction on the part of the Commissioner, on the protest file by the taxpayer. Again, since going up to
the Court of Tax Appeals – if the protest is not acted by the duly authorized representative of the
Commissioner after 180 days from the filing of the protest or request for reconsideration, taxpayer may
appeal to the CTA within 30 days, after the 180 days has expired, or await the final decision of the duly
authorized representative of the CIR Commissioner. So the moment a protest is filed, and the protest is
denied, the taxpayer may appeal to the CTA within 30 days, after the 180 days has expired, or if he
doesn’t want to await the final decision of the BIR. The option of the taxpayer to appeal to the Court of
Tax Appeals, or wait for the Commissioner’s decision, are mutually exclusive. Which means the resort to
an option, prohibits the application of the other. Pag binabasa niyo yung 228, and babasahin itong 18-
2013, tingnan niyo yung option na yun. Sa inaction, may 180 days rule. Pag lumampas ang 180 days,
may 30 days ka, kung gusto mong i-akyat na sa CTA. O kung ayaw mo, await for the decision of the
Commissioner, and again, this option, are mutually exclusive. Pag in-avail mo na yung isa, then you will
not avail of the other option anymore. So that brings us to the Court of Tax Appeals Act. So this is RA
9282. The CTA, by the way, is a special court. Now, at least to give you some highlights, in times past,
the Court of Tax Appeals… END
Yung assessment, assessment lang yun, inaadvise ka. Yung protest pag prinotesta mo, ibig sabihin
inaargue mo, disputed assessment yun. Pag denied ang protest mo, decision on the disputed
assessment. Kung sa administrative ito, that means exhaustion of administrative remedies, so you go to
court. Kaya pag pumunta ka sa (R.A. No.) 9282, what is the jurisdiction of the Court of Tax Appeals on
matters coming from the BIR, the Court of Tax Appeals has exclusive appellate jurisdiction on matters
involving final decisions on a disputed assessment. Dinagdag dun sa 228, pano kung hindi sumasagot
ang BIR, may nakalagay doon, if within 180 days…paano mo bibilangin yung 180 days, e di binigyan ka
ng 30 days, nagfile ka ng assessment, nagbayad ka ng protest, e meron ka pang 60 days, e magsubmit
ka ng additional evidence okay lang, kung hindi ka na magsubmit, okay lang kasi ang jurisdictional lang
doon ay iyong 30 days, yung 60 days pwedeng optional na yun kung wala kang isasubmit na idiretso
th
na…so 30 days plus 60 days is 90 days, on the 90 day then submitted for resolution na yung protest,
magbilang ka na ng 180 days, after 180 days hindi ka nakatanggap ng letter sa BIR, na sinasabing
denied, consider it as denied, ang tawag doon ay inaction. Kaya sa RA 9282, the Court of Tax Appeals
have exclusive appellate jurisdiction on matters involving inaction on the part of the Commissioner. Yun
tandaan niyo, umpisahan niyo Court of Tax Appeals Act.
Okay so alin yun presumption na ikaw ay nagfile ng process na yun, ibig sabihin nagpoprotesta ka e
dapat within 30 days akyat ka sa CTA, or after nung inaction appeal ka sa CTA, at sinasabi niyan
halimbawa, paano ba ang interpretation ng inaction na yun, e di 30 days plus 60 days, 90 days, inaction,
dumating yung 180 days, pagdating nung 180 days sabi consider it as denied at sabi you may appeal to
the Court of Tax Appeals. May decision diyan ang CTA…tapos nitong Supreme Court na ay yung RCBC
case, okay, pagdating doon ng 180 days ang option mo is definitely to consider it as denied so pagexpire
nung 180 days, magbilang ka ng 30 days pwede kang umakyat sa CTA, okay, from the time of expiration
of 180 days, consider it as inaction, okay, appeal ka, or wag kang umakyat, antayin mo yung sagot ng
BIR na dinedeny ka, okay, o di kaya baka naman baguhin ng BIR yung assessment o di kaya babaan ng
BIR yung assessment mo, intayin mo. So pwedeng gawin mo, una muna umakyat ka agad or wag kang
umakyat, intayin mo yung decision. Pero yun daw rule na yun is mutually exclusive, ibig sabihin kung
pagkadeny, pagka180 days, pagkaexpire umakyat ka na, at later sumagot ang BIR ay hindi ka na pwede
umakyat ulit, mutually exclusive yun. You get my point ha, mutually exclusive. Bakit naman ikaw e gusto
mo pang hintayin yung sagot ng BIR, baka mamaya yung protest niya ay hatiin niya yung
assessment…yun ang ano ha. E ngayon umakyat ka kagad, problema mo yun umakyat ka kaagad e,
okay.
[TAXI NOTES] 98
Kung wala ka namang ginawang return ay yun na nga make avail of best evidence obtainable rule and
this may be secured from any information, okay.
So sabi dito how is best evidence obtainable…the BIR has vast powers to obtain information from
anybody, ang magandang example dito ay yung Operation RIP, na sinabi ko sa inyo sa Estate Tax , it is
a very good example of the BIR sourcing information from dead body. Best Evidence Obtainable…ano
yung Operation RIP? In fact, this is covered by RMO, Revenue Memorandum Order. The BIR is
privileged to get information from any…information about names of persons who died from the 5 to 10
years, okay. 5 years nalang… so they get information from funeral parlors, from crematorium, insurance
companies, or from obituaries… kapag nakakita ng information doon of a person who died…since we are
talking of a person who dies, what is the exposure of a person who died for tax purposes, syempre Estate
Tax, okay, because dying is a tax event. Why is dying a tax event? Because it permitted the transmission
of property from the testator to the heirs, okay, that is a tax event. What it a tax event again? It is an event
that triggers or result in the change of ownership, so from the testator to the heirs under Section 84 of the
Tax Code ay kailangan magbabayad ka ng Estate Tax, yung administrator, okay. Maraming hindi
nagcocomply doon, so ang ginagawa ng BIR is to issue a Revenue Memorandum Order na Operation
RIP so they get information from all of these funeral parlors, crematorium, obituary, and then they look at
the records. The one that they are always looking into in actual practice are big ticket items and the big
ticket items of the person is the of course real property. If you are looking at real property, the best source
should always be the Registry of Deeds, so let’s say; I remember once, a commission, the BIR doing
Operation RIP, they were able to find a name of a person who died in Mandaluyong, so they look for data
from the Register of Deeds of Mandaluyong and they found out that this person has a property in Wack
Wack Subdivision, and during that time the zonal value of a property in Wack Wack Subdivision is 68,
000 per square meter. So how do they do an assessment, they find out if ever the administrator of this
person who died filed an estate tax return and they did not find anything, okay…so what will the BIR do?
They filed a tax evasion case against the administrator of the estate in the Court of Tax Appeals because
the amount is 1Million above, okay. So what could you gather from the type of style by the BIR, that is
making assessment on the best evidence obtainable. Kasi under Section 5, the best evidence obtainable
can be sourced from anybody whether it is the government or whether it is a private person. Kung private
person naman, syempre madali yan, lessor-lessee, inaassess mo yung lessor e di kukuha lang yung BIR
ng information sa lessee. How do they get information from the lessee? Una muna sinusulatan lang
naman muna yan. Pag despite the letter, sabi niyan… we would want you to submit to us this information
from this transaction because the records of the lessor shows that you paid this amount… this
payment…so much, can you please give us the records of this. Pag hindi ka nagcomply diyan, tatawag
ang BIR, then they issue you a subpoena duces tecum, okay. So that will force you to submit the
document unless you will be guilty of contempt, okay. Sometimes ang BIR naman, since I was connected
with the bank for many years, what they do when they examine the bank is to get financial statements
and records from the BSP because, you know, banks aside from filing tax returns to the BIR is also
mandated by the Manual of Regulations of the Bangko Sentral ng Pilipinas to submit financial reports to
the BSP and this time the examiner is trying to validate the bad debts, deductions of the bank and to
validate its authenticity and amount, the BIR gets information from the financial statements submitted to
the BSP if the amount jives, because bad debts records are also required by the Manual Regulations, so
on this basis the BIR can make an assessment, on the very basis of best evidence obtainable. So you get
how it works, ha? What BIR does in securing best evidence, well, that is usually through subpoena duces
tecum, of course they write a letter, because the subpoena duces tecum is already…ultimatum na yun no.
Minsan tumatawag lang muna yan, pag di tumatawag they wish our compliance through verbal request to
submit this document, sometimes subpoena duces tecum.
Court ruling and best evidence, ito, this Supreme Court decision, you will have this anyway naman,
binigay ko na ito sa Bar Operations, anyway, para may advance knowledge na kayo, this is the case of
Commissioner v. Hantex Trading Co. Inc., this is March 31. The Supreme Court held that the best
evidence includes the corporate and accounting records of the taxpayer who is the subject of the
assessment, okay, as well as all the accounting records that has something to do with the gross profit and
net sales…so everything, no. They can ask for the corporate and accounting records when looking at
[TAXI NOTES] 99
best evidence. These include all information regarding personal transaction from which the taxpayer
received any income. So you see how powerful they can get, the best evidence obtainable are those that
are accessible, any, whatever it is, corporate and accounting records, even personal transaction. It says
the law grants the BIR access to all relevant records; it places no limit on the type of medium by which the
record is subject to, ano. Because the purpose of the law is to enable the BIR to get all necessary
information in whatever form. Now, in this era of information technology, no valid reason to immunize
companies with computer-based, record-keeping capabilities from BIR scrutiny. So right now, with the IT
kahit na yun, pwedeng i-access ng BIR. That’s why the BIR always say, that with the IT persons… they
spend so much or so in getting people who are expert with IT. Para makakapantay sila sa corporations na
high-tech also.
Revenue Memorandum Circular 23-2000, stated in the absence of proof of any irregularities in the
performance of an official duty, assessment will not be made, okay, so in other words, in the absence of
any proof…because pag kumuha ka ng best evidence obtainable…ito magandang question sa Bar, yun
daw, one of the BIR Examiners ay nagpunta doon sa controller, usually utility controller of a corporation,
consists the head of everything that has got to do with accounting and finance, so the BIR Supervisor
examining the records of a corporation, while examining the records, he requested the controller if he can
place a call to the office, habang tumatawag siya sa telepono nakakita siya sa mesa nung controller ng
mga records, these can be source of assessment, medyo mausyoso din itong Examiner na ito no…is that
considered best evidence obtainable? Ang tingin ko ‘not’ because that is…yan magandang question sa
Bar ano…pwede mong sabihin na that is intrusion into the privacy of a person and therefore kahit na best
evidence obtainable…kapagkaganyan ang mga questions sa Bar, yan ang mga…pagalingan na kayong
magexplain. Kasi tumatawag lang sa telepeno, nakakita sa record, itong document na ito pwedeng
maging source ng assessment, yun ba ay best evidence obtainable, baka sabihin mo, first school of
thought, hindi naman dapat best evidence obtainable yun kasi nakuha mo lang yan, nagtelepono ka
lang. Second school of thought, best evidence obtainable, because taxes are the lifeblood of the
government…well I believe, I am more agreeable to the first school of thought. Baka sabihin mo, Mr.
Examiner, if you want the second school of thought I’ll also give you, huwag mong sabihing ganun ha.
Pero magandang question yun ha, pupunta yung supervisor, nakiusap tumawag doon sa telepono,
nakakita ng…office ng controller iyon, nandoon ang mga dokumento ng opisina, ang tagal niya sa
telepono, umiikot yung mata niya, yung kausap nga niya hindi na siya nakikinig, tinitignan na niya lang
yung dokumento, is that best evidence obtainable? Bahala na kayong magpagalingan ng pagpipilosopo
yun ano.
Okay, anyway, may hearsay evidence be considered best evidence? Magaganda, ano. Nabigay ko na to
sa Bar Operations, gusto kong idiscuss sa inyo. So the Supreme Court ruled in this case, administrative
agencies like the BIR are not bound by the technical rules of evidence in judicial proceedings therefore
the best evidence may consist of hearsay evidence which is oral or written testimony about an out-of-
court statement attributed to someone other than the testifying person. Okay, is that best evidence? Ay
depende na because anyway, this is in keeping with the… in consonance with the presumption that the
government is always presumed correct, kaya tatandaan niyo, yung best evidence obtainable, ang
iingatan mo doon is for you to sleep on your rights kasi kung ang assessment is based on best evidence
obtainable at nagaapply yung presumption that the government is always presumed correct, and you did
not correct that best evidence obtainable, tapos ka na. Kaya ang rule dito, when you say the
Commissioner is always presumed correct, the burden of proof is on the taxpayer to disprove the
presumption. Therefore, do not sleep on your rights. Kaya kung inaassess ka…parang yung transfer in
contemplation of death, okay, meron doon inexamine kasi nagfile ng estate tax return, the BIR was able
to source information of the transaction, a sale that was made prior to the death, very very close to the
death of the person, you know very well that under the Estate Tax Law under Section 85, one of the…part
of the gross estate is, aside from decedent’s interest is transfer in contemplation of death. What is a
transfer in contemplation of death? Actually this is a transfer where the motivating factor is the fact of an
imminent death … kasi yung tatlo doon, meron namang view doon na yung revocable transfer, transfer
under the general power of appointment at saka yung transfer in contemplation of death, is under the
interpretation naman talaga na hindi because of death, it is a transfer na kaya kasama ng gross estate is
because the owner does not want to relinquish control of the property. Kaya revocable transfer, ayaw
[TAXI NOTES] 100

niyang irelinquish ang control over the property, siya pa rin yun. Kahit anong gawin niyang dokumento
transferring the property, may indication that he does not want to relinquish control, siya pa rin yun. Sa
transfer in contemplation of death, ang parating presumption when you transfer very closely to the death,
especially if the person is sick , that could be a transfer in contemplation of death. So may nakita ang BIR,
because of the TIN Number, they found out a transfer and a sale, prior to the death of the testator and
they try to investigate that, and they look at that, and they are trying to assess it as a transfer in
contemplation of death, they take it back to the estate, para magassess ng deficiency estate tax. The
administrator should prove that that sale was made for a bona fide sale and the amount is bona fide
consideration. Okay, so what did you learn from that? If the administrator sleeps on his right, he did not
do anything to dispute that presumption, tutuluyan siya ng BIR ng deficiency estate tax. So in all of these
cases on best evidence, ang basis ng BIR dito…because of presumption of correctness. Kaya kung ikaw
ang taxpayer, never sleep on your rights and dispute that within the period as soon as possible so that
the presumption do not become conclusive.
This is a…decided case on best evidence no…records and data from the SEC, Bangko Sentral ng
Pilipinas, Bureau of Customs…the law allows the BIR to access all relevant materials, records, and data
relevant to the person. CTA rule that the taxpayer’s audited financial statement, constitute the data, may
be relevant or material in issuing an assessment against the taxpayer. So in other words, kung hindi
nagfile ng return ang taxpayer, nagpakita ang pangalan niya doon sa audited financial statement noong
counterparty niya, that could be the basis in the making of an assessment against him. So the question
still remains, is it possible for a person to be assessed by the BIR even if he did not file a return? Yes, on
the basis of best evidence obtainable.
Okay, so, Memorandum Circular 34-2014, bago ito, panahon na ni Kim Henares ito. This circular is
issued to clarify the rule on whether or not an assessment resulting from jeopardy assessment. Maganda
ito ano. So what is a jeopardy assessment? Well, jeopardy assessment, para at least madiscuss na din
natin, when you file a return there is the prescriptive period, okay, Section 203, 3 years is the period
within which a return is subject to examination, so when you file your return on April 15, 2013, the
prescriptive period is 3 years applying Section 203 on the assumption that the return is not defective ha,
kasi pag return mo defective baka maapply yung jurisprudence sa Yusay Gonzales ha, if your return is
defective it is as if you did not file a return, so if you did not file a return what applies is Section 222,
prescriptive period is 10 years. So kaya ang basic rule para makaavail ka noong general prescriptive
period o tinatawag na ordinary prescriptive period na 3 years, dapat ang return mo ay hindi defective. Ang
defective doon hindi kagaya nung pay-as lang na false return or fraudulent return, definitely ang return
mo fraudulent siguradong defective yun, pero pag it is a false return, does it mean that it is really
something that is false under Section 222? No, because there is falsity that is due to honest mistake.
Kaya nga sa kaso ni Aznar dinidistinguish ang false from fraudulent return. Are all fraudulent returns
false? Yes. But are all false returns fraudulent? No, because there is a rule whereby a false return is false
because of an honest mistake, Okay, yung sa kaso ni Aznar, honest mistake, e kung honest mistake yun
walang fraud yun, so anong nagaapply na prescriptive period, e di yung Section 203 pa rin. Okay, anong
nakalagay sa 203? When you file your return, the counting of the 3 years prescriptive period is the due
date or the actual filing whichever is later. Kaya kung ang deadline is April 15, 2013 and prescriptive
period nun is upto April 15, 2016, so 3 years. Kung nagfile ka ng January 2, 2013 kailan ang prescriptive
period? April 15, 2016 pa rin kasi ang counting is from due date. Kung nagfile ka ng later, August 15,
2013, kalian ang dedline, e di August 2016. Ganun ang can ounting ha, okay. Ngayon, itong return mo,
na finile mo ng April 15, 2013 na mageexpire ng April 15, 2016, yan ang open years, ay dapat
maissuehan ng assessment yun bago dumating ang period na yun.
Okay, so ano yung jeopardy assessment? Ang jeopardy assessment is a situation where the BIR
Examiner runs out of time at ang nangyari, halimbawa, ang deadline na maissue ang final assessment is
April 15, 2016, bago mo makumpleto yung assessment process, it may take about 4 months kasi
magpapadala ka pa ng notice, aantayin mo yung 15 days, magaantay ka ng reply, aantayin mo yung
protest…kailangan mo mga 3 to 4 months. Kung napuna ng BIR ang natitira nalang is 1 month nalang, it
is already March of 2016, isang buwang nalang bago mag April 15, 2016, yun ang deadline. So ang
problema ngayon, ang tanong, what should the examiner do? Makakalusot ang examiner kung siya ay
[TAXI NOTES] 101

makikiusap sa taxpayer na magexecute siya ng waiver, kasi under Section 222, the prescriptive period
may not run if there is an agreement between the taxpayer and the commissioner to extend the
prescriptive period. Ang tawag mo doon ay waiver of prescriptive period. May mga guidelines tayo kung
ano ang rules of waiver, of course, you specify the dates, and the date na dapat nagexpire, it must be
done before the expiry date, it must be approve by the Commisioner… Okay, let’s say…kung ang
taxpayer ay pumirma ng waiver, okay yun, kahit lumampas kasi kung ang expiration is April 15, 2016 at
pumayag ang taxpayer iextend hanggang December 31, 2016, okay yun. Why? Because the taxpayer
agreed to the extension of the prescriptive period. Anong legal basis doon? Section 222 and 223. Okay,
pag hindi pumayag ang taxpayer, ang examiner mapipilitan na gawin in 1 month what he should have
done for 3 months. If eventually nakagawa rin siya ng assessment, I don’t know how he did it, probably
basing only on formula, hindi na niya natignan yung ibang records, and then he come out with an
assessment, ang tawag mo doon is a jeopardy assessment. It is an assessment that is being done by the
BIR, it is not backed up by full of it but only for the purposes of beating the prescriptive period. Kaya ang
sinasabi dito sa Memorandum Circular 34-2014, this circular clarifies the rule on whether or not an
assessment resulting from jeopardy assessment or which was based on best evidence obtainable could
be considered as doubtful assessment under Section 204 of the Tax Code? Sabi doon sa circular, no,
okay, no, the answer is no. Scrutiny of the surrounding circumstances that led to the assessment should
be thoroughly evaluated…that cannot be done in case of a jeopardy assessment because…for want of
material time, because you may not do in 1 month what you have been doing for 3 or 4 months. Ngayon,
partner question, if a taxpayer is subject of a jeopardy assessment and you are the counsel of the
taxpayer, what should you advice your taxpayer? Sabihin mo, I can advise my taxpayer to invoke the right
of the commissioner under Section 204 of the Tax Code, which is to abate the assessment, abatement.
What do you mean by abate? Cancel. And what is one of the grounds for cancellation of the assessment?
When the assessment is unjust, jeopardy assessment is an unjust assessment.
[TAXI NOTES] 102

