Chavez Tax2

Chapter 1
INTRODUCTION TO TRANSFER
AND BUSINESS TAXES
Taxation Defined
Taxation is a process inherent in every state to exercise
the power to exact a proportional enforced contribution on
persons, property, or rights to raise revenue in order to defray
the necessary expenses of the government.
Transfer Taxes
Transfer tax refers to the burden imposed upon the right to
gratuitously transfer or transmit property, tangible, or intangible
from one person to another. If the transfer is onerous, a different
kind of tax may be imposed like in the case of sale or exchange of
a capital asset, the capital gains tax is imposed.
In transfer taxes, such as the estate and donor's tax, what is
taxed is not the estate or the donor but the right to gratuitously
transmit or transfer one's property to another. Hence, in taxation,
even rights are taxable. It is only the tax liability that is imposed
upon the estate or the donor, as the case may be.
The inherent power of the state to tax which is vested in
the legislature, includes the power to determine whom or what
to tax, as well as how much to tax. (Tolentino v. Secretary of
Finance [235 SCRA 630])
Two kinds of transfer taxes:

1. Estate tax
2. Donor's tax
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(A GUIDE TO PASSING THE BAR) VOLUME II
In estate taxation, what is taxed is not the decedent, neither

his property, but the right to gratuitously transfer an inheritance
that will take upon the death of the transferor. The transfer is
basically called succession and the decedent refers to the person
whose property is transmitted through succession, whether or
not through a will. If he left a will, he is also called the testator.
Art. 774 of the Civil Code provides that:
"Succession is a mode of acquisition by virtue

of which the property, rights and obligations to the
extent of the value of the inheritance, of a person are
transmitted through his death to another or others
either by his will or by operation of law."
Estate refers to the property and transmissible rights and

obligations of a person existing at the time of his death and those
which have accrued thereto since the opening of the succession.
[(Manglinong v. Lantano, CV-05102, September 7, 1987) Page
161, First Edition, Moreno's Law Dictionary]
Simply put, no death, no estate tax. No tax liability to speak
of considering that what is involved in estate tax is succession.
This is likewise supported by Art. 777 of the Civil Code which
provides that:
"The rights to the succession are transmitted from

the moment of the death of the decedent."
In donor's tax, what is taxed is not the donor, neither his

property, but the right to gratuitously transfer such property that
will take effect upon his lifetime. The transfer is basically called
donation and the donor refers to the person whose property is
transmitted through donation either orally or in writing, which
requires the acceptance by the donee.
"Donation is an act of liberality whereby a person

disposes gratuitously of a thing or right in favor of
another who accepts it."
Chapter 1 j
INTRODUCTION TO TRANSFER AND BUSINESS TAXES
When the donor intends that the donation shall take effect
during the lifetime of the donor, though the property shall not
be delivered until after the donor's death, this is considered a
donation inter vivos. The fruits of the property from the time of
the acceptance of the donation, shall pertain to the donee, unless
the donor provides otherwise. (Art. 729, CC)
Simplified:
Estate Tax Donor's Tax
1. Subject Right to transfer Right to transfer
2. Taxpayer Estate Donor
3. Liability to pay Administrator,

Executor or Legal Donor
Heir
4. Effectivity Lifetime of donor

Upon death
and donee
5. Tax base Net estate Net gift
6. Ceiling
P200.000.00 P100,000.00
[Exemption]
7. Filing Within 30 days

Within 6 months
from date of
from date of death
donation
8. Top Rates 15% - Relative

20%
30% - Stranger
Business Taxes
These are taxes imposed upon a person, natural or juridical,
who is engaged in trade or business or in the exercise of
profession, including but not limited to VAT, other percentages
taxes, excise taxes, and documentary stamp taxes.
The phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
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regardless of whether or not the person engaged therein is a

nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively
to members or guests), or government entity. (Sec. 105, NIRC)
Three (3) kinds of business taxes:

1. Value-added tax
2. Other percentage taxes
3. Excise tax
Chapter 2
TRANSFER TAXES ON ESTATE
Estate Tax
This is a tax imposed upon the right of a person to
gratuitously transfer or transmit his property, tangible or
intangible, to the person called to the succession that will take
effect upon his death.
Taxation being the lifeblood of the government, the
imposition of estate tax is principally to raise revenue. Under
the benefit received theory, the inheritance including all the
property, rights and obligations of a person is protected by
the state. The peaceful possession, and enjoyment of a right to
transmit property either by will or operation of law is sanctioned
by the state. Hence, in return, the government needs revenue to
defray its expenses.
Under the "State Partnership theory," the state is a passive
and silent partner of every individual in its territory. The state is
uncommunicative but participates in the accumulation of wealth
of every person, natural or artificial. In this view, the state, in
giving protection and safeguarding this wealth, has the right to
collect in order to compensate the effort or service it may render.
Collection of Estate Taxes

Estate tax being a national tax as provided for under Sec.
21(b) of the NIRC is collected by the Bureau of Internal Revenue
by virtue of its mandate under Sec. 2 of the same Code. Being
the lifeblood of the government, the collection is not conditioned
upon any outcome of a probate proceeding.
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In the case of Ferdinand Marcos II v. CA (273 SCRA 47

[1997]), it was held that the approval of the court, sitting in
probate, or as a settlement tribunal over the deceased is not a
mandatory requirement in the collection of estate taxes. It cannot
therefore be argued that the Tax Bureau erred in proceeding with
the levying and sale of the properties allegedly owned by the
late President, on the ground that it was required to seek first the
probate court's sanction. There is nothing in the Tax Code, and
in the pertinent remedial laws that implies the necessity of the
probate or estate settlement court's approval of the state's claim
for estate taxes, before the same can be enforced and collected.
It is in this case that the petitioner also expresses his
reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the
findings of the Department of Justice's Panel of Prosecutors as
per its resolution of 20 September 1991. Allegedly, this is clear
evidence of the uncertainty on the part of the Government as to
the total value of the estate of the late President.
The high Court said, "This is, to [the Court's] mind, the
petitioner's last ditch effort to assail the assessment of estate tax
which had already become final and unappealable.
It is not the Department of Tustice which is the government
agency tasked to determine the amount of taxes due upon the
subject estate, but the Bureau of Internal Revenue, whose
determinations and assessments are presumed correct and made
in good faith. The taxpayer has the duty of proving otherwise.
In the absence of proof of any irregularities in the performance
of official duties, an assessment will not be disturbed. Even an
assessment based on estimates is prima facie valid and lawful
where it does not appear to have been arrived at arbitrarily or
capriciously. The burden of proof is upon the complaining party
to show clearly that the assessment is erroneous. Failure to
present proof of error in the assessment will justify the judicial
affirmance of said assessment. In this instance, petitioner has
not pointed out one single provision in the Memorandum of the
Special Audit Team which gave rise to the questioned assessment,
which bears a trace of falsity. Indeed, the petitioner's attack on
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the assessment bears mainly on the alleged improbable and

unconscionable amount of the taxes charged. But mere rhetoric
cannot supply the basis for the charge of impropriety of the
assessments made." [Emphasis supplied]
Payment Before Delivery by Executor or Administrator

No judge shall authorize the executor or judicial adminis-
trator to deliver a distributive share to any party interested in
the estate unless a certification from the Commissioner that the
estate tax has been paid is shown. (Sec. 94)
In Estate of Hilario M. Ruiz (252 SCRA 541 [1996]), it was
held that, in settlement of estate proceedings, the distribution of
the estate properties can only be made:
1. After all the debts, funeral charges, expenses of admi-
nistration, allowance to the widow, and estate tax have
been paid; or
2. Before payment of said obligations only if the dis-
tributees or any of them gives a bond in a sum fixed
by the court conditioned upon the payment of said
obligations within such time as the court directs, or
when provision is made to meet those obligations.
[Emphasis supplied]
Non-registration for non payment of estate tax

The Registers of Deeds shall not register in the Registry of
Property any document transferring real property or real rights
therein or any chattel mortgage, by way of gifts inter vivos or
mortis causa, legacy or inheritance, unless a certification from the
Commissioner that the tax fixed in this Title and actually due
thereon had been paid is shown, and they shall immediately
notify the Commissioner, Regional Director, Revenue District
Officer, or Revenue Collection Officer or Treasurer of the city or
municipality where their offices are located, of the non payment
of the tax discovered by them.
Any lawyer, notary public, or any government officer who,
by reason of his official duties, intervenes in the preparation or
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acknowledgment of documents regarding partition or disposal

of donation inter vivos or mortis causa, legacy or inheritance,
shall have the duty of furnishing the Commissioner, Regional
Director, Revenue District Officer or Revenue Collection Officer
of the place where he may have his principal office, with copies
of such documents and any information whatsoever which may
facilitate the collection of the aforementioned tax. Neither shall a
debtor of the deceased pay his debts to the heirs, legatee, executor
or administrator of his creditor, unless the certification of the
Commissioner that the tax fixed in this Chapter had been paid
is shown; but he may pay the executor or judicial administrator
without said certification if the credit is included in the inventory
of the estate of the deceased. (Sec. 95)
Bank disallowance
If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with
another, it shall not allow any withdrawal from the said deposit
account, unless the Commissioner has certified that the taxes
imposed thereon by this Title have been paid: Provided, however,
That the administrator of the estate or any one (1) of the heirs
of the decedent may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty thousand pesos
(P20,000) without the said certification. For this purpose, all
withdrawal slips shall contain a statement to the effect that all of
the joint depositors are still living at the time of withdrawal by
any one of the joint depositors and such statement shall be under
oath by the said depositors. (Sec. 97)
Law governing the imposition of estate tax

It is a well-settled rule that estate taxation is governed by
the statute in force at the time of death of the decedent. The estate
tax accrues as of the death of the decedent and the accrual of
the tax is distinct from the obligation to pay the same. Upon the
death of the decedent, succession takes place and the right of
the State to tax the privilege to transmit the estate vests instantly
upon death. (Sec. 2, RR 2-2003)
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In estate tax, the following are the parties involved:

1. Decedent — the person who died leaving behind a
mass of property that is the object of succession.
2. Estate — refers to the properties and transmissible
rights left behind by the decedent. For tax purposes,
an estate is considered a juridical person and is liable
to pay the estate tax through its representative such as
the executor, administrator or heirs.
3. Executor — a person called upon by the testator or
one appointed in the will to carry out its terms and
provisions.
4. Administrator — a person appointed by the court
to administer, settle and distribute the estate of the
decedent.
5. Heirs — persons entitled to receive the estate. In
the Civil Code, heirs may either be compulsory or
secondary compulsory heirs.
6. Testator — refers to the decedent, if he died with a will.
In an overview, estate tax due is computed based on the
taxable net estate, to wit:
Gross Estate xx
Less: Ordinary deductions xx
Net estate before share of surviving spouse xx
Less: Share of surviving spouse xx
Net Estate before special deductions XX
Less: Special deductions XX
Net taxable estate XX
Hence, the tour of discussion will be based on the foregoing

formula. It is clear from the foregoing formula that the first part of
estate tax is the gross estate. The determination of the properties
to be included or excluded in the gross estate as well as its proper
valuation sets in.
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Gross Estate
The value of the gross estate of the decedent shall be
determined by including the value at the time of his death all
property, real or personal, tangible or intangible, wherever
situated. Provided, however, that in the case of a nonresident
decedent who at the time of his death was not a citizen of the
Philippines, only that part of the entire gross estate which is
situated in the Philippines shall be included in his taxable estate.
(Sec. 85, NIRC)
Based on the foregoing, there are two factors affecting the
composition of the gross estate, namely:
1. Citizenship and residence of the decedent at the time
of death
2. Location of the property, whether within or without
the Philippines
The gross estate may either be real or personal, tangible or
intangible property valued of the time of death, and thus, may be
included or not. Gross estate includes real and personal property,
whether tangible or intangible, or mixed, wherever situated:
Provided, however, that where the decedent was a nonresident
alien at the time of his death, his real and personal property so
transferred but are situated outside the Philippines shall not be
included as part of his gross estate.
Classifications of decedent:
1. Resident citizen
2. Nonresident citizen
3. Resident alien
4. Nonresident alien without reciprocity clause
5. Nonresident alien with reciprocity clause
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Simplified:
Real and Tangible Intangible
Personal Property Personal Property
Within Without Within Without
1. RCD Yes Yes Yes Yes
2. RAD Yes Yes Yes Yes
3. NRCD Yes Yes Yes Yes
4. NRAD Yes No Yes No
5. NRCAD with Yes No No No
reciprocity
The properties left behind by the decedent may be classified

as real, tangible and intangible personal property.
Immovable Property
Immovable or otherwise known as real property, simply
refer to those properties or assets of the decedent that are
considered permanent in nature, fixed or those which cannot be
moved from one place to another without impairing its original
state or condition.
The following under Art. 415 of the Civil Code are considered
immovable property:
1. Land, buildings, roads and constructions of all kinds
adhered to the soil;
2. Trees, plants, and growing fruits, while they are
attached to the land or form an integral part of an
immovable;
3. Everything attached to an immovable in a fixed manner,
in such a way that it cannot be separated therefrom
without breaking the material or deterioration of the
object;
4. Statues, reliefs, paintings or other objects for use or
ornamentation, placed in buildings or on lands by
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the owner of the immovable in such a manner that it

reveals the intention to attach them permanently to the
tenements;
5. Machinery, receptacles, instruments or implements
intended by the owner of the tenement for an industry
or works which may be carried on in a building or on
a piece of land, and which tend directly to meet the
needs of the said industry or works;
6. Animal houses, pigeon-houses, beehives, fish ponds or
breeding places of similar nature, in case their owner
has placed them or preserves them with the intention
to have them permanently attached to the land, and
forming a permanent part of it, the animals in these
places are included;
7. Fertilizer actually used on a piece of land;
8. Mines, quarries, and slag dumps, while the matter
thereof forms part of the bed, and waters either running
or stagnant;
9. Docks and structures which, though floating, are
intended by their nature and object to remain at a fixed
place on a river, lake, or coast;
10. Contracts for public works, and servitudes and other
real rights over immovable property.
Movable Property
Movable or otherwise known as the tangible personal
property simply refers to the properties or assets of the decedent
that are impermanent and can be moved from one place to
another.
Under Art. 416 of the Civil Code, the following are deemed
personal property:
1. Those movables susceptible of appropriation which
are not included in Art. 415;
2. Real property which by any special provision of law is
considered as personal property;
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3. Forces of nature which are brought under control by

science; and
4. In general, all things which can be transported from
place to place without impairment of the real property
to which they are fixed.
Intangible Personal Property

The following are considered intangible personal properties
situated in the Philippines under Sec. 104 of the NIRC:
1. Franchise which must be exercised in the Philippines;
2. Shares, obligations or bonds issued by any corporation
or sociedad anonima organized or constituted in the
Philippines in accordance with its laws;
3. Shares, obligations or bonds by any foreign corporation
eighty-five percent (85%) of the business of which is
located in the Philippines;
4. Shares, obligations or bonds issued by any foreign
corporation if such shares, obligations or bonds have
acquired a business situs in the Philippines; and
5. Shares or rights in any partnership, business or
industry established in the Philippines.
Nonresident Alien Decedent

For a nonresident alien decedent, the intangible personal
property is not taxable if there is a reciprocity clause. The rule
is, "with reciprocity, with exemption on intangible personal
property."
Reciprocity applies when no estate tax is collected with
respect to intangible personal property:
a. No transfer tax clause — If the decedent at the time of
his death was a citizen and resident of a foreign country which
at the time of his death did not impose a transfer tax of any
character, in respect of intangible personal property of citizens of
the Philippines not residing in that foreign country, or;
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b. Exemption clause — If the laws of the foreign country

of which the decedent was a citizen and resident at the time of
his death allows a similar exemption from transfer or death taxes
of every character or description in respect of intangible personal
property owned by citizens of the Philippines not residing in that
foreign country. (Sec. 104)
Composition of Gross Estate

A. Decedent's Interest
B. Transfer in Contemplation of Death
C. Revocable Transfer
D. Property Passing Under General Power of Appoint-
ment
E. Proceeds of Life Insurance
F. Prior Interests
G. Transfers for Insufficient Consideration
A. Decedent's Interest
To the extent of the interest therein of the decedent at the
time of his death. (Sec. 85[A])
The inheritance of a person includes not only the property
and the transmissible rights and obligations existing at the time
of his death, but also those which have accrued thereto since the
opening of the succession. (Art. 781, CC)
The interests referred to here are those which have accrued
in favor of the decedent at the time of death. Simply put, it may
consist of income earned but not yet received at the time of death.
Hence, it is the estate as a juridical person who will receive the
said income and the same will eventually form part of the gross
estate. E.g., dividend income declared prior to date of death but
received only after death or partnership profits divided before
date of death but was given to partners after death.
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B. Transfer in Contemplation of Death