REAL PROPERTY TAX (by Atty. Anthony Dy)
Here for real property taxation, you need to, if you can memorize Section 198. Fundamental principles of
real property taxation. (a) Real property shall be appraised at its current and fair market value. (b) Real
property shall also be classified for assessment purposes on the basis of actual use. Here, you need to
be very technical. Appraised current fair market value, classified based on actual use. You cannot
interchange the words without losing the meaning. Letter (c) Real property shall be assessed on the basis
of a uniform classification, self-explanatory. Letter (d) The appraisal, assessment, levy and collection shall
not be let to any private person. As you will recall under the local taxation, it is only collection of local
taxation that cannot be let to a private person. Here, from the first step down to the last step, it cannot be
let to a private person, but if you ask me on the rationale, hindi ko ma-gets eh. Baka naman, nagkamali
lang sila but I can see, I can see the rationale for imposing the same rule for both taxes. But I can’t see
the rationale why under the real property taxation, the prohibition extends from the first stage down to the
last stage while on the other hand from the local taxation it is only the last step that cannot be delegated.
But as it is, it is the current law that we have to be very, we have just to be aware of the distinction. Letter
(e) The appraisal and assessment shall be equitable. If you can see from here, the most important is only
(a), (b), and somehow letter (d). All others, they are part of the Constitution anyway.
Important definition. Actual use. This is the most important principle for real property taxation. It refers to
the purpose for which the property is principally or predominantly utilized by the person in possession
thereof. So that is the meaning of actual use, principal use. Assessed value is the fair market value of the
real property multiplied by the assessment level. What is the formula for real property taxes? Baka
matanong kayo sa bar. Formula for real property taxes, any volunteer? I’ll give 1,000. Real property tax is
fair market value times assessment level equals assessed value. Assessed value times real property tax
rate, real property taxes. You have to be concerned because one way or the other sometimes in the
future you will own real property. So fair market value in the tax declaration times assessment level 10%,
20%, 30% equals assessed value times real property tax rate then that is your amelyar. So anyone here
who have seen an actual tax declaration? Dun mo makikita yan eh.
So there are many various classifications of real property. There are 7: residential, commercial, industrial,
timber, special. So for purposes of the bar exam, you might want to memorize or know by heart these 3
things lang, out of the 7. What is commercial, what is industrial, what is residential? For commercial, land
devoted principally for the object of profit and is not classified as agricultural, eto medyo pilosopo na eh. It
is not devoted to principally to industrial activity and not falling under the other 6 types. Residential land is
land principally devoted to habitation. In practice there is somehow a confusion about warehouses. For
assessors, if they see a warehouse, their default is industrial yan. You might want to understand where
they’re coming from. If it is industrial, it has the highest classification there. Hence, higher real property
taxes. So if you would have clients in the future who would own warehouses, you have to make a
distinction, there are warehouses that should be classified as commercial and there are warehouses that
should be classified as industrial. So let’s say for example storage lang of goods, in-out lang in-out. How
can that be industrial? That’s only commercial, but let’s say there is a manufacturing activity or some
industrial activity inside that warehouse then that would probably be an industrial house. So industrial _
having a warehouse and industrial classification. For improvement that is self-explanatory. I just want to
call your attention on the concept of machinery. Because there are certain machineries under the Local
Government Code that could be considered taxable. There are also machineries that are not considered
as taxable for amelyar purposes. Here, you have to, we have to read it now. When we talk about real
property taxes on machineries, the concept of movable, immovable under the Civil Code, we will have to
throw that away. Hindi natin kailangan yun for real property tax purposes. Baka maguluhan kayo eh kasi
sa second Sunday, Civil Law sa umaga, taxation sa hapon. So pag nag-lunch na kayo, kalimutan niyo na
yung movable, immovable. Okay? For machinery to be taxable, it should fall under this one, it embraces
daw machineries, equipment, mechanical contrivances, instruments, appliances or apparatus which may
or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities
[TAXI NOTES] 103

for production, the installations and appurtenant service facilities, those which are mobile, self-powered or
self-propelled and those not permanently attached to the real property which are actually, eto yung
importante eh, which are actually, directly and exclusively used to meet the needs of a particular industry,
business or activity and which by their very nature and purpose are designed for, or necessary to its
manufacturing, mining, logging, commercial, industrial, or dapat necessary siya. Necessary is different
from incidental. So we can, we can go to certain examples later. So the most important thing right now is
to determine only machineries that falls under this definition can be subjected to real property taxes. Any
machinery that does not fall under this strict definition is not taxable.
Under Section 217 Real property shall be classified, valued and assessed on the basis of actual use
regardless of where located, whoever owns it, and whoever uses it. Remember actual use. Etong ano na
‘to whoever owns it and whoever uses it eh, actual use pa rin.
Imposing authorities. Provinces, cities, and municipalities within Metro Manila. Are, is there still a
municipality within Metro Manila? Pateros. I think Pateros is the last one standing. So province they can
impose real property tax not exceeding 1% of the assessed value. Remember the real property tax is not
based on the fair market value ah, it is based on the assessed value. Assessed value is the product of the
fair market value times classification level. That is the assessed value. The city or municipality in Metro
Manila can impose the tax not exceeding 2% of the assessed value. So as you can see, the maximum for
province is lesser while the city or the municipality in Metro Manila in this case is only Pateros, should not
exceed 2% of the assessed value.
Assessment level. As I mentioned earlier, there are 7, 1, 2, 3, 4, 5, 6, 7. There are 7. Special class of
properties. I cannot forget this because in our time it was asked as an objective type of question so all of
these are special properties. When you say special, they are not exempt ah. They are just subjected to a
preferential classification level which is I think 10%. Special is not exempt, it is taxable but has a special
classification level. So those are, all lands, buildings and other improvements thereon actually, directly
and exclusively used for hospitals, cultural or scientific purposes, and those owned by, those owned and
used by local water districts, and GOCCs rendering essential public services in the supply and distribution
of water and generation blah blah blah. For, for machineries of this entity, it is exempt. As you can see
later on. Exempt properties as you can see here. Letter (c) all machineries that are used by local water
districts and transmission of power, they are exempt. Machineries and equipment but for lands and
buildings, they are special. For letter (a) Real property owned by the Republic, or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person. For a real property owned by the Republic to be exempt, it is not necessary that they own
them, they must be able to actually use it. Based on the concept of actual use as well. If it is leased to a
private person then it ceases, it ceases to become an exempt property, based also on the term actual
use. Letter (b) is just a Constitutional implementation of the exemption on charitable institutions etc. Letter
(d) Real property owned by duly registered cooperatives under R.A. 6938. You cannot just state
cooperatives without mentioning Republic Act 6938. Because there are other cooperatives outside of this
one. So if you, if you keep this as an exemption then you just stopped there, then you have a half credit.
(e) Machinery and equipment used for pollution control and environmental protection are likewise exempt.
So there are only 5 exemption. For local taxation, under the Local Government Code, local government
units can provide for exemptions not stated in the code itself. But for real property taxes, it is only found
under Section 234. An ordinance cannot enlarge the list. So yung pagkakaiba, for local taxation, they be
can added, exemptions can be added. But for real property taxes, it cannot be added. It’s only there,
under Section 234.
Property declared for the first time. It is very important. It is also, it is a very usual problem among certain
businessmen. They would erect a building in hope that it won’t be discovered by the city assessor’s office
but with the advancement in technology of Google Earth, they can now discover. Before, if you cannot, if
you don’t let them enter, they cannot see all your warehouses. Right now with the use of Google Earth,
they can also estimate, the estimated area. So that is one downside of technology to unscrupulous
[TAXI NOTES] 104
landowners. Under Section 222, real property declared for the first time shall be assessed for taxes for
the period during which it should have been liable but in no case of more than 10 years prior to the date
of the initial assessment. Taxes should be based on the applicable schedule of values in force during the
corresponding period. So to be fair with naman, if you can go back 10 years, we need to use that values
existing during those periods. Hindi naman, it would be unjust to use the current values. Under this
provision, if such taxes are paid on or before the end of the quarter following the date of notice of
assessment, no interest for delinquency shall be imposed; otherwise, such taxes shall be subject to an
interest rate of 2% per month or a fraction thereof until such taxes are fully paid. So under this provision, if
you’re assessed 10 years back, no interest. How about surcharge? There is a surcharge of 25% right? If
you apply strictly this provision, you can be imposed surcharge because the provision itself it only gives
you the right not to pay interest if you pay within the deadline in this provision. If you pay beyond the
deadline, then you can be subjected to an interest rate of 2% per month and a maximum of 36 months so
a total of 72%. One problem in the implementation of this provision is the counting of 10 years. If a
warehouse was undeclared and discovered this year, 2017, is 2017 included in the 10 years or 2017 plus
10 years back? Even assessors’ office are confused with the implementation of this one. If you can read it
very carefully, in no case of more than 10 years prior to the date of initial assessment. It means this year
plus 10 years back. So technically, you would end up paying 11 years. Kasi 10 years prior to the date of
initial assessment which is this year. So technically it’s this year, plus 10 years back.
There are special levies called the Special Education Fund it’s 1%. The exception from real property tax
extends to Special Educational Fund. If I ask my students what’s the basis, sabi lang nila memory aid. But
under the Code, the basis is there. Ang sabi ng batas kasi, ayan oh. Province or blah blah, may levy and
collect in addition to the basic real property tax. So this is just incidental. If you are exempt from the basic
then you are exempt from the incidental. That is the basis. If you answer in the bar, exemption from real
property tax also extends to SEF that is just your legal conclusion. This is your legal basis. To get the full
credit, you need to answer correctly and provide the basis. Providing the right answer without basis, you
would have to expect a partial credit only.
This is the idle land tax. So you just have to, you just have to take note of the different thresholds before a
land can be covered by the idle land tax. For agricultural land, the threshold is at least 1 hectare in area,
50% of which remains uncultivated or unimproved. For lands other than agricultural, the area must be at
least 1,000 square meters, one half of which remained uncultivated or unimproved. For subdivision lots,
regardless of area, it is theoretically subject to idle land tax. Possible exemptions on idle land tax, you
might be given a scenario, a hypothetical scenario in the bar that would provide for one of these
exceptions. So you need to be aware of these exceptions so that you can answer correctly. Is there force
majeure, is there civil disturbance, natural calamity or any other cause or circumstances which physically
or legally prevent the improvement? Just in the case of Marawi di ba? Would Marawi fall under these
exceptions, saan diyan? Marawi. Siguro sa civil disturbance naman yan at the very least. Or at the very
least dun sa catch-all. Because theoretically how can you improve your land? Eh di ba nakita naman niyo
naman yung structures sa TV di ba? Kulang na lang sunog di ba? So I’m really saddened on what
happened to Marawi because.
There’s also a special levy on special assessment. So we just have to know the different limitations. The
tax should not exceed 60% of the actual cost of the projects and then the annual installment shall not be
less than 5 but not more than 10 years. So TCT cover, the local government unit cannot recover the
entire 100% from you. They can only recover up to 60%.
If you have an issue with a certain assessment, you have 60 days to appeal to the Local Board of
Assessment Appeals. I think your memory aid would provide a better matrix on this one. The Local Board
should decide your appeal not more than 120 days from appeal from the date of receipt of such appeal.
The owner or the person having legal interest is not satisfied with the decision of the LBAA may within 30
days after receiving the decision of said board, appeal to Central Board of Assessment Appeals. The
[TAXI NOTES] 105

decision of the Central Board shall be final and executory but of course subject to the CA’s jurisdiction.
(long pause) Sorry for that.
Effect of appeal with disputed assessment. Please take note that appeal on assessments of real property
shall in no case suspend the collection of the corresponding realty taxes. Subject of course to subsequent
adjustments later on, if you’re able to win your appeal, so it does not suspend. For local tax, if you want to
protest, no payment under protest. For real property taxes, you have to pay under protest. Malapit na
tayo.
Accrual of tax. Section 246. The real property tax of any year shall accrue on the first day of January and
from that date it shall constitute a lien on the property. What is the impact of this date of accrual of tax? If
on January 1, the property is exempt, then it continues to be exempt until the end of the year, even
though it is transferred to another taxable, to a taxable person. That is the impact of that one. Because
the real property tax for example for this year accrued January 1. So if you are exempt January 1, then
even if you have transferred second quarter, third quarter, that property is still exempt. So the taxable
person would have to start paying taxes only January 1, 2018, the following year. Because of this date of
accrual of tax concept.
Discount. If the basic real property tax and additional tax are paid in advance, the sanggunian concerned
may grant a discount not exceeding 20% of the annual tax due. If you can, who are from Valenzuela
here? Remember, the granting of a discount is not a matter of right. It is just optional on the part of the
LGU unit concerned. Valenzuela is an example of a locality wherein they don’t grant you any discount,
regardless whether you pay November, December. Their thinking is, eh babayaran mo din naman eh, so
sayang why exempt? Some localities kasi if you pay December of this year, you can get 20% next year.
Sometimes naman if you pay January of next year, you can get 10%. So it is just optional. Local
Government Code imposes a maximum discount of 20% only. So an ordinance cannot give a 25%
discount. That is the maximum. Interest penalty. The same 2% and then should not exceed 36 months.
Payment under protest as we have discussed earlier. No protest shall be entertained unless a taxpayer
first pays the tax. It must, the words “paid under protest” must be annotated on the tax receipts. The
protest in writing must be filed within 30 days from payment, who must be decided within 60 days upon
receipt thereof. In actual practice, some localities would indicate the payment under protest in the O.R.
itself before they print. Some localities, they would print the O.R. and then they would handwrite there the
words “payment under protest.” For me, I always go for printing before printing ay, type it before printing.
Because in that case, there is no confusion as to whether it was written there but for handwritten words of
“paid under protest” sometimes they won’t initial it pero okay yan, mamaya tignan mo. Because
sometimes if you don’t put the words “payment under protest” there, technically you have lost your right.
The rationale for indicating in the receipt “payment under protest” is so that the LGU can reserve that
payment under protest so that they won’t have to spend it. So it is, it constitutes a special fund, unlike you
paid it without indicating “payment under protest,” they won’t include that as part of the general fund. So
sometimes, pag talagang ayaw nilang i-type, then I would ask them to write it by long hand and then I will
ask them to write their name and initial it, for our protection. Pero the tax portion paid under protest shall
be held in trust by the treasurer concerned. So they cannot spend it, that’s why in most case naman, they
don’t want you to pay under protest. They won’t volunteer ah, sabihin lang nila hindi basta bayaran mo na
lang tapos kausapin mo si Mayor. They won’t advise you na ah kailangan mong mag-protest in writing,
kailangan mong ganito. They won’t volunteer. So be very careful. Sabi lang dito, in the event that the
protest is finally decided, the amount of the tax protested should be refunded to the protestant, or applied
as tax credit against his existing or future tax liability. In my 12 years of practice, I haven’t seen an actual
tax refund from the city government. Normally, they would just issue you a tax credit which you can use
on a year to year basis until maubos. Kung maubos mo pa. So but in theory , they can do 2 things, they
can grant you a refund or tax credit. But 99 times out of 100, hindi nga baka 100 times, they will grant you
a tax credit siguro.
[TAXI NOTES] 106

I think we’re almost done. Can a mortgagee redeem real properties sold in auction? Yes. Kasi sabi diyan
under Section 261, any owner or persons having legal interest, the phrase person having legal interest
would obviously cover a mortgagee because if the property is bought by another third party, then they
would practically, they might, their interest would be impaired but not totally lost if it is annotated.
Prescriptive period to collect. As we have mentioned earlier, for a local tax there is a period to assess
right? 5 or 10. There’s also a period to collect local tax which is 5 years. For real property taxation, there
is no period to assess, there’s only period to collect. 5 years as a general rule, exception is the property
first declared which we have discussed earlier 10 years. So under Section 270, the basic real property tax
there or other tax shall be collected in 5 years from the date they become due. So it accrues January 1,
so local government units has 5 years from January 1 to collect it, whether administratively or judicially. In
case of fraud or intent to evade payment of tax, within 10 years from discovery. Like, that is just a
reiteration of the previous provision.
Again, if there are instances wherein the periods are suspended, these are I think the same, the same
instances under local taxation, the same one. Personal property under civil law may be considered as
real property for purposes of real property tax where properties are essential to the conduct of the
business. This is what I was saying earlier, forget about movables and immovables under Civil Code
when we talk about machineries for taxable purposes. So here, it can be a personal property under the
civil law but it can be considered as taxable real property for purposes of RPT, where the properties are
essential to the conduct of the business. Of course, if machineries are unused, not subject to RPT. Again,
on the very important principle of actual use. If it’s not used, then there’s no ground for paying real
property tax. But in practice, it is a matter of defense. Because sasabihin sayo ng assessor, pano naming
malalaman yan na hindi mo ginagamit? At least you have a CCTV for the last 5 years. But our CCTVs are
only good for 20 days I think. That one, not important.
Oh eto, we’re now down to the last slides. So it’s just 5:45, we can have a quiz later. So facts: The
generator set of X company are being assessed with real property tax by the city assessor of CDO. The
city assessor cites the manual on real property appraisal and assessment operations which allegedly use
a generator as an example to illustrate a formula for appraising and assessing machinery subject to RPT.
So the subject machinery is generator set and the basis is a manual. The issue was are the generator
sets of X company subject to RPT? Sagot? O mag-quiz na lang tayo? Sagot is? No, for a movable
machinery to be considered as real property subject to RPT, they should qualify as an essential and
principal element of an industry, work or activity, without which, industry, work or activity cannot function.
Generator sets are not essential but simply incidental elements to the operation of an industry, work or
activity and are being used only in cases of power interruptions just like in the case of X company. Hence,
the same do not fall within the purview of the term machinery. So it might be convenient but not essential.
So that you won’t be confused, without this machinery ba can they function? Or convenient lang? Parang
aircon sa bangko, they can function without aircons. But of course, pupunta ka ba sa bangko na walang
aircon? We’re talking about theoretical, is it essential to the banking business? Like for example, last
month, one of my bank clients came to me for advice, sabi niya Anthony yung city of ganyan inimpose-an
ako ng real property tax on bill-counting machines, binibilang ang pera tsaka sa vault daw. Yung sa vault
baka pwede ko pang ma-argue na necessary, baka. Pero yung bill-counting machine, hindi ba bago nila i-
bill-count binibilang nila mano-mano? So it’s really not necessary, it’s just convenient di ba? I haven’t
seen a teller na hindi niya binilang harap-harapan. Binibilang ng isa, bibilangin sa bill-tellering machine
just to double check. So right now they have an assessment, all of their branches were assessed by a
certain locality on real property taxes on machinery. So I told them can you make me a summary of all the
machineries inside the bank? So that would be the only issue there. Whether all those machinery would
fall under the definition? By the way, o good luck na. So as promised, we have, I have finished the 3
topics ahead of time. So if you have any questions or clarifications, feel free to write me a letter with the
dean’s office. Your bar exam is in November right? So you still have 1 month and 5 days to read the
codals. I would really advise you to read all codals, Tariff and Customs Code, Local Government and Tax
[TAXI NOTES] 107