The transfer, in this case, is made at the thought of death.
The consideration or the go signal for the transfer is death. No
death, no transfer.
The Code in Sec. 85(B) speaks of two (2) kinds of transfer
in contemplation of death to the extent of any interest in the
property of which the decedent has at any time the transfer is
made, namely:
1. By trust or otherwise, in contemplation of or intended
to take effect in possession or enjoyment at or after
death.
2. By trust or otherwise, under which he has retained for
his life or for any period which does not in fact end
before his death:
a. The possession or enjoyment of, or the right to the
income from the property, or
b. The right, either alone or in conjunction with any
person, to designate the person who shall possess
or enjoy the property or the income therefrom.
Another example is a donation which is intended to take
effect upon the death of the donor. This is known as donation
mortis causa.
C. Revocable Transfer
The transfer made by the decedent during his lifetime but
the use, enjoyment and possession thereof is subject to his power
to alter, amend, revoke or terminate at the time of his death. In
this case, there was a transfer, however, the heir or beneficiary
cannot exercise absolute control or possession by virtue of the
reserved power of the decedent to revoke the transfer. It is
included in the gross estate of the decedent simply because the
disposition is revocable during his lifetime or before his death,
the decedent is still regarded as the owner of the property at the
time of his death.
There is a revocable transfer when the decedent during
his lifetime made a transfer by trust or otherwise, where the
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enjoyment thereof was subject, at the date of his death, to any

change through the exercise of a power (in whatever capacity
exercisable) by the decedent alone or by the decedent in
conjunction with any other person (without regard to when
or from what source the decedent acquired such power), to
alter, amend, revoke, or terminate, or where any such power is
relinquished in contemplation of the decedent's death (except in
case of a bona fide sale for an adequate and full consideration in
money or money's worth). (Sec. 85[C][1])
While the law requires that the decedent should exercise
the power to revoke the transfer during his lifetime or before his
death, the revocability of the transfer is not affected by the failure
of the decedent to exercise such power.
In par. 2, Sec. 85(C), the power to alter, amend or revoke
shall be considered to exist on the date of the decedent's death
even though the exercise of the power is subject to a precedent
giving of notice or even though the alteration, amendment or
revocation takes effect only on the expiration of a stated period
after the exercise of the power, whether or not on or before the
date of the decedent's death notice has been given or the power
has been exercised.
Simply put, despite such failure, the notice shall be consi-
dered to have been given or the power has been exercised on the
date of the decedent's death. As long as there is a reservation that
the transfer is revocable, then it is sufficient that it is part of the
gross estate to the extent of any interest therein.
D. Property Passing Under General Power of Appointment

A general power of appointment is a power of appointment
by which the donee can appoint, that is dispose of the donor's
property in favor of anyone the donee chooses, (p. 1190, Black's
Law Dictionary, 7th Edition)
On the other hand, a power of appointment is a power

conferred on a donee by will or deed to select and nominate
one or more recipients of the donor's estate or income. (Supra) A
power of appointment may either be general or special.
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As distinguished from a revocable transfer where the

decedent is the transferor, in a property passing under the
general power of appointment, the decedent is the transferee
or the recipient of the property. The property is transferred to
the decedent during his lifetime under a power of appointment
couched in general terms where he can designate any person
who shall possess or enjoy the property or the income therefrom
and upon his death, it is included in his gross estate.
Simply put, there are two (2) parties to speak of in a property

passing under a general power of appointment, namely;
1. The transferor or donor — one who made the general
power of appointment or the one who disposes a
property in favor of the transferee, giving the latter a
free hand for his disposal and enjoyment.
2. The transferee or donee or recipient/decedent — one
who is given the power of appointment couched in
general terms or one who shall receive the property
and may dispose or enjoy the said property anyway he
pleases. Such property transferred is the one subject to
tax at the date of his death.
Sec. 85(D) provides the value to be included in the gross
estate to the extent of any property passing under a general
power of appointment exercised by the decedent:
1. By will, or
2. By deed executed in contemplation of, or intended to
take effect in possession or enjoyment at, or after his
death, or
3. By deed under which he has retained for his life or any
period not ascertainable without reference to his death
or for any period which does not in fact end before his
death:
a. The possession or enjoyment of, or the right to the
income from, the property, or
b. The right, either alone or in conjunction with
any person, to designate the persons who shall
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possess or enjoy the property or the income

therefrom; except in case of a bona fide sale for
an adequate and full consideration in money or
money's worth.
E. Proceeds of Life Insurance

The proceeds of life insurance are included in the gross
estate to the extent of the amount receivable by the estate of the
deceased, his executor, or administrator.
Requisites:
1. Insurance under policies taken out by the decedent
upon his own life, irrespective of whether or not the
insured retained the power of revocation, or
2. To the extent of the amount receivable by any bene-
ficiary designated in the policy of insurance, except
when it is expressly stipulated that the designation of
the beneficiary is irrevocable. (Sec. 85[E])
Simplified:
Beneficiary Designation Gross Estate
1. Estate, Executor Revocable or Included

Administrator Irrevocable
2. Other than no. 1 Revocable Included
3. Other than no. 1 Irrevocable Excluded
Generally, the proceeds of life insurance is part of the gross

estate, except when:
1. A third person is designated as an irrevocable benefi-
ciary.
2. The proceeds from group insurance taken by the
employer.
3. The proceeds or benefits derived under SSS or GSIS.
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F. Prior Interest
Prior interest applies to the transfers, trusts, estates, interests,
rights, powers and relinquishment of powers either as:
1. Transfer in contemplation of death,
2. Revocable transfer, and
3. Proceeds of life insurance, whether made, created,
arising, existing, exercised or relinquished before or
after the effectivity of the Code. (Sec. 86[F])
G. Transfers for Insufficient Consideration

Transfers for insufficient consideration means that any
one of the transfers, trusts, interests, rights or powers either
as transfer in contemplation of death, revocable transfer or
property passing under the general power of appointment is
made, created, exercised or relinquished for a consideration in
money or money's worth but the same is not a bona fide sale for
an adequate and full consideration in money or money's worth.
The value to be included in the gross estate shall only be
the excess of the fair market value of the property, at the time of
death, over the value of the consideration received therefore by
the decedent. (Sec. 85[F])
The procedures to determine whether there exists a transfer
for insufficient consideration are as follows:
1. The transfer is either:
a. in contemplation of death, or
b. revocable transfer, or
c. property passing under a general power of
appointment
2. The consideration in money or money's worth is not a
bona fide sale for an adequate and full consideration or
the consideration is less than the fair market value at
the time of transfer.
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3. The difference between the fair market value at the

time of death and consideration shall be included in
the gross estate of the decedent.
Illustration:
Case 1 2 3
FMV, time of transfer P1,000,000 1,500,000 1,000,000
FM V, time of death 500,000 1,000,000 1,500,000
Consideration received 300,000 0 1,000,000
Amount to be included P200.000 1,000,000 0

In the Gross Estate
Procedure:
1. Compare the FMV at the time of transfer and the FMV

at the time of death.
2. If the FMV at the time of transfer is greater, determine
the difference between the FMV at the time of death
and the consideration received.
3. The difference then is the amount to be included in the
GE.
Note that in addition to the provisions of Sec. 85(A) to (G)
as items included in the gross estate, the following are likewise
to be included in the gross estate though the related provisions
can be found in the deductions allowed to arrive at the net estate,
namely:
1. Claims against insolvent person - Sec. 86(A)(1)(d)

provides that, before a claim against an insolvent
person can be considered as deductible, its value must
first be included in the gross estate.
2. Unpaid mortgages under Sec. 86(A)(1)(e).
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3. Property previously tax under Sec. 86(A)(2).

4. Family Home under Sec. 86(A)(4)
5. Amounts received under RA 4917 under Sec. 86(A)(7)
In this view, the foregoing is deductible only if it is included
in the gross estate. Simply put, the sine que non condition for
deductibility is that it must first be included in the gross estate
before claiming as such as a deduction.
Capital of the Surviving Spouse

The capital of the surviving spouse of a decedent shall not
be deemed part of his or her gross estate. (Sec. 86[H])
In computing the gross estate of the decedent, the exclusive
property of the decedent is included and in case of married
individuals, the conjugal property of the spouses are likewise
included. Take note that the capital of the surviving spouse, being
exclusive in nature, is not considered for purposes of determining
the gross estate of the decedent. However, insofar as the conjugal
property is concerned, the aliquot share of the surviving spouse
is allowed as a deduction to arrive at the taxable net estate.
Simplified:
Conjugal/Communal properties xx
Add: Exclusive properties XX

of the decedent
xx
Gross Estate
In this view, it is significant to determine the property

relations between the spouses. As provided in the Family Code,
it is conjugal partnership of gains if married before its effectivity
on August 3, 1988; otherwise, absolute community property if
married thereafter, absent any pre-nuptial agreement to the
contrary.
TAX 2 REVEALED
Summary on conjugal partnership of gains and the absolute

community of property
Simplified: Conjugal Absolute

Partner- Community
ship of of Property
Gains (ACP)
(CPG)
1. Property acquired during mar- Conjugal Communal

riage by onerous title through
common fund
2. Property obtained from labor, Conjugal Communal

industry, work or profession of
either or both spouses
3. Fruits, natural, industrial or civil Conjugal Communal

received during the marriage from
common property
4. Property acquired during the mar- Exclusive Exclusive

riage by gratuitous title (Inheri-
tance or donation)
5. Property brought to the marriage Exclusive Communal

as his or her own
6. Fruits from the exclusive property Conjugal Exclusive
Determination of the Value of the Estate

The valuation of the property to be included in the gross
estate is determined at the time of death, whether real or personal
property. The estate shall be appraised as its fair market value as
of the time of death. (Sec. 88[B])
Fair market value is the price that a seller is willing to accept
and a buyer is willing to pay on the open market and in an arm's-
length transaction. (Blacks' Law Dictionary, 7th Edition) However
a distinction should be made whether the subject property is real
or personal, to wit:
1. Personal property — FMV at the time of death.
Chapter 2
23
2. Real property — FMV at the time of death. However,

the appraised value of real property as of the time of
death shall be, whichever is higher of:
a. The fair market value as determined by the
Commissioner, or
b. The fair market value as shown in the schedule of
values fixed by the Provincial and City Assessors
(Sec. 88[B])
Authority of the Commissioner

Sec. 6(E) of the Code provides for the authority of the
Commissioner to prescribe real property values, to wit:
"The Commissioner is hereby authorized to divide

the Philippines into different zones or areas and shall,
upon consultation with competent appraisers both
from the private and public sectors, determine the fair
market value of real properties located in each zone or
area. For purposes of computing any internal revenue
tax, the value of the property shall be, whichever is the
higher of:
1. The fair market value as determined by the

Commissioner, or
2. The fair market value as shown in the
schedule of values of the Provincial and City
Assessors."
The properties comprising the gross estate shall be valued
on their fair market value as of the time of death. If the property
is a real property, the fair market value shall be the fair market
value as determined by the Commissioner or the fair market value
as shown in the schedule of values fixed by the provincial and
city assessors, whichever is higher. For purposes of prescribing
real property values, the Commissioner is authorized to divide
the Philippines into different zones or areas and shall, upon
consultation with competent appraisers, both from the private
and public sectors, determine the fair market value of real
properties located in each zone or area.
TAX 2 REVEALED
24
In the case of shares of stocks, the fair market value shall

depend on whether the shares are listed or unlisted in the stock
exchange.
1. Unlisted shares
a. Unlisted common shares are valued based on
their book value.
b. Unlisted preferred shares are valued at par
value.
In determining the book value of common
shares, appraisal surplus shall not be considered
as well as the value assigned to preferred shares,
if there are any.
2. Listed Shares
For shares listed in the stock exchange, the fair
market value shall be the arithmetic mean between the
highest and lowest quotation at a date nearest the date
of death, if none is available on the date of death itself.
To determine the value of the right to usufruct, use
or habitation, as well as that of annuity, there shall be
taken into account the probable life of the beneficiary
in accordance with the latest basic standard mortality
table, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner. (Sec.
5, RR 2-2003)
In giving the Commissioner of Internal Revenue the power

in this Section, it is solely for the reason that the executor,
administrator or the heirs bound to pay the estate tax is not at
liberty to prescribe the value of the real property subject to estate
tax. Otherwise, it will open the door for tax evasion.
Exemption of Certain Acquisitions and Transmissions

The following shall not be taxed:
A. The merger of usufruct in the owner of the naked title;
B. The transmission or delivery of the inheritance or legacy
by the fiduciary heir or legatee to the fideicommissary;
Chapter 2 25
C. The transmission from the first heir, legatee or donee

in favor of another beneficiary, in accordance with the
desire of the predecessor; and
D. All bequests, devises, legacies or transfers to social
welfare, cultural and charitable institutions, no part of
the net income of which insures to the benefit of any
individual: Provided, however, That not more than thirty
percent (30%) of the said bequests, devises, legacies
or transfers shall be used by such institutions for
administration purposes. (Sec. 87[A] to [DJ)
E. Bequests to be used actually, directly, and exclusively
for educational purposes under Art. XIV, Sec. 4(4) of
the Constitution.
F. Exemptions under reciprocity clause.
G. Exemptions under special laws such as:
1. Capital of the surviving spouse under Sec. 85(H)
of the NIRC.
2. If the net estate is P200,000.00 or below under Sec.
84 of the NIRC.
3. Benefits received from SSS under PD 1161 as
amended, or GSIS under PD 1146, as amended.
4. Benefits received from the U.S. Veterans Admi-
nistration under RA 360 or war benefits under RA
227.
The foregoing is exempt from estate tax since it involves
transfer of property. In paragraph D, the transfer of property
had already been subjected to estate tax. Hence, the merger
or transmission is no longer subject to estate tax for it would
tantamount to double taxation.
Illustration:
A. John Lennon died on April 6,2011 leaving a commercial
lot located in Bulacan. In his will, the naked title should
pass to his son George Harrison while the usufruct to
Ringo Starr, his nephew. Few months later, Ringo died.
TAX 2 REVEALED
26
The fair market value of the commercial lot at the

time of death will be included in the gross estate of
John. Upon the death of Ringo, the usufruct will now
be merged into the owner of the naked title, George,
who will eventually become the absolute owner. The
Code provides that the merger of usufruct in the
owner of the naked title, from Ringo to George shall be
exempt from estate tax liability.
B. When John died, he left an agricultural lot in Bulacan.
In his will, he tasked George, a brother, to preserve
and transfer the said lot to Paul, the youngest, upon
reaching the age of sixty (60).
The transfer of property between John and
George is subject to estate tax. But the transmission
or delivery from George as fiduciary heir to Paul, the
fideicommissary heir shall be exempt from estate tax.
In this case, George is known as the fiduciary heir or
the first heir while Paul is the fideicommissary or the
second heir.
C. John Lennon died leaving his cars and properties to
his wife, Yoko, and his son, Julian, Yoko renounced
his inheritance in favor of Julian. Consequently, Yoko
died.
The transfer of property from John to Yoko and
Julian is subject to estate tax. The renunciation or
transfer of property by Yoko to Julian is exempt from
estate tax.
ALLOWED DEDUCTIONS
There shall be levied, assessed, collected and paid upon the
transfer of the net estate as determined in accordance with Sees.
85 on gross estate and 86 on computation of net estate of every
decedent, whether resident or nonresident of the Philippines,
a tax based on the value of such net estate, as computed in
accordance with the foregoing scheduler rates. (Sec. 84)
In other words, the Revenue Code does not distinguish
whether the decedent is a citizen or an alien. Simply put, regard-
Chapter 2 27
less of whether the decedent is a resident citizen, nonresident

citizen, resident alien, or nonresident alien, the tax base is always
the net estate, the taxable net estate. It is basic that these dece-
dents therefore are allowed to claim certain deductions. How-
ever, there is no specific provision defining the taxable net estate
compared to taxable income under Sec. 31 of the Code.
But under Sec. 86(A) and (B), the value of the net estate shall
be determined by deducting from the value of the gross estate
the deductions allowed to certain decedents.
For citizen or resident of the Philippines, the following are
deductions allowed:
1. Expenses, Losses, Indebtedness, and Taxes (ELIT)
2. Property Previously Taxed (PPT or Vanishing
Deductions)
3. Transfers for Public Use
4. The Family Home
5. Standard Deduction
6. Medical Expenses
7. Amount Received by Heirs T Tndor RA 4917
For nonresident alien, the following are deductions allowed
to the gross estate:
1. Expenses, Losses, Indebtedness, and Taxes
2. Property Previously Taxed
3. Transfers for Public Use
Classifications of Deduction
Under RR 2-2003, the foregoing deductions can be classified
into two (2) kinds, namely:
1. Ordinary deductions
2. Special deductions
TAX 2 REVEALED
28
Simplified:
RC, RA, NRC NRA
A. ORDINARY DEDUCTIONS
1. ELITE Yes Yes (Pro

rated)
2. PPT or Vanishing deductions Yes Yes
3. Transfers for public use Yes Yes
B. SPECIAL DEDUCTIONS
4. The family home Yes No
5. Standard deduction Yes No
6. Medical expenses Yes No