Code. Do not go to the tax bar exam without reading at least once these codals because there are a lot of
questions that are answerable by codals eh, but don’t read it during night. Alam kong makakatulog kayo
niyan, you have to read it first thing in the morning while your senses are still there. So hopefully you
learned a thing or 2 from this lecture. I wish you luck. Hopefully next year, I will call you panyeros and
panyeras. Thank you!
[TAXI NOTES] 108

LOCAL TAXATION (by Atty. Anthony Dy)
Part of bar exams. _ All barristers have a difficult time with taxation. Admittedly it’s a very technical
subject. You might expect in taking the exams very very _. Take at least of the last year’s past exam. Out
of those schools with at least 100 barristers, no one garnered at least 70% passing rate. No one, for
schools with at least 100 barristers. So I think the highest was 67, so you’re my _ duty if kayo nahirapan,
yung iba din. Added too much pressure to yourself might be a problem. So don’t add pressure to yourself.
So another reminder would be, if you have not read at least once the Local Government Code and the
TCCP, maybe you still have time until the bar exam. I was surprised during my time when I took the bar
exam way back 2002. I had classmates who haven’t read, actually read the Local Government Code and
the Tariff and Customs Code. Especially for Tariff and Customs Law, it has been amended last year by
the CMTA Law. So if you have no new codal for that, probably you just google and then download. You
have to read at least once before the bar exam. What else? Aside from lifeblood, you might as well, we’d
be discussing certain important codal provisions so that aside from lifeblood you can also interject some
other legal basis.
So let’s start with local taxation. So it is covered by Sections 128 to 196 of the Local Government Code.
The basis of the local government unit’s taxing power is found under the Constitution. It is found under
Article X, Section 5 which provides that each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, charges, subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges
shall accrue exclusively to the local governments. If you can memorize this verbatim, much better so that
if you encounter a hypothetical scenario on the validity of an ordinance, you can cite this as provision, as
a basis. In accordance with the Constitutional provision as follows, the ordinance is within the authority of
the LGUs to enact. In this very short paragraph, you can see there the sufficient standard imposed by the
framers of the Constitution which is, which is the phrase basic policy of local autonomy. That is the
sufficient standard. You might encounter a hypothetical scenario where there are particular tax ordinance
enacted by a certain LGU is valid, if you encounter that particular hypothetical, the question could be very
general, is it valid? If you encounter a specific question, is it in accordance with the fundamental
principles of local government taxation, is it, okay yun. But my guess would be, it would be a general
question. So you must have these pointers in your mind before you answer the ordinance is valid or
invalid, you need to have mastered all these 5 principles. The first one would be, did it comply with
Constitutional inherent limitations, you must have mastered this during your Constitutional bar review,
compliance with fundamental principles of local taxation found in Section 130. Is it not among the
common limitations on taxing power found under Section 133, is it within the specific powers of the LGU
concerned, and lastly, if the power in the ordinance is not specified under the Local Government Code,
did it comply with the residual taxing power of the LGU under Section 186? If the answers to all these
questions is yes, it complied then the ordinance must be valid. So when you encounter a question, you
must think of these 5 guidelines. Parang structural way of analyzing the ordinance.
The first one is self-explanatory, I don’t dig too much on the first guideline. On the second guideline, let’s
just read Section 130 for those who haven’t encountered this provision. Most of these provisions or
guidelines are already found in the Constitution. I highlighted in red, those, those, those matters that are
specific to the Local Government Code. The first criteria under Section 130 is, (a) taxation shall be
uniform in each local government unit. It is found under the Constitution as well. Letter (b) taxes, fees,
and other charges, and other impositions shall: (1) be equitable and based as far as practicable on the
taxpayer’s ability to pay, also found in the Constitution. (2) must be levied and collected only for public
purposes, impliedly mandated under the Constitution. Number (3) it should not be unjust, excessive,
oppressive, or confiscatory. Number (4) should not be contrary to law, public policy, national economic
policy, or in restraint of trade. Letter (c) the collection of local taxes, fees, charges and other impositions
shall in no case be let to any private person. As you can see under letter (c), it is only the collection that
[TAXI NOTES] 109
cannot be entrusted to any individual entity. So if you think, the assessment power under local taxation
can be effectively entrusted to a private individual. The same cannot be said to real property taxation
wherein each step from appraisal, assessment, collection cannot be entrusted to private entities. That’s
the main difference between fundamental principles of local taxation and real property, letter (c). That’s
one, it is not a claiming words. There was really an express mandate from the framers of the LGC to
make that distinction. Letter (d) the revenue collected pursuant to the provisions of this Code shall inure
solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee,
charge or other imposition unless otherwise specifically provided herein. Under the Constitutional
provision I earlier recited there was no exception there. If a local government unit collects a tax, in general
it should be exclusively to that local government unit. It is only under the Local Government Code wherein
the law provided for certain exceptions which we would discuss some of them later on. (e) each local
government unit shall, as far as practicable, evolve a progressive system of taxation which is also found
in the Constitution so no need to discuss it further. The third guideline in the validity of an ordinance is, is
it not among the common limitations of taxing powers under Section 133? So here we have to actually
read all of them. So that if you encounter hypothetical scenario imposing one of these common limitations
then we would have a better chance of providing the correct answer. (a) Local government units can’t
impose income tax as a general rule. Only except on, in banks and other financial institutions. W hat
entities can fall under the term other financial institutions? You have stock brokers, dealers in securities,
pawnshops, lending investors, money exchangers. Those can fall under the phrase other financial
institutions. (b) LGUS cannot impose documentary stamp tax absolutely. (c) Taxes on estates,
inheritance, gifts, legacies, and other acquisitions mortis causa, they can generally be imposed. They
cannot generally be imposed except as otherwise provided herein. That phrase except as otherwise
provided herein refers to local tax imposable by provinces. Letter (d) LGUs cannot also impose custom
duties, registration fees of vessels and wharfage on wharves, tonnage dues, and all other kinds of custom
fees, charges and dues except wharfage on wharves constructed and maintained by the LGU unit
concerned. Letter (e) taxes, fees, and charges and other impositions upon goods carried into or out of, or
passing through, the territorial jurisdiction of local government units in the guise of charges for wharfage,
tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or
merchandise. I believe the rationale here for letter (e) is if we allow local government units to impose
taxes for goods entering into or out of, it would just increase the prices of goods. So it is just a way of
prohibiting LGUs from doing that. Letter (f) LGUs cannot also impose taxes, fees or charges on
agricultural and aquatic products when sold by marginal farmers or fishermen. The most critical term
there is marginal. So meaning marginal, hindi sila big time fisherman or agricultural farmers. Letter (g)
taxes on business enterprises certified by the bureau, Board of Investments as pioneer or non-pioneer.
For pioneer, they are granted 6 years income tax _, as well as local business tax _. For non-pioneer
naman, they are granted 4 years of exception. Here under the law, it is stated there, from the date of
registration. But under the implementing rules and regulations, it is normally counted from the date of
commercial registration, not from the date of registration. Date of commercial relation. (h) LGUs cannot
also impose excise taxes on articles enumerated under the NIRC because it is already imposed under the
Tax Code. As well as, letter (h), it has 2, it has 2 parts. The second part is taxes, fees or charges in
petroleum products. So that is a very important part of the sentence because for example you have a
dealership of Petron or Shell. Any gross receipts in that station is exempt from imposition from local taxes
pursuant to that phrase, taxes, fees or charges on petroleum products. But of course if the gasoline
station has other businesses like convenience store, that is subject to local taxes. Again, the possible
rationale for that is not to increase the charges of the cost of fuel. Letter (i) percentage or value added tax
on sales, barters, or exchanges or similar transactions on goods or services except as otherwise provided
herein. The reason is percentage tax are being, is already imposed under the Tax Code. So under the
rules I mentioned, local government units can no longer impose the same taxes. (j) taxes on gross
receipts of transportation contractors, and persons engaged in the transportation of passengers or freight
by hire and common carriers by air, land or water, except as otherwise provided in this Code. I think the
rationale there also is to lessen the overall burden of the transporting public. (k) taxes on premiums paid
[TAXI NOTES] 110

by way of reinsurance or retrocession. I think the rationale here is to encourage enterprises to engage in
the business of reinsurance. I think in the Philippines the reinsurance business is a dying industry. As you
have mastered in, in insurance, if you are an insurance company you might want to limit your risk by
entering into a contract of insurance with a reinsurance company to limit their overall risk. Letter (l) LGUs
cannot also impose taxes, fees or charges for the registration of motor vehicles as a general rule. The
only exception is for tricycles. Letter (m) Taxes, fees or other charges on Philippine products actually
exported. Some lawyers, they get confused. Letter (m) is not a legal basis to exempt exporters from the
payment of local business taxes, they’re still liable. Letter (m) only speaks of taxes, fees and charges on
the actual products exported. Wala nang additional taxes on the act of exporting but for local business
taxes, they are liable so don’t be confused with letter (m). For letter (n), LGUs cannot also impose taxes,
fees and charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered
under R.A. 6810 and R.A. 6938. Letter (o) taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities and local government units. This presupposes that these
entities are performing governmental functions. If any of these entities would be conduct, like an LGU, if
they would be conducting proprietary activities then that is not covered by the exception. Please take that
also that this paragraph does not include the GOCCs. It is very exclusive, National Government,
agencies, instrumentalities and local government units. GOCCs are not covered by this common
limitation.
If you are asked in the bar exam to enumerate at least 5 common limitations, it is up to you which among
them you will enumerate. But if you will ask my advice, because there are 2 schools of thought there. If
they are asking for 5, you might be rendering 5 basic examples or you can choose 5 complicated
examples. If you ask me, I would choose the 5 complicated examples, as long as you are correct.
Because you are there to impress. You’re not there to be average. So if you can provide for complicated
scenarios or more important common limitations, then provide it. But don’t make the mistake of let’s say
the examiner is only asking for 5 and then you enumerate 7, you cannot do that. Because if my mali sa 7
na dalawa, the examiner cannot just choose the 5 correct answers and disregard 2 wrong ones. So just
answer the question. If they are asking for 3, provide 3. If they are asking for 4, provide 4. What’s the rule
in case you are asked to provide 5, if you cannot, you can only think of 4? In that scenario you also have
to make an important decision. You enumerate and then just duplicate one of your answers, you can also
do it in paragraph form di ba? So those are the little things that could impact whether you will pass the bar
exam or not, those little things. So before writing down your answers, you might want to check may alam
ba kong lima? If you, may alam kayong lima, then you can enumerate one by one. If by imagining it you
can only think of 4, then probably do paragraph form. One limitation is ganyan, second limitation is
ganyan, and then bahala kayo kung mag uulit kayo. So, just a word of advice coming from my time.
The fourth guideline is, is it within the specific powers of the LGU concerned? As you would know, we
have 4 Local Government Units that have taxing powers right? They are, san ba yung mga estudyante ko
dito? Meron ba? Those are provinces, cities, municipalities and barangays. So we have 4. First one,
provinces. What taxes can they impose? So I enumerated herein some of its powers. Tax on transfer of
real property under Section 135, tax on business on printing and publication, franchise tax, tax on sand,
gravel and other quarry resources, professional tax, amusement tax, tax on certain delivery trucks. Out of
these 7, probably you read tax on transfer of real property, franchise tax, tax on sand, professional tax
and amusement tax. So you can disregard number 7 and number 2. I’m sure it won’t be asked, number 2
and 7. But for others you must read it. You might be asked in the bar exam, is a transfer of property via
succession subject to LTT? Someone dies, you have to take estate tax to BIR, but do you have to pay
local transfer tax to city hall or to the province? Answer is? Answer is, it depends to the mayor ano? The
answer is yes, under Section 135, the province may impose a tax on the sale, donation, barter or any
other mode of transferring ownership, or title of real property at the rate of not more than 50% of 1% of
the total consideration involved or the fair market value in case the monetary consideration involved in the
transfer is not substantial, whichever is higher. Under the last paragraph of Section 135, it shall be the
duty of the seller, donor, transferor, executor or administrator to pay the tax herein within 60 days from
[TAXI NOTES] 111

the date of the execution of the deed or from the date of the decedent’s death. This last paragraph is
somehow abused, in practice. If it’s succession, no problem. Date of death. But for other modes, the code
speaks of date of the execution of the deed. So some developers, I just think developers sometimes they
change the date of sale to avoid penalties. I think if the Local Government Code Unit ah Local
Government Code would be amended, this should be amended, within 60 days from date of completion
of payments. Because some developers even if you are paid already, sometimes the deed of sale is
executed 2 years after or 1 year after. The brokers who sold you the unit won’t care anyway because they
already get, secured their commission way way back before. So this is being abused right now. Because
it speaks of the date of execution.
There is a tax on sand, gravel and other quarry resources under section 138. Remember that under this
section the tax is 10% of the fair market value provided the minerals are extracted from public lands or
public waters. So if it is extracted from private properties, this tax cannot be imposed. This is one example
of an imposition wherein it is shared between LGUs. It is an exception to the rule that if a province was
able to collect this, it shall accrue exclusively to it. Because under this provision, it is shared by the
province 30%, city or municipality 30% and the remaining percent the barangay. The highest percentage
is the barangay because yung barangay yung nadedestroy eh, so 40%. If you ask Gina Lopez, maybe
she would want this increased. 40%, if you ask her.
Professional taxes. This one you need to be very very particular because next year you would become
full-fledged lawyers so you need to be aware of this one. Professional tax under Section 139 should not
be more than 300, payable on or before 31 of January. Professionals employed by the government are
exempt. So those employees of the Supreme Court as legal staff, those employed by senators as staff,
chiefs of staff or researchers, they are exempted from the payment of the Professional Tax. Sometimes I
would ask my lawyer friends, are you paying local business taxes to your principal office? Most of them
are not aware of the answer. Are you liable? For local business taxes as future lawyers? Let’s say you
received 10 million worth of service fees from your clients, are you liable? No. Not because practice of law
is not a business but because of this provision. Under this provision, Section 139 (b) such person who
has paid the corresponding professional tax shall be entitled to practice his profession in any part of the
Philippines without being subjected to any other national or local tax, license, or fee for the practice of
such profession. So provided that you paid the professional tax of 300, regardless of the number of
locations that you want to practice. Let’s say you have an office in Quezon City, you have an office in
Davao, you only have to pay one professional tax and then you are not, you are no longer required to pay
local business taxes or any other local tax, license or fees. For the practice ha, but for other regulatory
fees, you have to pay. So if you encounter this scenario, this is the basis. Your main basis is not practice
of law is not a business because that is a legal ethics basis, this is the Tax Code basis. You can add that
as a suppletory reason.
Amusement Tax. You might encounter a hypothetical scenario wherein you are being asked whether an
LGU can impose amusement taxes. You have to know of course the definition of amusement place. It is
defined under the code as including theaters, cinemas, concert halls, circuses and other places of
amusement where one seeks admission to entertain oneself by seeing or viewing the show or
performances. Spas are not included under amusement places because it has a very technical definition.
So not all places of amusement would fall under this one. Proceeds not more than 30% of the gross
receipts are shared equally between the province and the municipality. So this is again another example
of an exception to the rule that revenues collected by the LGUs shall accrue exclusively to it. This is one
example of sharing.
The fourth guideline of whether an ordinance is valid or not, is it within the specific powers of the LGU
concerned? We have discussed earlier provinces. Let’s now go to municipalities. Under the Local
Government Code, they can impose local business taxes under Section 143, they can also impose fees
and charges, fees for sealing and licensing of weights and measures. Like for example, under number 3
is let’s say you have a supermarket, junk shop, gasolinahan. They have weights and measures, so it is
[TAXI NOTES] 112
the municipality who can impose fees. Why are they monitoring this type of apparatuses? Because there
are a lot of frauds in terms of these apparatuses. They can also impose fishing rentals, fees and charges
and community taxes. For local business taxes, the local government unit provided for an enumeration of
businesses that are subjected to local business taxes. It also provides catch-all provision under letter (h)
on any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned
may deem proper to tax: Provided, That on any business subject to the excise, value-added or
percentage tax under the NIRC, the rate of tax shall not exceed 2% of the gross sales or receipts of the
preceding year. This catch-all provision is sometimes, there appears to be some confusion sometimes. It
doesn’t exempt any business that are already subject to excise, value-added tax, percentage tax. This
paragraph only means that if the business is not found under the preceding enumeration, the local
business tax rate should not exceed 2% of the gross sales or receipts. One kind of business that could
fall under this one is gross receipts from educational institutions, proprietary one. A few years ago,
probably not more than 2 years ago, a law dean came to me for advice. Sabi niya Antony, the City Hall is
requiring us to pay local business taxes on tuition fees, sabi ko saan bang school yan? The school is only
along U-belt. So I won’t mention the name. Sabi ko sir, it’s not non-stock non-profit naman di ba? Oo,
Anthony bakit? Are you saying we would fall under this catch-all? E sabi ko sir, if the ordinance does not
specify proprietary schools, then you would fall under the catch-all. Sabi niya sakin, so kapareho namin
yung mga spa, yung mga other amusement place, sabi ko wala tayong choice. We can lobby the city
council to provide the particular local business taxes for proprietary but proprietary schools are subject to
local business taxes. Remember under the 1987 Constitution, it is only non-stock, non-profit schools who
enjoy income tax and local business tax exemption. Provided, That the entities are used actually, directly,
and exclusively used for educational purposes. Proprietary schools, if their revenues are used for
educational purposes, it doesn’t mean anything. Unless Congress would enact a law saying that it is
exempt. But for national taxes, as you can recall from your Tax Code, it is not exempt. But it is subjected
to a preferential tax rate of 10%. Provided their income from non-related educational activities does not
exceed the certain threshold. So don’t be confused ah. For local business taxes, proprietary schools are
taxable. Non-stock, non-profit schools are exempted from local business taxes pursuant to an express
provision of the Constitution.
For local business taxes the critical concept there is not income, not revenue but gross sales for sale of
goods or gross receipts for sale of service. So this is in taxable basis for local business taxes. Under
Section 131 (n) it is defined as total amount of money or its equivalent representing the contract price,
compensation or service fee, including the amount charged or material supplied with the services and
deposits or advance payments actually or constructively received during the taxable quarter for the
services performed or to be performed for another person, excluding discounts if determinable at the time
of sale, sales return, excise tax and VAT. So you will not include these items when you are computing
gross sales receipts. Discount is self-explanatory. Pag diniscount mo na and the discount is there in the
invoice receipt, hindi mo na talaga isasama. But here, excise tax and VAT sometimes there’s confusion.
So we exclude it for purposes of gross sales or receipt. What are things that are subject to excise tax?
Pagbili mo ng kotse. Sometimes dealers would pass on excise taxes to you as car customers. So for
purposes of gross sales of that car dealership, they would not include excise taxes, as well as the VAT.
Here, this one you encounter this most of the time. Are local taxes pass on by hotels to its customers part
of gross receipts or not? Have you seen an actual official receipt of hotels? Di ba ang dami nilang ini-
impose na charges? Unlike in local restaurants, you only see 2 things: VAT and service charge. In hotels
they have so many add-ons. Sometimes they have local tax, so if you encounter this specially in the bar,
if the hotel passed on local tax to you as part of your bill, do you include that as part of your gross
receipts? Kasama, hindi? Or depende kay chef? So that is, yes it is part of the gross receipts as there is
no legal basis to exclude it from the computation of gross receipts. We discussed earlier the definition of
gross receipts right? There is an exclusion phrase there. It is not one of them so in case of exceptions or
exclusions, it is strictly construed against the one claiming it right? So it should form part of the gross
receipts. From a theoretical aspect and from a practical standpoint, kasama naman kasi yun sa binayaran
mo. Kasama yan sa nareceive ng hotel, so there is no really, no legal and factual basis to exclude it.
[TAXI NOTES] 113
Imagine napasa na nila kunwari 1%, ayaw pa nilang i-include yan from gross receipts? Parang masayado
naman na. So if the local business tax is only 1%, they could pass on to you the entire 1% right? They will
just have to pay 1% of the 1%. So I think that’s pretty fair. The burden of the entire 1% must be really
passed on. So they just have to pay 1% of 1%.
You might encounter a hypothetical scenario in the bar about a business who have retired from business.
Let’s say there is a business, let’s say a proprietary school, they wanted to retire from business today.
Let’s say there was a scandal in school. Are they liable for local business taxes if for their business
officially retire? The answer is it depends. Depends on what? It depends on the amount of gross receipts
derived from the year of retirement as compared to the gross receipts from the previous year. The
applicable provision is Section 145 of the Local Government Code which states that a business subject to
tax pursuant to the preceding Sections shall, upon termination thereof, submit a sworn statement of its
gross sales or receipts for the current year. This sworn statement is typically submitted even if you renew
your business permit every January. So when you retire this month, you will also have to submit a sworn
statement. If the tax paid during the year be less than the tax due on sales or gross receipt of the current
year, the difference shall be paid before the business is considered officially retired. So meaning, let’s
say you renewed your business permit last January. Your gross annual receipts for the preceding year
was let’s say 10 million pesos. If upon retirement this month, your gross annual receipts from January to
September is only 8 million, then you don’t have to pay any other additional local business taxes because
your gross receipts for the current year is lesser. But let’s say the reverse happened. When you retired
your gross receipts already is 50 million and your preceding annual gross receipts was only 10 million so
you have to pay the difference. So that is the meaning of “if the tax paid during the year be less than the
tax due on the said gross sales or receipts of the current year” that you will need to pay. That’s the
implication of that provision. So you just do a comparison. If you do, your default should be, if yan ang tax
nun last year from January to December, logic would dictate mas lesser yung taxes mo dapat this year
unless there is a surge in business. So siguro, for you not to be confused, the general rule there is you
don’t have to pay in taxes unless your gross receipts for the current year would exceed the preceding
year. Siguro para mas hindi mas magulo.
Who has the power to impose LBT against a sari-sari store retailer? Is it the province, city, municipality or
barangay? The answer is, it depends. It can be the municipality or the barangay. Under Section 143 (d)
the determining factor would be the gross sales. If the gross sales, in case of a city, if the gross sales is
50,000 or less, it is the barangay. If it’s 51,001, it is the municipality ay it is the city. Ay I’m sorry. If it is
50,000 or less, it is the barangay. If it’s 50,001 it’s the city. But in case of a locality involving a municipality
then the threshold is 30,000 pesos or less so it really depends. Just take note of pag municipality 30,000
minimum, city 50,000 or less. I think since the 1990 Local Government Code was enacted way way back
1991, it has already been how many years? more than 25 years. I think this threshold should be modified
accordingly but since there is no right to adjust, then any adjustment with this threshold should have to go
through Congress. Just imagine, how much is 50,000 per year? In a month, that’s only 4,000 di ba? 4,000
times 12 equals 48,000. So siguro naman lahat ng sari-sari store in a month di ba? 4,000 in a month
divided by 30 days. That’s only what? So I think this should be amended accordingly. Otherwise, kawawa
naman yung barangay. Wala na lang nagfo-fall sa jurisdiction nila. Lahat na lang sa city hall or sa
municipal hall.
Community taxes. This provision you just have to read it. These are some of the limitations. Individuals
subject to a minimum of 5 pesos but to a maximum of 5,000. Corporations, they are subject to a minimum
cedula of 500 to a maximum of 10,000. Must be, the distinction there I really don’t understand, specially
the maximum. If a corporation can be made to pay 10,000, why not the individual? Probably on the
minimum I can understand pag tao ka lang 5 pesos, pag individual (corporation) 500. But the maximum I
cannot understand. But anyway that’s the Local Government Code, so we have to know the distinction.
Must be paid no later than last day of February generally. Diplomats and consular representatives as well
as transient visitors, those who have, whose stay in the Philippines is not more than 3 months are
[TAXI NOTES] 114

exempted. If not paid on time 20% interest per annum until paid because there is a monthly interest of
2%. Under the Local Government Code, the monthly interest for any unpaid tax is 2%. Under the Tax
Code, any unpaid tax would carry with it an interest penalty of? Tax Code? Any volunteer? None? Under
the Tax Code it’s 20% right? This is another problem being discussed by foreigners. Pano daw, in our
country, paiba-iba pa ng batas, like for, I don’t understand. If we’re talking about a Philippine tax whether
it’s local or national, dapat isa lang ang penalty. If it’s 20%, 20%. If it’s 2%, 2%. May different rules about
the same thing. Anyway, barangay treasurer may be deputized to collect. If collected through barangay,
proceeds shared equally between municipality and barangay. A few years ago, you can see barangay
officials selling you cedulas right? But for the past couple of years I’ve seen lesser and lesser barangay
selling cedulas. I don’t know, maybe less accountability if the cedulas are being sold in barangays. In
your barangays do you buy cedulas? Yes? In some barangays they don’t allow anymore. They require
you to go to the city hall or the municipal city hall. So this is a very, another scenario wherein LGUs share
in the taxes being collected. So how many have we encountered, na may sharing? Cedula, amusement,
sand, gravel, so if you’re asked in a true or false question, are local taxes collected by LGUs, does it
accrue exclusive to them? Generally yes but subject to exceptions. So you can give at least 2 exceptions
right? If you encounter that type of a question wherein you’re asked to say the general rule and
exceptions, if you know all the exceptions you can provide all of them. Don’t be complacent in just
providing for one. If you know 2 then provide 2. You are there to impress. You’re not there to finish the
exam early. Also, your exam in the morning is how many hours? 4 hours? In the afternoon, still 3 hours o
4 na? Dapat alam niyo yun. During my time, the morning exam is 4 hours, the afternoon exam is only 3
hours. Right now? 4 hours uli? 3 hours? I am highlighting because we are not accustomed to an exam on
a whole day basis right? We are accustomed to a midterm exam 1 ½. We are accustomed to finals exam,
2 hours. So on your very first night, the first Saturday night you need to have a good night rest. Probably
not sleeping but at least nakahiga kayo di ba? During my time of the first Saturday was, difficult then. I
could not sleep. You have a restful mind. And then you would have a full strength to finish the exam on
the next day. So if you are lack in sleep or etc. baka medyo bumigay kayo sa afternoon. So the very first
Saturday is very critical. So please do your own relaxation thing on the first Saturday. If you need to drink
1 bottle of beer or 2 bottles please consume but not to exceed 2 bottles, you might not wake up on time.
The first Saturday is very difficult, second Saturday medyo okay na yan pwede na kayong magpuyat
niyan kasi alam niyo na yung pacing of the exam. But the first Sunday is really difficult. That’s why, most
of my colleagues then had a low exam grade on the first Sunday kasi you don’t know what to expect.
Hindi mo alam yung pacing, hindi mo alam kung kakain ka, hindi mo alam kung matutulog ka ba. So first
Saturday, first Sunday is usually the most difficult.
What is the taxing power of cities under the LGC? We have discussed provinces and municipalities. For
cities, it has the broadest taxing power. Sabi diyan, under Section 151, except as otherwise provided in
this Code, the city may levy taxes, fees, and charges which the province or municipality may impose. So
sila ang pinaka-okay. They can get the best of both worlds. But the only limitation is the rate of taxes that
the city may levy may exceed the maximum rates allowed for the province or municipality by not more
than 50%. So as a rule, they can impose taxes by provinces and municipalities and even exceed it by
50% except on these 2 local impositions, they cannot increase it: professional and amusement taxes. The
rate for professional tax is 300, amusement taxes, it depends on the amount of gross proceeds.
Barangays. Here you just have to read the codal. So that you can enumerate something if they are asked.
The most important among all their powers here in practice is barangay clearance. Yan yan eh. Kasi in
theory, tax on retailers as well di ba? As you have seen the threshold, 50,000 threshold and the 30,000 it
is no longer within the times. The barangay clearance, you can impose it for starting a business, building
permit, madami. So this is the main source of revenue, eh sometimes the very reason for some
corruption. Because if you cannot issue you barangay clearance to construct then you cannot apply for
building permit with the municipal city hall or province.
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The fifth guideline, if not specified under the LGC, did the ordinance comply with the residual taxing
power of the LGU? The residual taxing power is found under Section 186. I will read it for those who have
not encountered this provision. Local government units, they exercise the power to levy taxes, fees or
charges on any base or subject not otherwise, not otherwise, not otherwise specifically enumerated
herein or taxed under the provisions of the NIRC or other applicable laws. So this power only exists if it is
not provided under any of the preceding paragraphs, not taxed under the Tax Code or other applicable
laws. Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory
or contrary to declared national policy: Provided, further, That the ordinance levying such tax or fees or
charges shall not be enacted without any prior public hearing conducted for the purpose. So these are all
the limitations before an LGU can exercise its residual taxing power. There is no other law that impose
such a tax shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy
and then of course the procedural requirement of conducting a public hearing. And of course, posting and
publication.
Section 150 is very very important, situs. So if you have not read situs, Section 150, my advice would be
read it at least 3 times. And imagine scenario of each paragraph because this is not a simple provision.
When you read it and you don’t imagine, it appears simple. But if you’re confronted with an actual
scenario then it becomes complicated. I will read first the provision. Paragraph (a) of Section 150
provides for purposes of collection of taxes under Section 143 of the Code, manufacturers, assemblers,
repackers, brewers, distillers, rectifiers and compounders of liquor, distilled, spirits and wines, millers,
producers, exporters, wholesalers, distributors, dealers, let’s read it na lang in silence, etc. maintaining or
operating branch or sales outlet elsewhere shall record the same to the branch or sales outlet making the
sale or transaction. And the tax thereon shall accrue and shall be paid in the municipality of such branch
or sales outlet is located. That is the first portion. The second portion is in cases where there is no such
branch or sales outlet in the city or municipality where the sale or transaction is made, the same shall be
duly recorded to the principal office if the tax due shall be accrued. So under this first paragraph, there is
a list of all types of businessmen, from manufacturers down to other businesses. But the qualification
there is they should be maintaining branch or sales outlet. If your business falls under this and you
maintain a sales or branch outlet, then you have to pay local business taxes on the locality where your
branch or sales outlet is located. If you have no branch or sales outlet, in the city or municipality where
the sale took place, then you record in the principal office. That is the first paragraph. We will return at this
later on. Letter (b) the following sales allocation shall apply to manufacturers, assemblers, contractors,
producers, exporters with factories, project offices, plants, and plantations in the pursuit of their business:
(1) 30% of all sales recorded in the principal office shall be taxable by the city or municipality where the
principal office is located; while the (2) 70% of all sales recorded in the principal office shall be taxable by
the city or municipality where the following structures are located. Take note of the businessmen here,
manufacturers, assemblers, contractors, producers and exporters. They would have to have factories,
project office, plant, or plantations for this to apply. This 70% can further be allocated depending on
whether the structures are located in different localities. So here, for me you just have to read this
provision. I don’t think they would have to ask you, you just have to read this. The most important is letter
(e): The foregoing sales allocation, meaning the 30% to 70% shall be applied irrespective of whether or
not sales are made to the locality where the factory blah, blah, blah is to located. Let’s imagine lang ah.
Anong gusto niyong scenario? What do you want? For us to give life to this provision. Sige. Ano bang
pinakamarami? Let’s take the case of real estate development, yan you can see everywhere. You go to
Starbucks, may lalapit sayong leaflet. Maglalakad kayo may magbibigay ng leaflet, MRT may magbibigay
ng leaflet. Everywhere you can see agents and agents of the agents. So let’s say, let’s take the case of
SM for example. Principal office of SM is located MOA, MOA is Pasay. Let’s say they have a project in
Mandaluyong, residences, SM residences. Let’s say they have a kiosk in SM Trinoma, Quezon City. Let’s
say dun sila sa SM Trinoma nakaloko ng mga customer, reservation, PDCs etc. PDCs or checks will be
transmitted to Pasay, contracts will have to be done in Pasay. So we have 3 localities ah, we have Pasay
as a principal office, location of the project in Mandaluyong and a kiosk in SM Trinoma, Quezon City.
Let’s say for that particular project, they were able to generate 1 billion worth of gross sales. 1 billion. Now
[TAXI NOTES] 116
comes the renewal of the business permit. January of this year, you would have to apply to each local
government unit right? Business permit in your head office, business permit in your, in the project
location, business permit also in the kiosk. Each local government unit would want to collect taxes based
on the 1 billion, all of them. So you cannot just pay all of them because the total would be 3 billion. And
you only were able to get a sale of 1 billion so you would have to talk to all of them no, no, no, in
accordance with the local government unit, specifically Section 150 we need to report 1 billion to the
following LGUs. Do we apply the first paragraph of Section 150? Do we apply letter (b)? What do you
think? Go back to the provision. Imagine the case of SM as a developer. Do we apply section (a)? or who
says no collection? This is the general rule, if you fall under this one and you have branch offices, you
report it there. If you don’t have branch offices, you record in the principal office. Letter (b) sabi diyan, the
following sales allocation shall apply to the following: factories, project office. We apply (a) or (b)? Can I
have a show of hands? Who says letter (a)? Letter (b)? O bakit hindi kayo? Walang tama, letter (a)? letter
(b)? None of the above? We apply letter (b) because a, a real estate developer would fall under the term
contractor although we have the same contractor there with project offices. Di ba in each, in each real
estate development there is a project office there? Meron yan, imposibleng wala. Real estate project
without a project office. So if you apply letter (b), where do we apply the 1 billion? 30% in MOA, in Pasay,
because that is the place of principal office. 70% would be Mandaluyong. So ang kawawa dito si Mayor
Herbert because kiosk lang naman siya eh. From a theoretical aspect, tama naman. Kiosk ka lang diyan.
Alangan naman manalo ka pa sa principal office tsaka dun sa location where the project is located. It is
very important, I’ll just go back to letter (b). That would be the sales allocations whether the sales are
made in Quezon City, regardless, irrespective. That is the sales allocation if your scenario would fall
under letter (b). The, I think the rationale there was, baka kasi if that, if this provision is not made,
businessman might just choose localities with lesser local business taxes and argue, hindi diyan yung
sales nangyari eh. So in order to avoid that possible scenario, the framers of the Local Government Code
imposed this safeguard or limitation. So remember Section 150, read it at least 3 times before taking your
tax exam. And then imagine, imagine businesses ng kapitbahay mo, imagine businesses ng tito niyo or
tita niyo, or your own businesses. Taxation, you need to do a lot of imagination in order to test whether
you have understood the concept or not. You cannot just read provisions without imagining it. Believe me.
You would have a better chance of passing the tax bar exam, if you would read and imagine. And then
read back again. You have a better chance. And also don’t make the mindset that only CPAs would have
an easy time in taking the bar exam. Even CPAs would have a hard time. Me, I’m not a CPA but I can
teach you tax so that is a falsehood. That is a fallacy. You don’t need to be a CPA, eco major, business
major to excel in taxation. You just have to read, understand, imagine and read again.
This is the definition of a branch office or sales outlet. You need to read this if, because you might
encounter a scenario wherein the examiner is testing whether you know a branch office or sales outlet
from an ordinary structure. So this is the textbook definition under the implementing rules and regulations,
it is a fixed place in a locality which conducts operations of the business as an extension of the principal
office; however, offices used only as display areas of the products or stocks or items are stored for sale
although orders for the products will be received thereat are not branch or sales outlet as herein
contemplated. So remember that fixed place, fixed placed in a locality which conducts operations of a
business as an extension of a principal office.
Protest. Under Section 195, this is the full procedure on protest. Protest of local taxes. When the local
treasurer finds that correct taxes, fees, or charges have not been paid, he shall issue a notice of
assessment stating the nature of the tax, fee or charge, the amount of deficiency, etc. within 60 days from
the receipt of the notice of assessment by the affected taxpayer. The taxpayer may file a written protest
with the local treasurer contesting the assessment; otherwise, the assessment shall become final and
executory. So if you received an assessment and you are not satisfied, you have how many days? 60, to
file a written protest. Do you need to pay under protest? Ha? Like, under local taxation, you don’t have to
pay. Under the Tax Code, when there is an assessment and you want to protest, is there a payment
under protest under the Tax Code? Yes? Wala. Tax Code wala di ba? Sinong nagsabing meron? Sa Tax
[TAXI NOTES] 117