7. Benefits under RA 4917 Yes No
8. Share of the surviving spouse Yes Yes
ALLOWED DEDUCTIONS (Sec. 86)
A. ORDINARY DEDUCTIONS
1. ELITE or Expenses, losses, indebtedness, taxes and

etc.
a. Funeral Expenses — actual funeral expenses or
in an amount equal to five percent (5%) of the gross estate,
whichever is lower, but in no case to exceed Two hundred
thousand pesos (P200,000.00).
Illustration:
Case A Case B Case C
GE 2,500,000 4,500,000 3,000,000
Actual funeral 150,000 240,000 100,000
expenses
Chapter 2
I RANSFER TAXES ON ESTATE
5 % of GE 125,000 225,000 150,000

Maximum limit 125,000 200,000 100,000
(Php200,000) Allowed
The procedure is simply to compute for the 5% of the

gross estate and compare the result to the actual funeral
expense. The allowed deductible amount is whichever is
lower between the 5% of the gross estate and the actual
funeral expense but in no case to exceed the maximum limit
of P200,000.00.
Sec. 6(A)(1) of RR 2-2003 provides that any amount
of funeral expenses in excess of the P200,000.00 threshold,
whether the same had actually been paid or still payable,
shall not be allowed as a deduction under this Subsection.
Neither shall the unpaid portion of the funeral expenses
incurred which is in excess of the P200,000.00 threshold be
allowed to be claimed as a deduction under "claims against
the estate" provided under Subsection (C) hereof.
The term "FUNERAL EXPENSES" is not confined to
its ordinary or usual meaning. They include:
a. The mourning apparel of the surviving spouse
and unmarried minor children of the deceased
bought and used on the occasion of the burial;
b. Expenses for the deceased's wake, including food
and drinks;
c. Publication charges for death notices;
d. Telecommunication expenses incurred in inform-
ing relatives of the deceased;
e. Cost of burial plot, tombstones, monument or
mausoleum but not their upkeep. In case the
deceased owns a family estate or several burial
lots, only the value corresponding to the plot
where he is buried is deductible;
f. Interment and/or cremation fees and charges;
and
30 TAX 2 REVEALED
g. All other expenses incurred for the performance

of the rites and ceremonies incident to interment.
Expenses incurred after the interment, such as for
prayers, masses, entertainment, or the like are not deduct-
ible. Any portion of the funeral and burial expenses borne
or defrayed by relatives and friends of the deceased are
not deductible. Medical expenses as of the last illness will
not form part of funeral expenses but should be claimed as
medical expenses. Actual funeral expenses shall mean those
which are actually incurred in connection with the inter-
ment or burial of the deceased. The expenses must be duly
supported by receipts or invoices or other evidence to show
that they were actually incurred. (Sec. [A][l] RR 2-2003)
b. Judicial expenses — for judicial expenses of the
testamentary or intestate proceedings.
Expenses allowed as deduction under this category are
those incurred in the inventory-taking of assets comprising
the gross estate, their administration, the payment of debts
of the estate, as well as the distribution of the estate among
the heirs. In short, these deductible items are expenses
incurred during the settlement of the estate but not beyond
the last day prescribed by law, or the extension thereof, for
the filing of the estate tax return. Judicial expenses may
include:
a. Fees of executor or administrator;

b. Attorney's fees;
c. Court fees;
d. Accountant's fees;
e. Appraiser's fees;
f. Clerk hire-
g- Costs of preserving and distributing the estate-
h. Costs of storing or maintaining property of the
estate; and
Chapter 2
31
i. Brokerage fees for selling property of the estate.

Any unpaid amount for the aforementioned cost
and expenses claimed under "Judicial Expenses"
should be supported by a sworn statement of
account issued and signed by the creditor. (Sec.
[A][2],RR 2-2003)
Judicial expenses are expenses of administration.
Administration expenses, as an allowable deduction from
the gross estate of the decedent for purposes of arriving at
the value of the net estate, have been construed by the federal
and state courts of the United States to include all expenses
"essential to the collection of the assets, payment of debts
or the distribution of the property to the persons entitled
to it." In other words, the expenses must be essential to
the proper settlement of the estate. Expenditures incurred
for the individual benefit of the heirs, devisees or legatees
are not deductible. This distinction has been carried over
to our jurisdiction. Thus, in Lorenzo v. Posadas, the Court
construed the phrase "judicial expenses of the testamentary
or intestate proceedings" as not including the compensation
paid to a trustee of the decedent's estate when it appeared
that such trustee was appointed for the purpose of
managing the decedent's real estate for the benefit of the
testamentary heir. In another case, the Court disallowed the
premiums paid on the bond filed by the administrator as an
expense of administration since the giving of a bond is in
the nature of a qualification for the office, and not necessary
in the settlement of the estate. Neither may attorney's fees
incident to litigation incurred by the heirs in asserting
their respective rights be claimed as a deduction from the
gross estate. (CIR v. CA, G.R. No. 123206, March 22, 2000)
[Emphasis supplied]
In this case, it was ruled that the notarial fee paid for the
extrajudicial settlement is clearly a deductible expense since
such settlement effected a distribution of Pedro Pajonar's
estate to his lawful heirs. Similarly, the attorney's fees
paid to PNB for acting as the guardian of Pedro Pajonar's
property during his lifetime should also be considered
32 TAX 2 REVEALED
as a deductible administration expense. PNB provided a

detailed accounting of decedent's property and gave advice
as to the proper settlement of the latter's estate, acts which
contributed towards the collection of decedent's assets and
the subsequent settlement of the estate. (Supra)
c. Claim against the estate — for claims against the
estate to be deductible the following must concur:
1. At the time the indebtedness was incurred the
debt instrument was duly notarized; and
2. If the loan was contracted within three (3) years
before the death of the decedent, the administrator
or executor shall submit a statement showing the
disposition of the proceeds of the loan.
The word "claims" is generally construed to mean
debts or demands of a pecuniary nature which could have
been enforced against the deceased in his lifetime and could
have been reduced to simple money judgments.
Claims against the estate or indebtedness in respect of
property may arise out of:
1. Contract;
2. Tort; or
3. Operation of Law.
Requisites for deductibility of claims against the estate

1. The liability represents a personal obligation of the
deceased existing at the time of his death except:
a. Unpaid obligations incurred incident to his death
such as unpaid funeral expenses (i.e., expenses incurred up
to the time of interment); and
b. Unpaid medical expenses which are classified
under a different category of deductions pursuant to these
Regulations;
2. The liability was contracted in good faith and for
adequate and full consideration in money or money's worth;
Chapter 2 33
3. The claim must be a debt or claim which is valid in law

and enforceable in court; and
4. The indebtedness must not have been condoned by the
creditor or the action to collect from the decedent must not have
prescribed.
Substantiation Requirements
All unpaid obligations and liabilities of the decedent at the
time of his death (except unpaid funeral or medical expenses
which are deductible under a different category) are allowed as
deductions from gross estate. Provided, however, that the follow-
ing requirements/ documents are complied with/submitted:
(a) In case of simple loan (including advances):
1. Debt Instrument
The debt instrument must be duly notarized
at the time the indebtedness was incurred, such
as promissory note or contract of loan, except
for loans granted by financial institutions where
notarization is not part of the business practice/
policy of the financial institution-lender;
2. Notarized Certification
Duly notarized Certification from the credi-
tor as to the unpaid balance of the debt, including
interest as of the time of death.
a. Creditor is a corporation, the sworn certifi-
cation should be signed by the President, or
Vice-President, or other principal officer
of the corporation.
b. Creditor is a partnership, the sworn certifica-
tion should be signed by any of the general
partners.
c. Creditor is a bank or other financial institu-
tions, the Certification shall be executed by
the branch manager of the bank/financial
TAX 2 REVEALED
institution which monitors and manages the