Code wala. Local taxation, you want to protest, do you pay under protest? None. Real property taxation
you want to protest, you need to pay under protest? Yes, as a general rule. In the TCCP, under the
previous code, there is a requirement to pay under protest. But as we will discuss later on, the framers
changed the wording of the law. It may now omit payment under protest under the TCCP, depending on
the circumstances involved. So I will just finish the, the paragraph. The local treasurer shall decide the
protest within 60 days, excuse me. (pause) Sorry for that, it was my father, I’ll just text him. (pause) We
are here until 9:30 right? Up to what time ba? 9 ba? I promise I will dismiss you early. We won’t consume
until 7:30, you want to have a break? Sige. Let’s finish local taxation then let’s have, how many minutes
yung break na gusto niyo? Mga 1 day? Let’s do a 30-minute break after this one. We’re down to ano
naman eh, 20 slides. We’ll just run through it. So if you want to contest, you have 60 days to protest.
Local treasurer shall decide the protest within 60 days. Taxpayer shall have 30 days from the receipt of
the denial of the protest or from the lapse of the 60-day period upon which to apply with the court of
competent jurisdiction. So if you received an assessment, you have 60 days to protest. Treasurer has 30
days to decide. If you received a denial, you have how many days to appeal? 30 di ba? If no, if no, formal
denial, what happens in actual cases? If the treasurer does not ano? You just have 30 days from the
lapse of the 60 days. 60 days is too fast in an actual setting. So 2 months lang eh. So sometimes you
might lose your ability to appeal to the court of competent jurisdiction if you are not mindful of the 60-day
deemed denial period. So 30, 60, 30. So under Section 195.
Accrual of the tax. Generally, it shall accrue the first day of January. If there are new taxes, it shall accrue
on the first day of the quarter next following the effectivity.
Penalties for late payment. Under Section 168, there is a surcharge of 25%. In the Tax Code, there is
also a surcharge of 25%. Under the Tax Code there is an exceptional instances wherein the surcharge
becomes higher. Tax Code. Generally it’s 25, exception is 50%. In the Local Government Code, it is a
fixed 25% regardless, regardless of the presence or absence of a law. But for interest, it should not
exceed 2% per month. But there is a limitation. But in no case shall be more than 36 months. So the
maximum interest that can be imposed against you is 72. So be very careful in paying deficiency local
taxes. In deficiency real property taxes sometimes LGUS they may, they make mistakes daw. When they
give you an SOA. Sometimes the interest rate is more than 72%. If you are able to catch it, then they will
say sorry sir, nagkamali computer eh. But if you were not able to catch it and you’re actually paid already,
then next year they will just say ay sir critical na po yan. Sorry sir ah, kasi yung computer. So we need to
be very, very meticulous. We need to double check the SOA handed to you by the local city hall or local
municipal hall because sometimes they do manual computation. I encountered that so many, so many
times.
Peiod of assessment collection. For local taxes, it shall be assessed within 5 years. In case of fraud or
intent to evade, it may be assessed 10 years. For real property taxation, there is no period to assess but
period to collect. For local tax, there are 2 periods. 5 years, 10 years. Under the Tax Code, general rule is
Tax Code? General rule is 3 years. Exception, 10 years. So local taxation, general rule 5 years.
Exception 10 years. Tax Code 3 years, exception 10 years also. This is one instance you need to
imagine. To better help you memorize and understand. In terms of prescriptive period, you need to
compare them each one. Para mas madaling mamemorize, specially for procedure. You compare each
one. For local taxation, it may be collected within 5 years, so power to assess 5 years, exception 10
years. But power to collect is 5 years. Under these following periods and instances, the periods can be
suspended. So you just have to read them since it’s self-explanatory. When the treasurer is legally
prevented of course the period will be tolled. Taxpayers requests for reinvestigation and executes a
waiver. So notwithstanding that a taxpayer has requested for reinvestigation, it does not automatically toll
the period. There must be a waiver. Accepted by the other side. So be careful ah. For request for
reinvestigation, it is not automatic. There must be an accompanying waiver, signed by the taxpayer and
accepted by the other party. Because it is an agreement. It can’t be a unilateral suspension. Taxpayer’s
out of the country or otherwise cannot be located for obvious reasons. Then there are personal properties
[TAXI NOTES] 118

exempt from distraint. You just have to read them under Section 185. You can be asked as an objective
type of question. In the bar exam, I’ve only enumerated certain important provisions. If you can cite this
specific provision in the bar, mas maganda. Konti lang naman yung ci-nite ko di ba? Because that could
be additional points for you. But if you don’t know, can’t recall a specific provision, just cite under the
Local Government Code as amended under Republic Act 7160, it might suffice.
Refund rule. Refund rule under the LGC is somehow similar with the Tax Code. There must be a written
claim to be filed with the local treasurer, 2 years from the date of payment or from the date the taxpayer is
entitled to a refund. So halos same lang.
Contesting an ordinance, that is Section 187. This is a procedure upon which, you can contest an
ordinance. Under this provision, any question on the constitutionality or legality of the tax ordinance or
revenue measure may be raised on appeal within 30 days from effectivity thereof to the Secretary of
Justice who shall render a decision within 60 days from the date of receipt, however, That such appeal
shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the
tax: Provided, finally, That within 30 days after receipt of the decision or the lapse of the 60-day period
without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate
proceedings with a court of competent jurisdiction. So this is the procedure upon which you might want to
contest a tax ordinance with the DOJ.
Taxability of the schools. We have somehow touched this one. I’ll just reiterate. Under Section 4, Article
XIV, paragraph 3: All revenues, if you can memorize this by heart, this could be a possible question in the
bar. If you can memorize these 2 paragraphs, I bet you, you will get a full credit if you can memorize this.
That I noticed in the past few years, I noticed in the past few years that if you get a grade of 83 in the bar
exam, an average of 83, you can get to the top 10 already, 83 maybe top the bar, 83. It’s not that the bar
exam is becoming more difficult, it’s just that the answers, nagkaron na ng deviation from the old way of
answering. Remember most of your examiners are of advanced age. At the very least 50 years and up
yan, so they don’t belong in your generation wherein you confuse legal conclusion with legal basis. This is
the legal basis, then if you can apply it to your facts, then that is your legal conclusion. So sometimes
even for my students, I encounter scenarios, hypothetical. Yes sir, the revenues are exempt because,
they provide their legal conclusion, in their own words. But in order to get the full credit, you need to
provide a legal basis under the law itself, under the Constitution so that you can get the full credit. And
under this Constitutional provision, it says that all revenues and assets of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes shall be exempt
but not automatically. It is, must be actually, directly and exclusively used for educational purposes. It’s
not enough that it is earned by non-stock, non-profit schools. It must be actually used for educational
purposes to get the exception. If you can see here, it covers both revenues and assets. So meaning
assets, including real property taxes, for revenues, including income taxes, as well as local business
taxes, provided the condition is there. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law. In the second
paragraph of this subsection, it provides for the taxability of proprietary schools. It says, proprietary
educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions
subject to the limitations provided by law including restrictions on dividends and provisions for
reinvestment. The critical phrase here is “may likewise be entitled to such exemptions.” That means _.
Under the Tax Code, they are not exempted, they were just given a preferential tax rate. But for the LGC,
they have been provided for preferential tax. Maybe when the Local Government Code is amended,
maybe it’s high time to provide for a preferential local business tax rate because tama naman yung sinabi
sakin ni dean, how can you impose the same local business tax rate on schools and spas, di ba? One is
for educational purposes and one is for pleasure. But in the absence of an express provision, then our
hands are tied. So we’re down to some certain examples to for me to check whether you have somehow
understood anything that I’ve said for the past, for the past one hour and a half.
[TAXI NOTES] 119

So the facts of the case is: X company is a corporation primarily engaged in the business of mineral
exploration. It is deemed assessed for local business tax on its income for the years 2007 and 2008. X
company questions the assessment, argues that there are no gross receipts which could be used as
basis for the computation of the LBT since it is still in the exploration stage. Some localities, even if you
have no have gross sales or receipt, they would just base your local business taxes on your
capitalization. Wala kang sales eh san namin be-base yan? From a practical standpoint, yun ang
ginagawa nila. So the issue here is, is X company subject to LBT on income earned in 2007 and 2008?
Answer. No. Under Section 7 of Local Finance Circular No.2-09, provides that LBT on mine company
shall be determined from their gross receipts from the preceding calendar earlier. Considering that X
company is still in the exploration stage, there are no gross sales to speak of. In the absence of such
gross sales, there is such no basis for the imposition of LBT. X company shall only be taxable when it
starts its commercial operations. Meaning from the time it sells its minerals to its clients. So remember
that for local business taxes, an important thing for local business taxes is gross sales or receipts. Even if
your in your auditing financial statements you have accrued income or you have accrued revenue as long
as there is no actual gross sales or receipts, there is no basis for the imposition of local business taxes.
That’s why gross receipts is a very important concept for local business taxes. Here, this one is, we have
touched this already earlier. X company donated real property in favor for JK foundation. Is the donation
exempt from local transfer tax? No. Because it contemplates all types of transfer of ownership, including
succession, including donation.
This one, not anymore. Hindi masyado yan. Ah eto, this one. This was only issued by the Supreme Court
last year. The facts of this case was: an ordinance was enacted for the collection of garbage fees on
residential properties which shall be deposited solely and exclusively in an earmarked special account
under the general fund, to be utilized for garbage collection. The garbage fee ranges from 100 to 500
pesos for residential households, depending on the land area. For condominium unit owners and
socialized housing unit owners, the garbage fee ranges from 25 pesos to 200 pesos depending on the
unit area. In this case, there are 2 tables, 1 table for condominium unit and socialized housing unit
owners, the lowest is 25 pesos, the highest is 200. For other residential households, depending on the
land area, the minimum is 100, maximum is 500. The collection of the garbage fee shall accrue the first
day of January and shall be paid simultaneously with the payment of the real property tax but not later
than the first quarter installment. Before the ordinance, only business establishments have to pay a
garbage fee. Taxpayer asserts that the collection of garbage is a basic and essential duty and function of
the LGU. By imposing the garbage fee, the LGU has shown a potential in pattern to collect taxes to pay
for public services that could be covered by its revenues for taxes imposed on property, idle land,
business transfer, amusement, etc, as well as their share from the _. On the other hand, LGU’s side’s
naman, it is an exercise of power, police power to create sources of ay no I’m sorry, an exercise of its
power to create sources of income under Section 5, Article X. LGU also asserts that the ordinance is an
exercise of a police power and the collection for every household is only a meeker amount of 33 centavos
per day compared with the sum of 165983 that the LGU annually spends for every household for garbage
collection and waste management. Magkano ba yun, 33 centavos times 365? 120, so parang sinasabi ng
LGU, pasalamat nga kayo kinokolekta lang namin sa inyo 100 per day versus 160. The issue was, is the
ordinance valid? The Supreme Court said no. For an ordinance to be valid, though it must only be within
the corporate powers, it must not only be within the corporate powers of the LGU to enact, it must be
passed according to the procedure prescribed by law, it should also conform to the following
requirements: First, not contrary to the Constitution or any statute, not unfair or oppressive, not partial or
discriminatory, not prohibit but may regulate trade, general and consistent with public policy, and not
unreasonable. As jurisprudence indicates, the tests are divided into the formal and the substantive.
Formal meaning, whether the ordinance was enacted within the corporate powers of the LGU, and
whether it was passed in accordance with the procedure or guideline. Public hearing, publication, posting.
And the substantive, involving the inherent din, like the conformity of the ordinance with the limitations
under the Constitution, etc. Sabi diyan, ordinance violates the equal protection clause of the Constitution,
and the provisions of the LGC that an ordinance must be equitable and based as far as practicable to the
[TAXI NOTES] 120
taxpayer’s ability to pay, and not unjust, excessive, oppressive or confiscatory. In the subject ordinance,
the rates of the imposable fee depend on land or floor area, and whether the payee is an occupant of a
lot, condominium, socialized housing project or apartment. For the purpose of garbage fee collection,
there is in fact no substantial distinction between an occupant of a lot on one hand and an occupant of a
unit in a condominium, socialized housing project or apartment on the other hand. Most likely, the
garbage output produced by these types of occupants is uniform and does not vary to a large degree.
Thus, dissimilar schedule of fee is unjust and inequitable. So if you would read this decision, it appears,
the only reason why it was disallowed was different table, papaano kung same table? For all land owners
and unit owners, isang table lang talaga. They did not discuss that eh. They chose the easy way out eh.
The easy way out there was violation of equal protection. But I know of one locality. Eto nirereklamo nila
halos 120 pesos lang. In one locality in Metro Manila, they’re imposing a garbage fee on a per square
meter basis. For business establishments, I’ve encountered businessman who is paying more than, the
garbage fee is higher than local business taxes. But until now, it has not been questioned in the
appropriate courts because of course if you want to question, then your business could be affected. Here
kasi residential lang eh. So kahit magreklamo ka, ano ba naman magagawa sayo? I-increase-an ka lang
naman ng real property taxes but the business is not affected. So they chose the easy way out there.
Sabi pa ng Supreme Court, the rates being charged by the ordinance are unjust and inequitable. A
resident of a 200-meter unit in a condominium or socialized housing project has to pay twice the amount
than a resident of lot similar in size, unlike in the occupants. All occupants. So here they were just
questioning the table. Why different table for 1 set or owners and another table for a different set of
owners? So equal protection. It was the case of Ferrer v. City Mayor Bautista, so Quezon City. So it was
from, ay 2015 pala I’m sorry. So one of the issue here was also taxpayer was alleging double taxation, so
yun hindi ko na sinama, kasi klarong klaro naman di ba? How can there be double taxation, they are
paying real property taxes and garbage fee di ba? So hindi ko na sinama kasi sayang lang ng slides. I
think that wraps up our ah. If you have time, read the implementing rules of the LGC. I think it’s
downloadable. Sometimes, some provisions are expounded in the implementing rules so if you have read
once the Local Government Code then pangalawang basa niyo implementing rules na. So that at least
you can read it twice. So let’s have a, ilan? Gano katagal ang gusto niyo? It’s now 3:10, anong oras niyo
gustong bumalik? Tomorrow na? 3:10 let’s come back 3:30 that’s okay? Then we will discuss tariff and
then real property. So I’ll see you at 3:30.
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TARIFF AND CUSTOMS LAWS (by Atty. Anthony Dy)
As promised to you the second part of our lecture is the Tariff and Customs Code as amended by the
CMTA Law or RA 10863. So, please memorize that, Customs Modernization and Tariff Act - RA 10863.
At least may 1 point na 'yan, if you can cite it. "Under the Customs Modernization and Tariff Act - Republic
Act 10863", it would convey to the examiner that you have read at least the title.
Flexible Tariff Clause
Let's start with the Flexible Tariff Clause under the 1987 Constitution. This could be asked in a very
objective type of question. "Please explain the flexible tariff clause of the President." Here, your answer
should be of two ...
The flexible tariff clause under the constitution and as implemented by the TCCP to get a full credit. So in
the constitution, Sec. 28, par. 2 provides "Congress may by law authorize the President to fix within
specified limits and subject to such limitations and restrictions that it may impose tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties...
Here, the sufficient standard imposed by the Constitution was "within the framework of the national
development program". That is the sufficient standard.
Also, if you can see, here, it talks about import and export quotas. No import or export ban was
mentioned. Quota. When you say quota, pwede pero may quota. But in the TCCP, in some instances, the
President have issued certain EOs imposing the ban of certain importation. A total ban. The rationale
behind the flexible tariff clause if you're asked in the bar exam is: The reason behind such permissible
delegation is the necessity of giving the President the authority to act with dispatch on matters affecting
the national economy. It being recognized that the legislative process is much too cumbersome for
speedy resolutions of economic problems especially those relating to foreign trade. Especially now, that
our Congress is bicameral, right? So, it's very very hard and long for them to past a law. Especially if they
are too busy conducting investigations, allegedly in aid of legislation. I don't know if in the next
Constitutional Convention maybe there is reason to decide, is bicameral ba bagay sa'tin or unicameral
nalang? Kasi ganun din eh. In the last constitutional convention, how many votes? Was it a lopsided win,
bicameral over unicameral? No, it was not. It was a close fight. Bicameral won by only 1 vote. By a single
vote, imagine. During 1987, natalo lang ang unicameral ng 1 vote. If only they were able to lobby against
2 pro-bicameral we could be seeing a unicameral system of Congress right now. One vote. I think it is
time to study whether there is a need to go back to unicameral.
The implementing law for the flexible tariff clause powers of the President is found now under the CMTA
law under sec. 1608. So, please take note of that number. Previously under the old TCCP, it was sec.
401, I think.
Here, (a) In the interest of the general welfare and national security, and, subject to the limitations
prescribed under this Act, the President, can do a lot of things under flexible tariff. Here, the sufficient
standard of Congress is general welfare and national security. Parang ang layo dun sa national
development program ng Philippines sa constitution. But, it is what it is. So, under:
(1) Increase, reduce, or remove existing rates of import duty including any necessary change in
classification. The existing rates may be increased or decreased to any level, in one or several
stages, but in no case shall the increased rate of import duty be higher than a maximum of 100% ad
valorem;
So, under paragraph 1, increase, reduce, remove. Any increase cannot be more than the 100% ad
valorem.
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(2) Establish import quotas or ban imports of any commodity, as may be necessary;
We have import quotas on chicken, onions, rice, etc. Former President GMA previously banned imports of
ukay-ukay. You know ukay-ukay, right?
(3) Impose an additional duty on all imports not exceeding 10% ad valorem whenever necessary.
According to the CMTA Law, upon periodic investigations by the Commission meaning the Tariff
Commission and recommendation of NEDA, the President may cause a gradual reduction of rates of
import duty granted in Section 1611 of this Act, including those subsequently granted pursuant to this
section.
(b) Before any recommendation is submitted to the President by NEDA pursuant to the provisions of this
section, except in the imposition of an additional duty not exceeding 10% ad valorem, the Commission
shall conduct an investigation and shall hold public hearings wherein interested parties shall be afforded
reasonable opportunity to be present, to produce evidence and to be heard. The Commission shall also
hear the views and recommendations of any government office, agency, or instrumentality. The
Commission shall then submit its findings and recommendations to the NEDA within 30 days after the
termination of the public hearings.
So, meaning, there is a need to conduct an investigation and public hearings only in cases not involving
the increase of additional duty not exceeding 10%. For this one, no need of an investigation or a hearing
because the President is empowered already by the TCCP as amended by CMTA law ... For all other
cases there must be public hearing. That's part of due process.
(c) The power of the President to increase or decrease rates of import duty shall include the authority to
modify the form of duty. It means now, they can modified from ad valorem to specific duties.
(d) Any order issued by the President pursuant to the provisions of this section shall take effect 30 days
after promulgation, except again in the imposition of the additional duty not exceeding 10% ad valorem
which shall take effect at the discretion of the President.
So, any use of flexible tariff clause powers - 30 days, except, when there is an additional duty not
exceeding 10% which shall take effect at the discretion, whether 15 days, 60 days, it depends upon the
President.
(e) The power delegated to the President as provided for in this section shall be exercised only when
Congress is not in session.
This is a material amendment of the law. Prior to the CMTA law, this section (e) was not there. Before,
whether Congress was in session or not, the President can exercise flexible tariff clause powers. Right
now, medyo dangerous 'to. 'Di ba? Ibig sabihin kapag may session, the President has no power. Eh busy
sila sa investigation, right now, today, morning they ... afternoon naman busy naman. So, how can they
perform their legislative functions, 'di ba? So, I don't know. I think the previous rule was better because it
was delegated naman by the Constitution, right? The President has flexible tariff clause powers. Bakit
ngayon meron ng condition? It can only be exercised while Congress is not in session. So, be careful with
that law. I anticipate that in your bar exam, the questions from TCCP might be objective because it was
only a new amendatory law. So, I don't think the examiner will be working yet, because there are not a lot
of books out there other than your memory aid that would provide for the amendments. So, let's just be
ready. We need to read the actual provision itself so that any hypothetical scenario can be anticipated.
(f) The power herein delegated may be withdrawn or terminated by Congress through a joint resolution.
Here, that is another innovation by Congress. The flexible tariff clause daw under the TCCP as amended
can be withdrawn through a join resolution by Congress. They could do that if they want, so, no problem.
Additional Power of the President
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Under the CMTA Law, there was an additional power granted to the President under section 304.
Under Sec. 304, when public interest requires, that's the sufficient standard here, the President may, by
executive order, declare any public wharf, landing place, infrastructure, street or land, in any port of entry
under the jurisdiction of the Bureau as may be necessary, for customs purposes and/or to authorize a
port or terminal operator to transfer overstaying cargoes in an inland depot or terminal.
I think this section is an off-shoot of the decongestion in the port. A few years ago, 'yung sobrang traffic.
So, I think, this is just an off-shoot of that, empowering the President when public interest requires to
relocate certain non-moving containers out of the port area into a designated place. So, that could be a
potential, a reason, a big reason why this new provision was inserted.
Sources of Customs Laws
Customs laws does not only refer to the provisions of the TCCP. It also include other laws and regulations
subject to the enforcement by the Bureau of Customs. What are these laws subject to the enforcement of
the Bureau of Customs?
(1) Under the Tax Code, particularly sec. 107, there are importation of goods that are subject to VAT.
The VAT must be paid before these goods are released from customs custody. So, like VAT, it is a
BIR collection, a BIR revenue but it is actually being collected by the Bureau of Customs. So, in terms
of revenue collection targets, it is not counted as part of BOC's target. It is part of BIR's collection
target.
(2) Also, under the Tax Code under sec. 131, importations of certain articles subject to excise taxes. The
payment of excise tax must also be made before the goods are leased from customs custody. For
those items subject to excise taxes like cigarettes, cars, there is a document in the BIR that you need
to secure, ATRIP - authority to release imported goods. In that document, the BIR will compute in
advance the excise taxes that have to be paid. So, with that document, you have to go to the Bureau
of Customs and present that. Without that ATRIP document, they cannot process your release of
imported items. So, ATRIP - authority to release imported goods.
(3) The regulations that may be issued by the BSP or the Bangko Sentral ng Pilipinas. The
implementation of such regulations is vested in the Bureau of Customs. Remember if you're going
abroad, there is this thing that you have to declare. How much foreign currency are you allowed to
bring out of and into the Philippines. That is a Bangko Sentral regulation being implemented by the
Bureau of Customs. Not the immigration ha, wala silang pakialam dyan. Bureau of Customs 'yan. So,
dapat galing-galingan n'yong mag-ipit kung saan-saan. No joke, No joke. You have to bring the carry-
on bag. You can bring a book, you can bring a wallet. So, i divide divide n'yo. Kasi the threshold is
only 10,000 pesos. What can you buy with 10,000 pesos? I think, that has to be amended to 100,000
pesos siguro.
Signing of CMTA
It was signed into law by former President Benigno Aquino last May 30, 2016. Because it was last year,
obviously it is covered by your Bar Exam coverage. You will be the first one, the guinea pigs of the CMTA
law. So, in the various materials by the Office of the President, it was supposed to modernize the
Bureau's facilities, procedures and overall operations.
RA 10863 also mandates the BOC to adopt non-intrusive examination of goods and may only be allowed
to conduct physical examination if (a) directed by the Commissioner, (b) the goods are subject to an alert
order, (c) if there are controversies surrounding the goods declaration and the import process. Letter (b)
is very very important due to the on-going senate investigations. Alert orders. Before, it was not
institutionalize in the TCCP itself, it was only in various customs circulars wherein alert orders were
mentioned. But right now, it is institutionalize in the CMTA law itself. We will discuss it in more detail later.
Purposes of Imposition of Duties
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This can be asked in an objective type of question, what are the purposes of tariff and customs? First, its
primary role is to raise revenues. Next to the BIR, the BOC is the number 2 collecting agency in the
Philippines. Second, it is also intended to protect domestic economy. Third, it also supports foreign policy.
It is also made to implement commitment to other nations, like trade agreements.
Agencies involved in Customs Laws
Here, there is no change under the CMTA Law, there are still 2 agencies involved: the Tariff Commission
and the Bureau of Customs. So, don't make the mistake that only one agency is involved, the Bureau of
Customs. There are two. Under the Tax Code, there is only one, the Bureau of Internal Revenue. But for
Tariff and Customs Laws, there are two. One is advisory, the other is the implementor.
Functions of the Tariff Commission