loan of the decedent-debtor.
d. Creditor is an individual, the sworn certifi-
cation should be signed by him. In any of
these cases, the one who should certify must
not be a relative of the borrower within the
fourth civil degree, either by consanguinity
or affinity, except when the requirement be-
low is complied with.
e. When the lender, or the President /Vice-
president /principal officer of the creditor-
corporation, or the general partner of the
creditor-partnership is a relative of the debtor
in the degree mentioned above, a copy of the
promissory note or other evidence of the
indebtedness must be filed with the RDO
having jurisdiction over the borrower within
fifteen days from the execution thereof.
Proof of Financial Capacity
In accordance with the requirements as pres-
cribed in existing or prevailing internal revenue
issuances, proof of financial capacity of the
creditor to lend the amount at the time the loan
was granted, as well as its latest audited balance
sheet with a detailed schedule of its receivable
showing the unpaid balance of the decedent-
debtor. In case the creditor is an individual who
is no longer required to file income tax returns
with the Bureau, a duly notarized Declaration
by the creditor of his capacity to lend at the time
when the loan was granted without prejudice
to verification that may be made by the BIR to
substantiate such declaration of the creditor.
If the creditor is a non-resident, the executor/
administrator or any of the legal heirs must submit
a duly notarized declaration by the creditor of his
capacity to lend at the time when the loan was
Chapter 2 35
granted, authenticated or certified to as such by

the tax authority of the country where the non-
resident creditor is a resident;
4. Undertaking
A statement under oath executed by the
administrator or executor of the estate reflecting
the disposition of the proceeds of the loan if said
loan was contracted within three (3) years prior to
the death of the decedent;
(b) If the unpaid obligation arose from purchase of goods
or services:
1. Documents or contracts
Pertinent documents evidencing the pur-
chase of goods or service, such as sales invoice/
delivery receipt (for sale of goods), or contract for
the services agreed to be rendered (for sale of ser-
vice), as duly acknowledged, executed and signed
by decedent debtor and creditor, and statement of
account given by the creditor as duly received by
the decedent debtor;
2. Notarized certification
Duly notarized Certification from the
creditor as to the unpaid balance of the debt,
including interest as of the time of death.
a. Creditor is a corporation, the sworn Certifi-
cation should be signed by the President, or
Vice-President, or other principal officer of
the corporation.
b. Creditor is a partnership, the sworn certifica-
tion should be signed by any of the general
partners.
c. Creditor is a sole proprietorship, the sworn
certification should be signed by the owner
of the business.
TAX 2 REVEALED
36
In any of these cases, the one who issues

the certification must not be a relative of the de-
cedent-debtor within the fourth civil degree, ei-
ther by consanguinity or affinity, except when the
requirement below is complied with. When the
lender, or the President/Vice President/principal
officer of the creditor-corporation, or the general
partner of the creditor-partnership is a relative of
the debtor in the degree mentioned above, a copy
of the promissory note or other evidence of the
indebtedness must be filed with the RDO having
jurisdiction over the borrower within fifteen days
from the execution thereof.
3. Certified true copy of the latest audited balance
sheet of the creditor with a detailed schedule of
its receivable showing the unpaid balance of the
decedent-debtor. Moreover, a certified true copy
of the updated latest subsidiary ledger/records
of the debt of the debtor-decedent, (certified
by the creditor, i.e., the officers mentioned in
the preceding paragraphs) should likewise be
submitted.
(c) Where the settlement is made through the Court in a
testate or intestate proceeding, pertinent documents
filed with the Court evidencing the claims against
the estate, and the Court Order approving the said
claims, if already issued, in addition to the documents
mentioned in the preceding paragraphs. (Sec. [A][3],
RR 2-2003)
In Dizon v. CTA (553 SCRA 111 [2008]), an issue was

raised on certain allowable deductions from the gross estate
of the decedent. The specific question is whether the actual
claims of the creditors may be fully allowed as deductions
from the gross estate of the decedent despite the fact that the
said claims were reduced or condoned through compromise
agreements entered into by the estate with its creditors.
Chapter 2
37
It was ruled that, "Claims against the estate," as

allowable deductions from the gross estate under Sec. 79 of
the Tax Code, are basically a reproduction of the deductions
allowed under Sec. 89(a)(1)(C) and (E) of Commonwealth Act
No. 466 (CA 466), otherwise known as the National Internal
Revenue Code of 1939, and which was the first codification
of Philippine tax laws. Philippine tax laws were, in turn,
based on the federal tax laws of the United States. Thus,
pursuant to established rules of statutory construction, the
decisions of American courts construing the federal tax
code are entitled to great weight in the interpretation of our
own tax laws. (Now Sec. 86[A][1 ][c])
It is noteworthy that even in the United States, there
is some dispute as to whether the deductible amount for a
claim against the estate is fixed as of the decedent's death
which is the general rule, or the same should be adjusted to
reflect post-death developments, such as where a settlement
between the parties results in the reduction of the amount
actually paid. On one hand, the U.S. court ruled that the
appropriate deduction is the "value" that the claim had at
the date of the decedent's death. Also, as held in Provstra
v. U.S., where a lien claimed against the estate was certain
and enforceable on the date of the decedent's death, the fact
that the claimant subsequently settled for lesser amount did
not preclude the estate from deducting the entire amount of
the claim for estate tax purposes. These pronouncements
essentially confirm the general principle that post-death
developments are not material in determining the amount
of the deduction. [Emphasis supplied]
On the other hand, the Internal Revenue Service
(Service) opines that post-death settlement should be taken
into consideration and the claim should be allowed as a
deduction only to the extent of the amount actually paid.
Recognizing the dispute, the Service released Proposed
Regulations in 2007 mandating that the deduction would
be limited to the actual amount paid.
TAX 2 REVEALED
38
In announcing its agreement with Propstra, the U.S. 5th

Circuit Court of Appeals held:
[Th]e [Court] [is] persuaded that the Ninth
Circuit's decision...in Propstra correctly apply the Ithaca
Trust date-of-death valuation principle to enforceable
claims against the estate. As [th]e [Court] interprets]
Ithaca Trust, when the Supreme Court announced
the date-of-death valuation principle, it was making
a judgment about the nature of the federal estate
tax specifically, that it is a tax imposed on the act of
transferring property by will or intestacy and, because
the act on which the tax is levied occurs at a discrete
time, i.e., the instance of death, the net value of the
property transferred should be ascertained, as nearly
as possible, as of that time. This analysis supports
broad application of the date-of-death valuation rule.
[Th]e [Court] expresses] [its] agreement with the date-
of-death valuation rule, made pursuant to the ruling of
the U.S. Supreme Court in Ithaca Trust Co. v. United States.
First. There is no law, nor do[es] [th]e [Court] discern[s]
any legislative intent in [the] tax laws, which disregards
the date-of-death valuation principle and particularly
provides that post-death developments must be considered
in determining the net value of the estate. It bears emphasis
that tax burdens are not to be imposed, nor presumed to
be imposed, beyond what the statute expressly and clearly
imports, tax statutes being construed strictissimi juris against
the government. Any doubt on whether a person, article or
activity is taxable is generally resolved against taxation.
Second. Such construction finds relevance and consistency
in [the] Rules on Special Proceedings wherein the term
"claims" required to be presented against a decedent's
estate is generally construed to mean debts or demands of
a pecuniary nature which could have been enforced against
the deceased in his lifetime, or liability contracted by the
deceased before his death. Therefore, the claims existing at
the time of death are significant to, and should be made the
basis of, the determination of allowable deductions. (Supra)
Chapter 2
39
Classic in this case is that, in as much as the valid

claims of creditors against the estate are in excess of the
gross estate, no estate tax was due. Several major creditors
of the estate were not included, as they did not file a claim
with the probate court since they had security over several
real estate properties forming part of the estate.
The high Court here nullified the Bureau of Internal
Revenue's deficiency estate tax assessment against the
Estate of Jose R Fernandez. The BIR's failure to formally
offer the pieces of evidence that would justify the deficiency
estate tax, despite CTA's directives, is fatal to its cause. Such
failure is aggravated by the fact that not even a single reason
was advanced by the BIR to justify such fatal omission.
Hence, the case was taken against the BIR.
d. Claims against insolvent persons — claims of
the deceased against insolvent persons where the value of
decedent's interest therein is included in the value of the
gross estate.
The author submits that since a claim against insolvent
persons is a deductible item, the insolvency of the debtor or
his inability to pay his debt to the estate of the decedent must
be proven and not merely alleged. For to allow otherwise,
this will be a gigantic avenue to overstate the deductions
allowed in order to minimize the taxable net estate.
e. Unpaid mortgages, taxes and casualty losses —
unpaid mortgages upon, or any indebtedness in respect
to, property where the value of decedent's interest therein,
undiminished by such mortgage or indebtedness, is
included in the value of the gross estate, but not including
any income tax upon income received after the death of the
decedent, or property taxes not accrued before his death, or
any estate tax.
The deduction herein allowed in the case of claims
against the estate, unpaid mortgages or any indebtedness
shall, when founded upon a promise or agreement, be lim-
ited to the extent that they were contracted bona fide and
TAX 2 REVEALED
40
for an adequate and full consideration in money or money's

worth.
There shall also be deducted losses incurred during the
settlement of the estate arising from the following:
1. Fires,
2. Storms,
3. Shipwrecks, or
4. Other casualties, or
5. From robbery, theft or embezzlement.
Requisites:
1. Not compensated for by insurance or otherwise;
2. At the time of the filing of the return such losses have
not been claimed as a deduction for the income tax
purposes in an income tax return; and
3. Such losses were incurred not later than the last day
for the payment of the estate tax as prescribed in
Subsection (A) of Section 91. (Sec. 86[A][1 ])
a. Unpaid mortgages
Unpaid mortgages upon, or any indebtedness
in respect to, property where the value of the
decedent's interest therein, undiminished by such
mortgage or indebtedness, is included in the value
of the gross estate. The deduction herein allowed
in the case of claims against the estate, unpaid
mortgages or any indebtedness shall, when
founded upon a promise or agreement, be limited
to the extent that they were contracted bona fide
and for an adequate and full consideration in
money or money's worth.
b. Taxes
Taxes which have accrued as of the death of
the decedent which were unpaid as of the time of
death. This deduction will not include:
Chapter 2
41
1. Income tax upon income received after

death, or
2. Property taxes not accrued before his death,
or
3. The estate tax due from the transmission of
his estate.
c. Losses
There shall also be deducted losses incurred
during the settlement of the estate arising from
fires, storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement, when such
losses are not compensated for by insurance or
otherwise, and if at the time of the filing of the
return such losses have not been claimed as a
deduction for income tax purposes in an income
tax return, and provided that such losses were
incurred not later than the last day for the payment
of the estate tax as prescribed in Subsections (A)
and (B) of Sec. 91.
In case unpaid mortgage payable is being claimed by

the estate, verification must be made as to who was the
beneficiary of the loan proceeds. If the loan is found to be
merely an accommodation loan where the loan proceeds
went to another person, the value of the unpaid loan must
be included as a receivable of the estate. If there is a legal
impediment to recognize the same as receivable of the
estate, said unpaid obligation/mortgage payable shall
not be allowed as a deduction from the gross estate. In
all instances, the mortgaged property, to the extent of the
decedent's interest therein, should always form part of the
gross taxable estate. (Sec. 6[A][5], RR 02-2003)
In the case of a citizen or resident of the Philippines,
the ELITE is deductible in full. But if the decedent is a
nonresident alien, ELITE must be the proportion of such
deductions which value of such part bears to the value of
his entire gross estate wherever situated. Simply put, the
TAX 2 REVEALED
42
deductible ELITE must be prorated using the following

formula:
Philippines GE
— x ELITE
Entire GE
2. PPT or Vanishing deductions (Sec. 86[A][2])

The concept of vanishing deduction is simply to
minimize the effect of taxing twice the same property
within a period of five (5) years. Thus, minimizing or
avoiding double taxation. It is called vanishing deduction
because the amount allowed as deduction in the long run is
decreasing. The longer the period of interval, the lower the
rate or percentage allowed. What is decreasing initially is not
the amount deductible but the rate or percentage. As such
though, the net effect is a decreasing deduction because if
the final basis for vanishing deduction is multiplied by the
rate, the result is the amount allowed as a deduction.
These deductions shall only be allowed where the

donor's tax or estate tax was finally determined and paid
by or on behalf of such donor, or the estate of such prior
decedent, as the case may be, and only in the amount finally
determined as the value of such property in determining the
value of the gift, or the gross estate of such prior decedent,
and only to the extent that the value of such property
is included in the decedent's gross estate, and only if in
determining the value of the estate of the prior decedent.
The vanishing deduction is the amount equal to the
value specified below of any property forming a part of the
gross estate situated in the Philippines of any person who
died within five (5) years prior to the death of the decedent,
or transferred to the decedent by gift within five (5) years
prior to his death, where such property can be identified
as having been received by the decedent from the donor
by gift, or from such prior decedent by gift, bequest, devise
or inheritance, or which can be identified as having been
acquired in exchange for property so received.
Chapter 2
43
Simply put, the rate is dependent upon the period of

interval between two (2) incidents, namely:
1. The date of death of present decedent and date of death
of prior decedent if the property previously taxed was
acquired or received by inheritance; or
2. The date of death of present decedent and the date of
gift, if the property previously taxed was acquired or
received by donation.
The percentage of vanishing deduction is simplified as
follows:
If the period of interval is
More than but not more than Percentage
0 1 year 100%
1 year 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
5 years 0
Requisites: no prior vanishing deduction.

1. The property situated in the Philippines must be part
of the gross estate of the present decedent.
2. The present decedent must have died within five (5)
years prior to the death of the prior decedent or the
property was transferred by donation to the present
decedent within five (5) years prior to his death.
3. The estate tax or donor's tax must have been paid on
the property transferred to the present decedent.
4. Such property can be identified as having been received
by the present decedent from the d o n o r b y gift, o r
TAX 2 REVEALED
from such prior decedent by gift, bequest, devise or

inheritance, or which can be identified as having been
acquired in exchange for property so received.
Procedure for VD:

1. Determine the value to be taken or the lower amount
of the property previously taxed between the FMV at
the time of death of the present decedent and the FMV
at the time of death of prior decedent, or FMV at the
time of donation.
2. Deductions must be pro rated and subtracted from the
initial basis.
3. Multiply the rate by the final basis to arrive at the
vanishing deduction.
4. In case any mortgage or lien on the property previously
taxed was paid by the present decedent, this shall be
deducted from the value in No. 1 to arrive at the initial
basis.
5. Where the property referred to consists of two (2) or
more items, the aggregate value of such items shall be
used for the purpose of computing the deduction.
Formula:
Lower value of PPT in No. 1 XXX
Less: Mortgage paid (if any) XXX

Initial Basis XXX
Less:
Initial Basis x ELITE + TPP XXX

Gross Estate
Final Basis XXX
Percentage %
Vanishing deduction XXX
Chapter 2 45
3. Transfers for public use or TPP

The amount of all the bequests, legacies, devises or
transfers to or for the use of the Government of the Republic
of the Philippines, or any political subdivision thereof,
exclusively for public purposes.
Take note that transfer for public purpose is an exclusive
deduction unless the spouse made a written consent or is
a party to the transfer only then will it be considered as a
conjugal deduction. family code took effect = 8/3/88

B. SPECIAL DEDUCTIONS before = conjugal property of gains
after = if silent, absolute conjugal
4. The family home partnership
An amount equivalent to the current fair market value

of the decedent's family home: Provided, however, That if the
said current fair market value exceeds One million pesos
(P1,000,000.00), the excess shall be subject to estate tax. As a
sine qua non condition for the exemption or deduction, said
family home must have been the decedent's family home
as certified by the barangay captain of the locality. (Sec.
86[A[41)
Family home refers to the dwelling house, including
the land on which it is situated, where the husband and
wife, or a head of the family, and members of their family
reside, as certified to by the Barangay Captain of the locality.
The family home is deemed constituted on the house
and lot from the time it is actually occupied as a family
residence and is considered as such for as long as any of
its beneficiaries actually resides therein. (Arts. 152 and 153,
Family Code) For purposes of these regulations, however,
actual occupancy of the house or house and lot as the family
residence shall not be considered interrupted or abandoned
in such cases as temporary absence from the constituted
family home due to travel or studies or work abroad, etc. In
other words, the family home is generally characterized by
permanency, that is, the place to which, whenever absent for
business or pleasure, one still intends to return. The family
home must be part of the absolute community or of the
^ TAX 2 REVEALED
conjugal partnership, or of the exclusive properties of either

spouse depending upon the classification of the property
(family home) and the property relations prevailing on
the properties of the husband and wife. It may also be
constituted by an unmarried head of a family on his or her
own property. (Art. 156, ibid.)
For purposes of availing of a family home deduction
to the extent allowable, a person may constitute only one
family home. (Art. 161, ibid.)
Conditions for the allowance of FAMILY HOME as deduction

from the gross estate
1. The family home must be the actual residential home
of the decedent and his family at the time of his death,
as certified by the Barangay Captain of the locality
where the family home is situated;
2. The total value of the family home must be included as
part of the gross estate of the decedent; and
3. Allowable deduction must be in an amount equivalent
to the current fair market value of the family home
as declared or included in the gross estate, or the
extent of the decedent's interest (whether conjugal/
community or exclusive property), whichever is lower,
but not exceeding P1,000,000.00. (Sec. 6[D], RR No.
2-2003)
5. Standard deduction (Sec. 86[A][5]) automatic deductions.
A deduction in the amount of One Million Pesos