So, under the new CMTA Law, there is a revised list of functions of the tariff commission (Sec. 1603).
Essentially, it is still the same. But, of course, if we are asked in the bar exam, we need to cite what is the
current wordings of the CMTA law.
(a) they are tasked to adjudicate cases on the application of trade remedies against imports
(b) Study the impact of tariff policies and programs on national competitiveness and consumer welfare in
line with the economic objectives of the government;
(c) Administer the Philippine tariff schedules and tariff nomenclatures;
(d) This is one of their more important powers - Issue advance rulings on tariff classification of imported
goods and render rulings on disputes over tariff classification of goods pursuant to Section 1100 (we'll
discuss it more detailed later - what type of advanced rulings the BOC and the tariff commission can
issue) except in cases involving goods on which the Commission has provided advance ruling on tariff
classification. The main reason of advance ruling is to speed-up the process, advance ruling 'eh. Before
the imported goods come to the Philippine jurisdiction, there is already a ruling by the Tariff Commission.
So, there should be no problem in the actual computation of taxes and duties.
(e) Provide the President and Congress with independent analysis, information and technical support on
matters related to tariff and non-tariff measures affecting Philippine industries and exports for policy
guidance;
(f) Analyze the nature and composition, and the classification of goods according to tariff commodity
classification and heading number for customs and other related purposes, which information shall be
furnished to various government agencies: NEDA, DTI, DA, DOF, DENR, and BSP;
(g) Review the trade agreements for negotiation and trade agreements entered into by the Philippines
and make recommendations, if necessary, on the consistency of the terms of the agreements with the
national policy objectives. This is again another important function of the Tariff Commission.
(h) Conduct public consultations and public hearings pursuant to its functions; and
(i) Deputize or delegate, to appropriate government agency its function of rendering rulings on disputes
over tariff classification of goods, until the plantilla positions necessary for undertaking such function
have been approved and filled-up: Provided, That such delegation of function shall not extend beyond
3 years from the effectivity of this Act. So, this provision somehow confirms that the Tariff
Commission is undermanned. So, here, they can deputize or delegate personnel outside from the
official plantilla. Plantilla is parang positions. So, but the delegation cannot exceed 3 years. So,
Congress would anticipate dapat within 3 years time you already hired sufficient number of
employees that would help you in issuing all those advance rulings.
For powers of the Tariff Commission, you just have to read them and probably memorize 3 so that if you
are asked objectively, can you compare the powers of the Tariff Commission vis-a-vis the powers of the
Bureau of Customs, you can at least enumerate some. I'm not asking you to memorize everything but
some. Just focus on the most important functions I have highlighted earlier.
Powers of the Bureau of Customs

How about the Bureau? Its functions are outlined in section 202 of the CMTA law.
[TAXI NOTES] 125

(a) Assessment and collection of customs revenues from imported goods and other dues, fees, charges,
fines and penalties. That is their primary function - assessment and collection.
(b) I don't know if they can fulfill this one - Simplification and harmonization of customs procedures to
facilitate movement of goods in international trade. Because if it is very simple and harmonized,
sometimes, there is no room for corruption. Sometimes, they complicate it, put certain layering on it,
that's why it forms some sort of corruption on their level.
(c) Border control to prevent entry of smuggled goods;
(d) Prevention and suppression of smuggling and other customs fraud;
(e) Facilitation and security of international trade and commerce through an informed compliance
program. 'Yan medyo buladas nalang 'yan eh.
Here, you have 3 types of supervision and contol powers -
(f) Supervision and control over the entrance and clearance of vessels and aircraft engaged in foreign
commerce;
(g) Supervision and control over the handling of foreign mails arriving in the Philippines for the purpose of
collecting revenues and preventing the entry of contraband. The entry of mails are sometimes
abused. D'yan minsan maraming undeclared items. When you say kasi mails, hindi lang naman 'yung
sobre eh. It can be in a form of package ... so, this are sometimes overly abused.
(h) Supervision and control on all import and export cargoes, landed or stored in piers, airports, terminal
facilities, including container yards and freight stations for the protection of government revenue and
prevention of entry of contraband;
(i) Conduct a compensation study with the end view of developing and recommending to the President a
competitive compensation and remuneration system to attract and retain highly qualified personnel,
while ensuring that the Bureau remains financially sound and sustainable. I don't know, without a
corresponding budget - whatever study they'll come up with will not be sufficient. There must be a
substantial portion earmarked so that they can improve the quality of personnel at the BIR and the
BOC. Remember, they expect these two agencies to collect practically 70-80% of the total revenues
per year, that they need to staff them with competent and efficient people. So, I don't know if we can
experience that during our time but that's the very ideal goal on the part of President Duterte.
(j) One of their important functions also is to exercise exclusive original jurisdiction over forfeiture cases
under this Act; and
(k) Enforcement of this Act and all other laws, rules and regulations related to customs administration.
So, please take note of the Doctrine of Primary Jurisdiction. Whether the TCCP was amended by the
CMTA law, that is still a good advice - the Doctrine of Primary Jurisdiction. For me, the most important
power of the BOC is the power to prevent express smuggling and other frauds. It is manifested through
the power to control and supervise the clearance as well as the entrance of vessels, aircrafts originating
from foreign countries. Police power to exercise over harbor, airport, trailer and port. For us, I think, our
weakness is in terms of "border control in waters" kasi our country is, how many island ba our country,
7,100 depending on low-tide or high-tide. So, airports are manned by sufficient people. Ports are manned
by sufficient people. But so many items are being smuggled outside of the airports and ports. Minsan may
iiwan nalang sa dagat. 'Yan 'yung dapat tayong mag-improve eh. We can only improve on it if we have
the sufficient vessels and other equipments necessary.
The BOC also has the right of pursuit against vessels subject to seizure, even if it is beyond our time
zone. This is called the ... jurisdiction of the BOC - sometimes we call this - Right of Pursuit. The BOC
may exercise this power of pursuit when the vessel is subject to seizure and forfeiture and there was a
violation of the customs laws committed within the Philippines.
Consistent with its power to prevent or avoid smuggling, the BOC may enter in a building, house,
structure, enclosure, and warehouse. No search warrant is required as long as they reasonably pertain to
the place where the smuggled goods, seizure or search really made. But it must be shown that the place
does not constitute a dwelling place. This is also because if it's a dwelling place, it is covered by the
constitutional provision where one must ... What is the principle that we need a search warrant for a
dwelling house? Anong principle ang gaga,ktin n'yo d'yan? If you are confronted with a situation in the bar
exams, that BOC will enter a house which stored imported items, what principle do you use? 'Di ba may
[TAXI NOTES] 126

principle about castle? A man's house however humble is his own castle. So, as a rule, under the CMTA
law or even under the previous TCCP, the BOC has the right to enter any enclosure, as long as hindi s'ya
bahay. Medyo hirap lang sila kapag mga chinese structures 'yan, kasi normally first floor, 'yun 'yung
negosyo. Second floor bahay. Sometimes, there appears to be some confusion because bahay nga e 'di
ba? But for non-chinese structures, a home is obvious naman. What if you encounter a situation wherein
the watchman or security guard and his family live in that place or building where smuggled items are
stored, can there be a seizure without a search warrant? Or in other words, can we consider that as a
dwelling place? Maraming ganyan ha. Enclosures na nakatira lang gwardya at pamilya nya. Before the
CMTA Law, it was not expressly provided. But under the CMTA Law, this situation is expressly covered.
No, that will not make the building a dwelling place. Under the 2nd paragraph under section 219.
Authority to Enter Properties

Sec. 219. Authority to Enter Properties. – Any person exercising police authority may, at any time, enter,
pass through, and search any land, enclosure, warehouse, store, building or structure not principally used
as a dwelling house. Here, the most important phrase, "at any time". Monday to sunday, 24/7 'yan, at any
time, not principally used as a dwelling house.
When a security personnel or any other employee lives in the warehouse, store, or any building, structure
or enclosure that is used for storage of goods, it shall not be considered as a dwelling house for purposes
of this Act.
The Congress already inserted this condition to counter any possible allegation where the defense is that
the structure is used as a dwelling house purposes. So, now it is very clear.
Authority to Search Dwelling House

Authority to Search Dwelling House is provided in Sec. 220– A dwelling house may be entered and
searched only upon warrant issued by a Judge of a competent court, the sworn application thereon
showing probable cause and particularly describing the place to be searched and the goods to be seized.
Her, the hands of Congress is tied because that is a constitutional provision. We need a search warrant
as a general rule to search a dwelling house. There's only so many exceptions to that rule, right? Can you
give one? Any exception to the search warrant requirement? Oh, basta marami 'yan. So, in your Consti
you can be asked to enumerate certain exceptions.
Power to Inspect and Visit

The BOC also has the power to inspect and visit under sec. 224 – The Commissioner or any customs
officer who is authorized in writing by the Commissioner, may demand evidence of payment of duties and
taxes on imported goods openly for sale or kept in storage. Under the first sentence 2 personnel can
exercise the power - the Commissioner or any officer provided there is authorization in writing. So, if you
have a future client calling you "Attu. merong taga-BOC dito eh, wishing to inspect our warehouse, you
just ask them, do they have an authority in writing from the Commissioner? Parang letter of authority 'yun.
Of course, aside from the letter, you need to verify if they have a government ID, so that you can compare
the name in the ID and the name in the authorization. In the event that the interested party fails to
produce such evidence within 15 days, the goods may be seized and subjected to forfeiture proceedings.
So, pagpunta ng BOC dun sa warehouse or store and you have no evidence of payment of duties and
taxes, like for example, kapag sinabi mong, "Sir, 'di naman ako ang importer n'yan 'eh." Kanino mo binili?
If you cannot produce it at that point in time, you have theoretically 15 days to present to the BOC proofs
that the proper taxes and duties were paid., During the proceedings, the interested party shall be given
the opportunity to prove or show the source of the goods and the payment of duties and taxes thereon:
Provided, further, That when the warrant of seizure has been issued but subsequent documents
presented evidencing proper payment are found to be authentic and in order, the District Collector shall,
within 15 days from the receipt of the motion to quash or recall the warrant, cause the immediate release
of the goods seized, subject to clearance by the Commissioner. This is another safety mechanism
introduced by the new law - dapat may clearance from the Commissioner. Hindi pwedeng district collector
lang. This is a safeguard. Provided, finally, That the release thereof shall not be contrary to law. Sec. 224,
this is very important, so if you have time to read before the bar exams please read the law.
[TAXI NOTES] 127

That particular section I can think of one big super market chain, most supermarket chains are importers
because they can command discounts from volume, right? But, I'm surprised about one particular
supermarket chain. They are not importers. They buy it from local. So, theoretically, it does not make any
sense. But from a practical standpoint, maybe they are thinking of something else. So, just a food for
thought. Because if you have 50 supermarkets, you can import na from other countries eh, so that you
can buy it at a lesser price. Why would you buy from a local source unless you are fooling around with
taxes and duties.
Power of Seizure
Sec. 216. Exercise of Power of Seizure. – Any person exercising police authority under this Act has the
power and duty to seize any vessel, aircraft, cargo, goods, animal or any other movable property when
the same is subject to forfeiture or when they are subject of a fine imposed under this Act.
Power to Search Vessels/ Aircraft (sec. 221)

Power of Search of Vessel and Aircraft, this is just a reiteration of the previous TCCP code provision, I will
read it for those who have not read it. Any person exercising police authority under this Act may board,
inspect, search and examine a vessel or aircraft and any container, trunk, package, box or envelope
found on board, and physically search and examine any person thereon. In case of any probable violation
of this Act, the person exercising police authority may seize the goods, vessel, aircraft, or any part
thereof. Such power to search includes removal of any false bottom, partition, bulkhead, or any other
obstruction for the purpose of uncovering any concealed dutiable or forfeitable goods. Just like in the
case of the on-going BOC investigation, saan ba nila tinago 'yung drugs? Sa mga receptacles 'di ba? So,
they can forcibly open it to determine whether there are drugs inside. The proceeding herein authorized
shall not give rise to any claim for damage caused to the goods, vessel or aircraft, unless there is gross
negligence or abuse of authority in the exercise thereof. Let's take the case of the BOC investigation, if
there was an anonymous tip that there are hidden drugs in the various receptacles, if the BOC will forcibly
open the receptacles, and it turns out negative, generally they are not liable unless they can prove that
there was gross negligence in their part on removing the receptacles or there was abuse of authority in
the exercise thereof. So, let's say for example, merong 20 receptacles, in theory, kung negative 'yung 19
dyan, baka namdun sa isang receptacle. If I'm the BOC, I will open everything. 'Di ba? The
importer/consignee might question, no you destroyed everything, but me, if I'm the BOC, what if the
imported drugs are just in one cylinder or container, so I have to double check whether the drugs are in
each of the receptacles. So, be careful of this provision. It depends on the facts in the bar exams. So,
look for abuse of authority or negligence.
Power of Search of Vehicles, Carriers Persons and Animals (sec. 222)

Upon reasonable cause, any person exercising police authority may open and examine any box, trunk,
envelope, or other container for purposes of determining the presence of dutiable or prohibited goods.
This authority includes the search of receptacles used for the transport of human remains and dead
animals. Such authority likewise includes the power to stop, search, and examine any vehicle or carrier,
person or animal suspected of holding or conveying dutiable or prohibited goods. Here, this is a
theoretical power but I don't think our Bureau of customs are very strict with this one. Unless, there are 10
coffins, but if there is only 1 coffin, it,has undergone naman various screening procedures in the country
of origin, so, I don't think they are that strict when it comes to receptacles used for the transport of human
remains. But in some movies that we were able to watch sometimes 'di ba they hide drugs from dead
people, anong movie yun? Bad boys.
Power of Search of Foreigners

Under Sec. 223 - Upon reasonable cause, travelers arriving from foreign countries may be subjected to
search and detention by the customs officers. The dignity of the person under search and detention shall
be respected at all times. Female inspectors may be employed for the examination and search of persons
of their own sex. Here, we have read so many instances wherein foreigners are being used a drug mules
into the country. So, this is the provision that would empower them to freeze and search the persons and
the baggages of foreigners.
Power of Special Surveillance
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Sec. 306. – The Bureau shall conduct surveillance on vessels or aircrafts entering Philippine territory and
on imported goods entering the customs office: Provided, That the function of the Philippine Coast Guard,
shall continue to be in force. So, in the supervision and monitoring of our seas, it will be two - Bureau of
Customs and the Phil. Coast Guard that will ensure and protect our coastline.
Kinds of Imported Articles:

The CMTA Law basically, it is still the same. You still have the general kind, the dutiable articles under
sec. 104. For the prohibited articles, they divided it into two - dati kasi isa lang, sec. 101 yata yon,
nandoon na 'yung absolutely prohibited and qualifiedly prohibited. Ngayon, to avoid confusion, they
provided for 2 sections, for absolutely prohibited, it is found in sec. 118 from letters a-g, for those
restricted importations (sec. 119) except when otherwise authorized by law, the importation and
exportation is restricted like medicines, lottery, sweepstakes, guns, those are examples of restricted
importations. Prohibited 'yung mga articles by inciting sa treason, articles for abortion, etc. So, basically,
they are the same examples, it's just that they created new provisions. So, prohibited articles, just try to
memorize 3, same goes with restricted importations so that if you are asked to explain and gives
examples, you can give examples. The fourth one conditionally-free and duty-free articles, it is found
under sec. 800. As you can see, parang kinumplikado ulit ng Congress, 'yung prohibited under 118,119
pero 'yung comditjonally-free 800, ang layo na sobra. Sometimes, hindi ko alam bakit nila ginagawa 'yung
ganoon 'di ba? It can be simple naman 'di ba?
De Minimis Importation
Anyway, under a Customs District Order No. 2-2016, we have such a thing now called "De Minimis"
importations. When younsay de minimis importations, those are importations 10,000 or less. They are not
subject to duties or taxes. So, pwede kayong magpadala sa mail with a value of 10,000 and below.
Dutiable Articles
If your imported articles falls under the general rule, dutiable articles, you just have to know the concept of
transaction value. There are various methods to determine transaction value, we're not here to discuss
them. Just read it in your memory aid. This is the first formula, if you can't determine the basis under the
first formula, then you go to method 2, then method 3, then method 4, method 5, and method 6. So, these
methods are used according to order. If you can comply with one, then you go to method one, if method
one is not possible then go to method two.
Duties of an Importer
Duties of an importer - it remains kasi under the CMTA law.
(1) Ensure that the goods are recorded in the cargo manifest.
(2) File an import entry within the time prescribed by law. What's the impact of filing an import entry
beyond the period prescribed by law? The goods could be considered abandoned.
(3) Declare the correct value or weight as the case may be.
(4) Pay the correct duties and taxes.
(5) Keep and maintain importation records. What's the impact of maintaining importation records? They
can do kasi post-audit eh. So, if you don't have any records, how can you prove later on that you paid
the correct duties and taxes? But in actual practice sometimes, so many companies are just too
reliant on their brokers. Ito budget, ito papel, and the brokers naman if they can minimize the taxes
and duties, sometimes they are the ones filing the entries so that their take home is much higher. But,
many cases, the importers or consignees are not aware. I'm telling all my importer clients, don't trust
too much your brokers. You have to double check what kind of entries are they filing because if there
is any possible violation, then that would be your violation, sama lang 'yung broker but you are the
principal. You cannot feign ignorance by saying that it was the broker who filled-up the entry.
Conditionally-Free Importations
So, we're not here to discuss all the conditionally-free imported items. I'm just here to highlight the general
guidelines and certain possible scenarios in the bar. Sec. 800 provides - The following goods shall be
exempt from the payment of import duties upon compliance with the formalities prescribed in the
regulations which shall be promulgated by the Commissioner with the approval of the Secretary of
[TAXI NOTES] 129

Finance: Provided, That goods sold, bartered, hired or used for purposes other than what they were
intended for and without prior payment of the duty, tax or other charges which would have been due and
payable at the time of entry if the goods had been entered without the benefit of this section, shall be
subject to forfeiture and the importation shall constitute a fraudulent practice against customs laws. This
is an important addition by the current law. That the President may, upon the recommendation of the
Secretary of Finance, suspend, disallow or completely withdraw, in whole or in part, any conditionally-free
importation under this section. Prior to the CMTA Law, this power is absent. So, they are just making it, I
think it is just an anticipation, there might be some possible abuse in the future and the President can
come in and stop the importation of those items without payment of duties and taxes. Letter (a) is exactly
the same provision under the previous law but they just need to highlight
(a) Aquatic products caught or gathered by fishing vessels of Philippine registry. That's the first
requirement but not the only requirement. Provided, that they are imported in such vessels Provided,
further, that they have not been landed in any foreign territory or, if so landed, that they have been
landed solely for transshipment without having been advanced in condition; So, here, for the aquatic
products to be exempted, it must not only be caught or gathered by fishing vessels of Phil. registry,
dapat hindi rin s'ya nag-land sa foreign territory kasi paano kapag doon ka bumili ng isda, then, you
say nahuli mo lang. This is a protection.
Letter (f) this could be asked in the bar exams because there are different threshold.
(f) Personal and household effects belonging to returning residents. The phrase "returning residents" shall
refer to nationals who have stayed in a foreign country for a period of at least 6 months. Returning
residents shall have tax and duty exemption on personal and household effects subject to the following
conditions:
(1) It shall not be in commercial quantities. What constitutes commercial quantities would depend on the
item. Recently, there was an alleged grandchild ba of Ramon Rebilla, nag-import ng aborting pills and ng
amoxicillin. 'Yung punong-puno 'yung luggage n'ya. 'Yun talaga commercial quantities 'yon without a
doubt. But if we're talking about laptops, if you import one, that's not commercial quantity, but if you're
importing 5, same brand, same model, probably, it is already in commercial quantity. Case to case basis.
(2) It is not intended for barter, sale or for hire; and
(3) Limited to the FCA or FOB value of: here, we have to read it at least twice so that we can recall the
threshold.
(i) P350,000.00 for those who have stayed in a foreign country for at least 10 years and have not availed
of this privilege within 10 years prior to returning resident's arrival;
(ii) P250,000.00 for those who have stayed in a foreign country for a period of at least 5 but not more than
10 years and have not availed of this privilege within 5 years prior to returning resident's arrival; or
(iii) P150,000.00 for those who have stayed in a foreign country for a period of less than 5 years and have
not availed of this privilege within 6 months prior to returning resident's arrival.
So, there's a different maximum threshold depending on your length of stay outside the Philippines. The
longer you have stayed in other countries, the higher your bracket.
Any amount in excess of the above-stated threshold shall be subject to the corresponding duties and
taxes under this Act. This is a welcome amendment because under the previous law, when it was passed
in 1978, the threshold was only 10,000. 10,000 then was malaking pera eh. Imagine 2017, 10,000 now.
That's why when there was a huge problem in the balikbayan boxes, the Bureau of Customs was correct.
Our hands were tied eh. You amend the law then we can implement but right now, there is no way for us
to exempt eh. Kahit naaawa kami sa mga balikbayan. So, it is a welcome development. This is another
welcome insertion by Congress. Every 3 years the Secretary of Finance shall adjust the amount herein
stated to its present value using the CPI as published by the PSA. So, every 3 years the 350,000 250,000
and 150,000 can be adjusted using the sa NSO yan eh, so they can do the calculation. So, we don't nave
to go to Congress dvery now and then to have the threshold increased. There is now a mechanism. So,
that is a welcome development.
[TAXI NOTES] 130

Also, In addition to the privileges granted under the immediately preceding paragraph, returning OFWs
shall have the privilege to bring in, tax and duty-free, home appliances and other durables, limited to one
of every kind once in a given calendar year accompanying them on their return, or arriving within a
reasonable time which, barring unforeseen and fortuitous events, in no case shall exceed 60 days after
every returning OFW's return to the Philippines. Again, any amount in excess shall be subject to the
applicable taxes and duties.
(g) This provision is about balikbayan boxes. Residents of the Philippines, OFWs or other Filipinos while
residing abroad or upon their return to the Philippines shall be allowed to bring in or send to their families
or relatives in the Philippines balikbayan boxes which shall be exempt from applicable duties and taxes
imposed under the Tax Code. So, for the balikbayan boxes - personal and household effects only and
shall neither be in commercial quantities nor intended for barter, sale or for hire and that the value of
which shall not exceed P150,000.00: Provided, further, That every 3 years the Secretary of Finance shall
adjust the amount herein stated to its present value using the CPI as published by the PSA: Provided,
finally, That residents of the Philippines, OFWs or other Filipinos can only avail of this privilege up to 3
times in a calendar year. So, mamimili nalang kayo anong event, christmas, birthday, new year. Any
amount in excess of the allowable non-dutiable value shall be subject to the applicable duties and taxes;,
So, in theory, the maximum amount under the section is 450,000 balikbayan boxes regardless of the size.
They are more concern with the body. But, of course, whatever value is cited in the bill of lading normally
hindi naman lahat 'yan physically inspected right, as long as upon xray, medyo consistent naman doon sa
declaration, probably, they won't physically imsoect the items. But, theoretically those are the
requirements. Again, a far cry from 10,000. 10,000 vs 450,000.
Under the CMTA law, there is a technical definition of OFWs. Ngayon ba yan pa ang tawag? OFWs? I
think there is a more politically-correct na e now, right? Parang OCWs ba? But under the CMTA law, they
used the term OFWs. They refer to holders of valid passports duly issued by the Department of Foreign
Affairs (DFA) and certified by the Department of Labor and Employment (DOLE) or the Philippine
Overseas Employment Administration (POEA) for overseas employment purposes. They cover all
Filipinos, working in a foreign country under employment contracts, regardless of their professions, skills
or employment status in a foreign country. So, 'yung mga TNT pasok 'yan.
(m) This provision applies whenever there is a calamity in the country. Those Imported goods donated to
or, for the account of the Philippine government or any duly registered relief organization, not operated for
profit, for free distribution among the needy, upon certification by the DSWD or the Department of
Education (DepED), or the Department of Health (DOH), they are considered conditionally-free imported
items. So, there are twin requirements here. Kanino dinonate? Philippine government of registered
organizations not operated for profit. Eh dapat may certification of either DSWD, DepED, or DOH. Outside
of those agencies, those imported items, whether donated to cannot be covered by the exemption. So,
under sec. 800, there are a-aa, so ilan 'yon. So, marami 'yan. So, if you are asked to enumerate 5, ang
dami nyong pagpipilian, hanggang aa eh.
You can be asked to distinguish between dutiable items, prohibited items, conditionally-free items, and
then you can give examples to distinguish all of them. This is an important provision - the provisions of
the general and special laws to the contrary not withstanding, including those coming from ... there shall
be no exception whatsoever from the payment of duties except otherwise provided for in this Act which is
sec. 800 as well as the following:
(1) those granted to government agencies, instrumentalities or GOCCs with existing contracts,
commitments, agreements, or obligations with foreign countries requiring such exemption.
(2) Also, those granted to international institutions, associations or organizations entitled to exceptions,
pursuant to agreements and special laws like international institutions, amrami yan di ba? During
calamities, marami sa ating ganyan di ba? WHO, Red Cross ba kasama dyan? Si Rosa Rosal?
(3) Those that may be granted by the President upon prior recommendation of the NEDA in the interest
of national economic development. So, that is the catch-all there.
[TAXI NOTES] 131

Importations by Government -
sec. 406 – Except those provided for in Section 800, all importations by the government for its own use or
that of its subordinate branches or instrumentalities, or corporations, agencies or instrumentalities owned
or controlled by the government, shall be subject to the duties, taxes, fees and other charges. Take note
of this ha. Importations by the government are generally taxable except if they fall under sec. 800.' I can't
understand the rationale the rationale for this. There is a faster phase of importation as you go through
customs.
Special Customs Duties

This has not been amended by the CMTA Law. It is still five kinds of special duties. So, if you have
encountered a book or a material which says that it is only 4, maybe it is about time that you throw away
that book. They are found Dumping duties - sec. 711 of the CMTA, countervailing duties - sec. 713,
marking duties - sec. 710, discriminatory duties - sec. 712 and safeguard duties - sec. 712. This can
come in an objective type of question when you are asked to distinguish all of them. There are different
imposing authorities. There are different rates. There are different purpose or objectives of such
imposition. I think your memory aid would offer a better summary of these items. So, don't forget there are
five. Ang palaging naiiwan dyan is the safeguard duty.
Protest Procedure
There is a very important amendment to this one. Under the 2nd par., I'll read first the 1st paragraph.
Under sec. 1106, here you have to memorize the number so that if you encounter a hypothetical
scenario, a customs case about protest, you can cite it. Sec. 1106 of the CMTA Law provides the
following: When a ruling or decision of the District Collector or customs officer involving goods with
valuation, rules of origin, and other customs issues is made, except the fixing of fines in seizure cases,
the party adversely affected may appeal by way of protest against such ruling or decision by presenting to
the Commissioner at the time when payment of the amount claimed to be due the government is made,
or within 15 days thereafter, a written protest setting forth the objection to the ruling or decision. So, in all
these instances, regarding valuation, rules of origin, other customs issues except the fixing of fines, you
can make an appeal by way of protest to the Commissioner. Two modes: simultaneously when payment
is made, or within 15 days thereafter, 15 days after payment is made. A written protest, wala namang
verbal. Under the 2nd par. subject to the approval of the Secretary of Finance, the Commissioner shall
provide rules and regulations as to the requirement for payment or nonpayment of the disputed amount
and in case of nonpayment, the release of the importation under protest upon posting of sufficient
security. So, this is a welcome development because prior to the CMTA Law, even if the assessment is
contrary to law or there's a ground to say that the importation is exempt, the Collector will just say,
Anthony, hindi namin papayagan 'yung protest kasi our hands are tied eh. So, we have to argue pa, hindi
Sir, general rule lang 'yan eh. It only speaks of ordinary importations eh. But here, it is now very clear.
The BOC in coordination with the Sec. of Finance can determine whether there is a need to pay under
protest or there is a need to exempt it from the payment under protest. But in case you are able to argue
that there is no need to lay the disputed amount, they can only release the importation if you post a
sufficient security or bond. Tama naman 'yan. Wala kang bayad. So, kung matalo ka, meron kang bond
that the BOC can go after, so I think, that's fair rather than paying the whole amount, you just pay a surety
company with premiums. I think that's fair.
Under sec. 1107, this is just a reiteration – In all cases subject to protest, the interested party who desires
to have the action of the District Collector reviewed, shall file a protest otherwise the action of the District
Collector shall be final and conclusive. So, without a protest, whether the action of the district collector is
erroneous, it becomes final and binding. So, anong moral lesson dyan? You need to be aware of the
prescriptive period to file a protest. Otherwise, you lose your right. Anong gagawin n'yo kunwari, na miss-
out nyo ng one day? Theoretically, walang sagot dyan. Pero sa practice meron yan. Once you become
lawyers, you think about it. Maraming cases na ganyan, I've encounterd a colleague of mine, umiiyak sya
dahil 10 million yung nakalimutan nyang i protest, and we're just speaking of 1 day. So, what could be yoir
possible remedy? If you read the memory aid, wala ng magagawa dyan. So, we will reserve the
discussion of that on another day, on your oath-taking.
[TAXI NOTES] 132

Sec. 1110. Decision in Protest. – When a protest is filed in proper form, the Commissioner shall render a
decision within 30 days from receipt of the protest. In case the protest is sustained, in whole or in part, the
appropriate order shall be made, and the entry reassessed, if necessary.
Right of appeal (sec. 114) – Any party adversely affected by a decision or omission of the Bureau
pertaining to an importation, exportation, or any other legal claim shall have the right to appeal within 15
days from receipt of the questioned decision or order.
Alert Orders
This could be asked in the bar exams because the Senate conducted so many hearings about the issue
on alert order. So, right now they are monitoring how many alert orders were issued at the time of PNoy,
and how many alerts orders were issued on the first year of Pres. Duterte.
Under Sec. 1111, so 'yan madaling lang 'yan ma memorize dba? Parang hot-line lang 'yan dba. O basta
alert order, 1111 - Alert orders are written orders issued by customs officers as authorized by the
Commissioner on the basis of derogatory information regarding possible noncompliance with this Act. So
you have to use this well to get the full credit. You cannot use your own words here. An alert order will
result in the suspension of the processing of the goods declaration and the conduct of physical or
nonintrusive inspection of the goods, nonintrusive meaning X-ray 'yan, Within 48 hours or, in the case of
perishable goods, within 24 hours from inspection, they will recommend the continuance of processing or
issuance of a warrant of seizure and detention as the case may be. Kung walang problema sa order, the
lrder will be continue the processing, kung may problema, they will recommend the issuance of a warrant
of seizure and detention. The Bureau's information system shall immediately reflect the imposition or
lifting of an alert order. So, don't forget that, section 1111.
Derogatory information shall indicate the violations and other necessary specifics. The following shall not
be considered derogatory information: Shall not ha, 'yan lahat makikite mo in general, kumbaga, parang
fishing expedition.
(a) General allegations of undervaluation;

(b) General allegations of misclassification without providing the appropriate tariff heading and duty of the
shipment to be alerted;
(c) General allegations of over-quantity without indicating the source of information supporting the
allegation;
(d) General allegations of misdeclaration in the entry without indicating the suspected actual contents
thereof; and
(e) General allegations of importations contrary to law without indicating the specific law or rule to be
violated.
Ang hirap naman palang mag-alert order. Saan ka makakakuha ng specific information? It's either with
disgruntled employee ha or may contact ka sa abroad. Ang hirap nyan. Ang hirap. Or unless 'yung broker,
inisqueal n'ya 'yung kliyente nya. So, those are instances wherein you cannot recommend an alert order
based on these instances.
No alert order shall be issued on account of allegations of undervaluation unless said undervaluation is
caused by the submission to customs of forged or spurious invoice or other commercial documents. So,
this is one possible instance of allowing an alert order provided the supporting documents in the import
entry are spurious or fake pero mga small tim nalang gumagawa nyan. Kasi kung big time ka, of course
yung mga gagamitin mong invoice or recits genuine. Ito mga small time lang ang maka-capture eh.
An alert order may be issued only after lodgement (I'm sure you have heard so many times lodgement) of
the goods declaration and prior to the release of goods from customs custody. Under no circumstances
shall, the suspension of the processing of goods declaration be allowed except through an alert order
[TAXI NOTES] 133

issued by an authorized customs officer. This is very important. In theory dapat tuloy-tuloy lang yan. But
in the BOC we have so many lanes. We have the red lane, yellow lane, green lane and super green lane.
In super green lane, wala ng tanong-tanong dyan. In green lane, konting tanong-tanong. Yellow, pwede.
Sa red talaga, 100% physical examination, red alert. So, if you become tax lawyers in the future, there is
no hard and fast rule for them to approve you a super green lane status. It is subjective eh. Malaks ka ba
kay Commissioner or Collector? Wala namang criteria eh. So, it's very very hard. You can count on your
fingers those law firms that can get you a super green lane status. So, it's not an easy application where
there are specific requirements. It is a case-to-case basis.
This is also very important. The costs of the physical inspection shall be borne by the Bureau, as a
general rule. Provided, That such cost shall be reimbursed by the owner prior to the release of the goods
if the physical inspection results in the assessment of additional duties or taxes or the issuance of a
warrant of seizure. So, kapag may alert order and there was a physical examination, and the result was
negative. Any cost is shouldered by the Bureau. If the result is positive, eh syempre 'yung owner na ang
magbabayad non. On how it is computed, I don't know. Maybe the cost of personnel ... like for example
what happened in the drugs importation case. It turned out positive right? So, all cost related to that
inspection should be shouldered by the owner of the warehouse or the consignee. But until now, we don't
know who they actually are 'di ba? Lahat sila nagtuturuan 'di ba?
Under the provision also, the Commissioner shall be notified of the recommendation by the alerting officer
within 24 hours from the issuance of the alert order. I think this is a safety mechanism of after-thought.
So, kapag may nangyaring issue, may mechanism, hindi ka pwedeng mag-imbento na may alert order,
because there is a mechanism. You have to report to thr Commissioner within 24 hours. Alert orders shall
be dated and assigned a unique reference number - that is another safety feature. The Bureau shall
create a central clearing house for alert orders - ito 'yung naririnig na may central office ang investigation
headed by 'yung ... ni Failon, sya 'yung head ng clearing house. Have you been following that? kayo
talaga oh. Youtube nyo nalang if you have time. You can learn some things about the TCCP by watching
the proceedings.
Properties subject to Forfeiture - (Sec. 1113)

It is somehow a reiteration of the items under the previous law. It is from letter a-l, previously it was
section 2530, This are some examples.
(a) Any vehicle, vessel or aircraft, including cargo, which shall be used unlawfully in the importation
or exportation of goods or in conveying or transporting smuggled goods in commercial quantities
into or from any Philippine port or place. The mere carrying or holding on board of smuggled
goods in commercial quantities shall subject such vehicle, vessel, aircraft, or any other craft to
forfeiture: Provided, That the vehicle, vessel, aircraft or any other craft is not used as a common
carrier which has been chartered or leased for purposes. So, as a rule, if there are smuggled
items of commercial quantities found in the vessel, it is subject to forfeiture unless it is a common
carrier.
Ito naman about sea stores. Alam n'yo 'yung sea stores parang airplane din 'yan eh dba, meron din silang
binebenta rin. (b) Any vessel engaging in the coastwise trade which shall have on board goods of foreign
growth, produce, or manufacture in excess of the amount necessary for sea stores, without such goods
having been properly entered or legally imported. Meron na ba dito yung nakapag-cruise? Normally 'yan
'yung pwede kang bumili ng mga liquors-liquors sa bar. So, dapat 'yung sufficient quantity lang 'yan in
your journey. If sobrang dami na 'yan na di mo na maja-justify na ganyan kalakas uminom mga pasahero
namin eh. So, those are the goods that could be subject to seizure. For vessels, they call it sea stores, for
aircrafts, carts (hehehe). So, letter (k) is also very important. Any conveyance... The mere conveyance of
smuggled goods by such transport vehicle shall be sufficient cause for the outright seizure and
confiscation. They are talking about a different kind of conveyance. This is somehow a catch-all provision
under properties subject to forfeiture under letter (l) Goods sought to be imported or exported: (1) Without
going through a customs office whether the act was consummated, frustrated, or attempted. (2) Found in
the baggage of a person arriving from abroad and undeclared by such person. So be very careful, 'di ba
[TAXI NOTES] 134

oag-uwi natin sa Pilipinas meron dun form and then upon getting oir luggage we have to make a personal
determination saang counter tayo pupunta. Di ba may counter ng goods to declare and not to declare?
San tayo palaging pumupunta? Nothing to declare - so, in theory delikado 'yun. Kasi pwede kayong
mahuli dyan eh. Fraud yun eh. If you have something to declare and you went to the counter na nothing
to declare, that is a fraudulent act, unless sasabihin mo hindi ako marunong magbasa e - that is your only
defense. You cannot argue e mahaba kasi ang pila dun eh. Wala namang pila dyan palagi, sa goods to
declare. (3) Through a false declaration or affidavit executed by the owner, importer, exporter, or
consignee concerning the importation of such, goods; (4) On the strength of a false invoice or other
document executed by the owner, etc. or (5) Through any other practice or device contrary to law by
means of which such goods entered through a customs office to the prejudice of the government. As you
can see here, hindi pumasok sa customs office. Meron sa bagahe mo pero hindi mo dineclare. Gumamit
ka ng false invoice sa affidavit, gumamit ka ng false invoice sa other documents. Those are the general
grounds wherein the Bureau has the power to forfeit any imported or exported items.
Nature of Forfeiture Proceedings (Sec. 1114)

This is just a reiteration with minor modification to the previous law. – The forfeiture of the vehicle, vessel,
or aircraft shall not be effected if it is established that the owner thereof or the agent in charge of the
means of conveyance - has no knowledge of or participation in the unlawful act: Provided, ang dali kasing
sabihin na wala kang knowledge or participation, sino bang aamin? Provided, it creates a prima facie
presumption if any of the following instances are present: (a) If the conveyance has been used for
smuggling before; (b) If the owner is not in the business for which the conveyance is generally used; and
(c) If the owner is not financially in a position to own such conveyance. So, in any of these instances,
there is a prima facie case for forfeiture.
These are just concepts that you have to be aware of. Forfeiture proceedings are in the nature of a
proceeding in rem directed against the res or the imported goods, civil and administrative in nature, not
criminal. Hence, any repeal of the law will not be given retroactive effect. Acquittal in a criminal charge
before the City Fiscal office does not operate as res judicata in a seizure or forfeiture proceeding. A
distinction exist between the proceedings before the fiscal which are in personam since they are directed
against the holder of the thing whereas a forfeiture proceeding is one in rem directed against the thing
itself. Ito mga pang-bola-bola nalang ito eh if you encounter a hypothetical scenario.
Burden of Proof in Forfeiture Cases

Under Sec. 1123. Burden of Proof in Forfeiture Proceedings. – In all proceedings for the forfeiture of any
vehicle, vessel, aircraft, or goods under this Act, the burden of proof shall be borne by the claimant. There
is no presumption of innocence here. Once forfeiture proceedings are initiated, the burden of proof is
against you.
Decision on forfeiture cases - sec. 1125

In forfeiture cases, the District Collector shall issue an order for hearing within 15 days, or 5 days in case
of perishable goods, from issuance of the warrant. The District Collector shall render a decision within 30
days upon termination of the hearing, or within 10 days in case of perishable goods. So, as you can see
here maraming procedure and timeline depending on the goods itself. Mas mahaba if non-perishable,
mas maikli if perishable for obvious reasons. What are the samples of perishable goods? Drugs?
(hehehe) mga vegetables, mga ganun, 'yung mga dapat na fini-freezer or something, those are samples
of perishable goods. Imported vehicles 'yan hindi persohable 'yan pwedeng mag-antay yan ng matagal.
Appeal to the Commissioner –

Under sec. 1126, I have to read these provisions bear with me because this is the only way eh, you
cannot just rely on the memory aid eh. You need to read the actual provision so that you can imagine the
actual scenario.
In forfeiture cases, the person aggrieved by the decision of a District Collector may, within 15 days or 5
days in case of perishable goods, from receipt of the decision, file a written notice of appeal, together with
the required appeal fee to the District Collector, furnishing a copy to the Commissioner. Be very careful.
[TAXI NOTES] 135

Kapag natalo ka sa forfeiture, saan ka magfa-file ng written appeal? Sa collector pa rin. Copy-furnished
lang ang Commissioner, magkaiba 'yun ah. Natalo ka sa Collector saan ka mag-a-appeal? sa kanya pa
rin, copy-furnished lang ang Commissioner. And you have to pay the required appeal fee. Without the
appeal fee, your protest or appeal is treated as a mere tissue paper. The District Collector shall
immediately transmit all the records of the proceedings to the Commissioner, who shall review and decide
on the appeal within 30 days from receipt of the records, or 15 days in the case of perishable goods:
Provided, That if within 30 days, no decision is rendered, the decision of the District Collector under
appeal is deemed affirmed. So, kapag ganyan ang wording ng batas, hindi nakang magdedecide ang
Commissioner. Imagine all the forfeiture cases in the Philippines and he is required to review within 30
days. In most cases, he will just let the 30 days lapse. And you have to be very very careful when it
concerns the period, because you might lose your remedy afterwards. If you are not really monitoring the
deemed denied period. There is still an automatic review in forfeiture cases just like under the previous
law.
Automatic Review in Forfeiture Cases - sec 1127

Under this section there is an automatic review by the Commissioner or an automatic review by the
Secretary. The Commissioner automatically review any decision by the District Collector basta adverse to
the government. In practice ang lokohan namin dyan, naglagay ka kasi sa Collector, dapat sa
Commissioner's office meron din. But I'm just kidding. So, this is meant to protect precisely the revenues
of the BOC. If you're able to convince the Collector based on nonlegal means then, there is a
Commissioner's office to review the decision. Again, the records of the case shall be elevated within 5
days from the promulgation of the decision. The Commissioner shall decide on the automatic review
within 30 days, or within 10 days in the case of perishable goods, from receipt of the records. When no
decision is rendered within the prescribed period or when a decision adverse to the government is
rendered by the Commissioner involving goods with a value of 10 million pesos or more, the records of
the decision of the Commissioner, or of the District Collector under review, as the case may be, shall be
automatically elevated within 5 days for review by the Secretary of Finance. The decision issued by the
Secretary of Finance, whether or not a decision was rendered by the Commissioner within 30 days, or
within 10 days in the case of perishable goods, from receipt of the records, shall be final upon the Bureau.
Other cases - sec. 1128

There's also an automatic review of other cases. Kanina forfeiture ngayon other cases. Essentially, it is
saying the same thing. So, you just have to read it in your codal. Is there a new codal for CMTA? Meron
ng codal from Rex? Maybe if there is, maybe it is time to buy? It's an investment naman eh. If there's no
codal yet, then, download it. But I don't advise you to print it because it is composed of around 80 pages
eh in short bond paper. So try to download it and read it.
Settlement in Forfeiture Cases - sec. 1124

Even if you have paid the fine or you have paid the redeemed value, the goods shall be released and all
liabilities which may attach to the goods shall be discharged without prejudice to the filing of
administrative or criminal case for smuggled items. So, notwithstanding you have paid the fine or you
have paid the redeemed value, they can go after you administratively or criminally because again, they
are different proceedings. However, settlement is not allowed when there is fraud, or where the
importation is prohibited or the release of the goods is contrary to law. Just like in the Tax Code,
compromise is not allowed when there is fraud. Makes sense.
Authority of Commissioner to Compromise - sec 1131

Earlier, it is the Power of the Commissioner to make settlements. Here, it ks the authority of the
Commission to make a compromise. Subject to the approval of the Secretary of Finance - that is another
safety feature, the Commissioner may compromise any administrative case arising under this Act
involving the imposition of fines and surcharges, including those arising from the conduct of a post
clearance audit, unless otherwise specified by law. Cases involving forfeiture proceedings shall however
not be subject to any compromise. Because forfeiture proceedings they can be subject to settlement but
not to compromise.
[TAXI NOTES] 136

Effect of Abandonment
Abandonment redeems importer from payment of duties and taxes but not from possible criminal liability.
Some importers have the wrong notion. Sige, abandon nalang natin 'yan. You only redeem yourself from
the civil aspect but on your violations of the TCCP, you are not redeemed. Abandonment can either be
express or implied. Express abandonment - self-explanatory. These are cases of implied abandonment
(sec. 1129): (a) When the importer fails to file entry within 30 days from discharge of goods or upon filing
of the entry, failure to claim the imported goods within 15 days. So, those are cases of implied
abandonment.
Remedy of Implied Abandonment

The owner may reclaim the articles at any time before the goods are sold or dispose of by paying the
relevant duties, taxes, and charges. So, whether you have committed acts of implied abandonment, there
is still a remedy as long as the goods have not been disposed of to a third party. For obvious reasons,
kapag nabenta na, wala ka ng magagawa.
BOC Rulings
These are just, they just copied it, we have classification ruling, valuation ruling, the rules of origin. So, I'll
just read the classification ruling (sec. 1100) - An importer or exporter may file a written application for an
advance ruling on the tariff classification of goods with the Commission (meaning the Tariff Commission).
The Commission shall render a ruling within 30 days. When a declared tariff classification of goods, not
subject of a pending application for advance ruling, is in dispute, the importer, exporter, or the Bureau
shall submit the matter to the Commission for a ruling, so, kapag meron kang advance ruling, kapag nag
sumite ka, kung wala ka naman you can also submit to the Commission for a ruling. You just have to go
through this. This is a condition for various advance rulings that we have cited earlier. An application for
an advance ruling shall cover only one product or item. The application for advance ruling shall be filed at
least 90 days before the importation or exportation to give the Tariff Commission time to review your
request for advance ruling (sec. 1113). Any aggrieved party from the advanced ruling may, within 30 days
from receipt of an adverse ruling or decision, appeal the same to the CTA without prejudice to the
authority of the Secretary of Finance to review decisions adverse to the government. So, if adverse to the
government, automatic review to the Sec. of Finance. If favorable to the Bureau then you have the
remedy of going-up to the CTA. Just like any adverse rulings in the tax code, after exhausting your
remedies to the Sec. of Finance, then you can go to the CTA as a matter of right.
Refund
This is a fairly new provision. Under Sec. 913 – All claims and application for refund of duties and taxes
shall be made in writing and filed with the Bureau within 12 months from the date of payment of duties
and taxes. This is a new requirement. 12 months, in writing same na 'yan, but you must claim within 12
months from date of payment.
The importer may file an appeal of a denial of a claim for refund or abatement, whether it is a full or partial
denial, with the Commissioner within 30 days from the date of the receipt of the denial. The
Commissioner shall render a decision within 30 days from the receipt of all the necessary documents
supporting the application. Within 30 days from receipt of the decision of the Commissioner, the case may
also be appealed to the CTA. Just take note ha, refund, need to file in writing, within 12 months from
payment.
Power of BOC to Audit

This is a fairly new provision under sec. 1000 - Within 3 years from the date of final payment of duties and
taxes or customs clearance, this applies to importations exempt from taxes and duties, the Bureau may
conduct an audit examination, inspection, verification, and investigation of records pertaining to any
goods declaration, which shall include statements, declarations, documents, and electronically generated
or machine readable data, for the purpose of ascertaining the correctness of the goods declaration and
determining the liability of the importer for duties, taxes and other charges, including any fine or penalty,
to ensure compliance with the law. This specially applies to super green lane importers or green lanes,
kasi nga walang tanong-tanong di ba. So, here, within 3 years from their date of payment, the Bureau can
[TAXI NOTES] 137

conduct an audit, inspection, verification, and investigation of all their records, to ascertain whether all
their allegations in the import entry are correct. So, remember ha, 3 years.
Important definitions you know it naman. Port of entry, foreign ports, ah, this one, smuggled items and
contraband, they are not the same. They are technically different. Contrabands are articles of prohibited
importations or exportations. So, smuggled items, it is much broader. Contrabands can be included in
smuggling but not all smuggled items are contrabands. Smuggling - it is an act of any person who shall
fraudulently import or bring to the Philippines, or assist in so doing, any article, contrary to law or shall
receive, conceal, buy, sell or any like manner facilitated transportation, concealment or sale of such
article after importation knowing that the same is imported contrary to law. Said articles shall be known as
smuggled articles. So, as you can see in the word smuggling, it encompasses a lot of things eh. It might
be a decent thing but you did not import or export it in the manner in accordance with law. So, that can
still be considered smuggling. Unlike contraband, bawal 'yan. Whether you complied to the procedure or
not, bawal 'yan.
So, we're done with TCCP and as promised to you we will go home early.
[TAXI NOTES] 138


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2017 TAXATION LAW TRANSCRIPT

Intro to Income Taxation (Justice Dimaampao) 6

Income Taxation (Justice Dimaampao) 10

Tax on Corporations (Justice Dimaampao) 29

Deductions and Exemptions (Justice Dimaampao) 36

Value-Added Tax (Atty. Cabaneiro) 42

Tax Administration and Enforcement (Atty. Cabaneiro) 77

NIRC Remedies (Atty. Cabaneiro) 85

Real Property Tax (Atty. Dy) 103

Local Taxation (Atty. Dy) 109

Tariff and Customs Law (Atty. Dy) 122

GENERAL PRINCIPLES (by Atty. Nicasio Cabaneiro)

STAGES OF TAXATION (Aspects of Taxation)

TAX DISTINGUISHED FROM OTHER IMPOSITIONS

TAX V. LICENSE (FEE)

TAX DISTINGUISHED FROM DEBT

Immunity: No person shall be imprisoned for non-payment of poll tax.

*Back to Poll Tax: Poll tax, situs is presence.

d. Tariff – those are imposed under the Customs Code.

3. As to the Tax Rate

Pag di mo binayaran ang tariff, di mo malalabas yung goods.

When does importation begin and when does importation end?

When you study remedies, you read Title I.

Read Title I (Sections 1-20)

NATURE AND APPLICATION OF TAX LAWS

INTRO TO INCOME TAXATION (by Justice Japar Dimaampao)

DOCUMENTARY STAMP TAX

CUSTOMS MODERNIZATION ACT

INCOME TAXATION (by Justice Japar Dimaampao)

Corporate Taxpayers: Offline Air Carriers

Resident Foreign Corporations: Doing Business

All Events Test

Substituted Filing of Income Tax Return

Capital and Ordinary Assets

Holding Period for Capital Gains Tax

Net Capital Loss Carry-Over

Gain by Legal Fiction: Forced Sales and Capital Gains Tax

Exemption from Capital Gains Tax

TAX ON CORPORATIONS (by Justice Japar Dimaampao)

Sec. 27(E) - CREBA v.

Tax Sparing Credit Cash/Property P&G v. CIR, 204

1. Minimum Corporate Income Tax

Now, these are the decided cases:

1. CREBA v. Romulo, 614 SCRA 605

2. Manila Mining Corp. v. CIR, 499 SCRA 782

These are the distinctions:

Normal Corporate Rate MCIT

Either Taxable Income, or Gross

Even on the 1st year of corporate On the 4th year of corporate

2. Improperly Accumulated Earnings Tax

B - Banks and other nonbank financial intermediaries;

Jurisprudence: Cyanamid v. CIR (322 SCRA 639)

Not all examinees can answer this.

3. Resident Foreign Corporation

These are the rulings in the Air Canada case.

2. The applicable rate as a rule is 30%.

3. The tax base is taxable income, meaning, it can claim deductions.

4. Branch Profit Remittance Tax

Deutsche Bank v. CIR

5. Tax Sparing Credit Rule

The situation is this: Actual case, Procter & Gamble.

Procter&Gamble U.S.A. is a non-resident foreign corporation. It made an investment here in the

6. International Air Carrier and Shipping