(P1,000,000.00) shall be allowed as an additional deduction
without need of substantiation. The full amount of P1,000,000
shall be allowed as deduction for the benefit of the decedent.
The presentation of such deduction in the computation of
the net taxable estate of the decedent is properly illustrated
in these Regulations. (Sec. 6[E], RR No. 2-2003)
Take note that this kind of deduction available to
citizen or resident decedent is not optional but a legislative
Chapter 2
47
grace deductible in full amount. The only requirement is

that the decedent must either be citizen or resident of the
Philippines.
6. Medical expenses
Medical Expenses incurred by the decedent within one
(1) year prior to his death which shall be duly substantiated
with receipts: Provided, That in no case shall the deductible
medical expenses exceed Five Hundred Thousand Pesos
(P500,000.00). (Sec. 86[A][6])
All medical expenses (cost of medicines, hospital bills,

doctors' fees, etc.) to be deductible must be:
1. Incurred (whether paid or unpaid) within one (1) year
before the death of the decedent shall be allowed as a
deduction
2. Duly substantiated with official receipts for services
rendered by the decedent's attending physicians, in-
voices, statements of account duly certified by the hos-
pital, and such other documents in support thereof
3. The total amount thereof, whether paid or unpaid,
does not exceed Five Hundred Thousand Pesos
(P500,000.00). Any amount of medical expenses
incurred within one year from death in excess of Five
Hundred Thousand Pesos (P500,Q00.00) shall no longer
be allowed as a deduction under this subsection.
Neither can any unpaid amount thereof in excess of
the P500,000.00 threshold nor any unpaid amount for
medical expenses incurred prior to the one-year period
from date of death be allowed to be deducted from the
gross estate as claim against the estate.
Illustration on how to determine the amount of
allowable medical expenses given the P500,000.00 threshold
amount. If the actual amount of medical expenses incurred
is P400,000.00, then only P400,000.00 shall be allowed as
deduction and not the entire P500,000.00 threshold amount.
TAX 2 REVEALED
If the actual amount of medical expenses incurred

within the year prior to the decedent's death is P800,000.00,
only the maximum amount of P500,000.00 shall be allowed
as deduction. If in case the excess of P300,000.00 (P800,000.00-
500,000.00) is still unpaid, such amount shall not be allowed
to be deducted from the gross estate as "claims against the
estate." (Sec 6[F], RR No.2-2003)
tax excempt retirements and
7. Benefits under RA 4917 separation pay.
Amount Received by Heirs Under RA 4917. — Any

amount received by the heirs from the decedent—employee
as a consequence of the death of the decedent-employee
in accordance with RA 4917: Provided, that such amount is
included in the gross estate of the decedent.
Requisites:
1. The decedent-employee has been employed for at
least ten (10) years;
2. Not less than fifty (50) years old at the time of his
retirement;
3. Must have availed of this benefit only once.
4. The benefits granted must be in accordance with
a reasonable private benefit plan maintained by
the employer duly approved by the Bureau of
Internal Revenue.
8. Share of the surviving spouse

In Sec. 86(C) the share in the conjugal property refer-
ring to the net share of the surviving spouse in the conju-
gal partnership property as diminished by the obligations
properly chargeable to such property shall, for the purpose
of this Section, be deducted from the net estate of the dece-
dent.
After deducting the allowable deductions appertaining

to the conjugal or community properties included in the
gross estate, the share of the surviving spouse must be
Chapter 2 49
removed to ensure that only the decedent's interest in the

estate is taxed. (Sec. 8, RR 2-03)
In determining the gross estate of the decedent, the
conjugal property is included. It is therefore significant to
determine the net share of the surviving spouse. In arriving
at the net estate of the decedent, conjugal deductions must
likewise be taken into consideration. If there are conjugal
properties, there must likewise be conjugal deductions. As
a matter of rule, the deductions allowed from gross estate
are presumed to be conjugal unless specifically mentioned
or identified as exclusive.
Simply put, either way, in arriving at the net conjugal
estate the formula would be:
Conjugal properties xx
Less: Conjugal deductions xx
Net Conjugal estate xx
The net conjugal estate may either pertain to the net

share of the surviving spouse or that of the decedent. For
the surviving spouse, it is not subject to estate tax. For
the decedent, it is subject to estate tax in addition to the
decedent's exclusive property.
Take note that the foregoing formula and principles
apply only if the decedent is married.
Sec. 85 of the Code provides that no deduction shall
be allowed in the case of a nonresident not a citizen of the
Philippines, unless the executor, administrator, or anyone of
the heirs, as the case may be, includes in the return required
to be filed under Sec. 90 the value at the time of his death of
that part of the gross estate of the nonresident not situated
in the Philippines.
Estate Tax Table

In computing for the estate tax due, the tax base is the
taxable net estate. Sec. 84 provides the rates of estates tax, to wit:
TAX 2 REVEALED
If the net estate is:
Over But not Tax Plus Of the

Over shall be Excess Over
P 200,000 Exempt — P 200,000
P 200,000 500,000 P0 5% 500,000
500,000 2,000,000 15,000 8% 2,000,000
2,000,000 5,000,000 135,000 11% 5,000,000
5,000,000 10,000,000 465,000 15% 10,000,000
10,000,000 And over 1,215,000 20% 10,000,000
In arriving at the taxable net estate, it is significant to

determine whether the decedent died single or married. The
purpose is to compute for the net conjugal estate taking into
consideration the share of the surviving spouse.
Tax credit for estate taxes paid to a foreign country (Sec.

86[E])
The estate tax imposed or paid in a foreign country can
be claimed as a tax credit or can be credited against the estate
tax due in the Philippines. For this matter, it is only the citizen
or resident citizen who can avail of this credit because their
properties located outside the Philippines are subjected to estate
tax in this jurisdiction and may likewise be subjected to transfer
taxes in that foreign country. Hence, to minimize the indirect
effect of double taxation, tax credit for estate taxes paid to a
foreign country is allowed subject to certain limitations.
Limitations on credit
The amount of the credit taken under Sec. 86(E) shall be
subject to each of the following limitations:
Chapter 2 51
a. The amount of the credit in respect to the tax paid to

any country shall not exceed the same proportion of
the tax against which such credit is taken, which the
decedent's net estate situated within such country
taxable under this Title bears to his entire net estate;
and
b. The total amount of the credit shall not exceed the
same proportion of the tax against which such credit is
taken, which the decedent's net estate situated outside
the Philippines taxable under this Title bears to his
entire net estate.
Simply put, the amount of tax credit is determined by:
Formula: [whichever is lower]
Limit A
Net Estate (per foreign country) x Philippine = limit
Entire GE Estate Tax
Limit B
Net Estate (all foreign countries) x Philippine = limit
Entire GE Estate Tax
Note, the concept on whichever is lower clause is similar
to income tax credit and donor's tax credit. See illustration on
Chapter 3 on donor's tax credit.
Returns and Payment of Estate Tax

Three (3) important points to remember, namely:
1. The filing of notice of death
2. The filing of estate tax return
3. The payment of estate tax due
Notice of Death
The filing of notice of death is mandated under Sec. 89 of the
Code in the following cases:
1. In all cases of transfers subject to tax, or
TAX 2 REVEALED
52
2. Where, though exempt from tax, the gross value of the

estate exceeds Twenty thousand pesos (P20,000.00).
Time of Filing of Notice of Death

The executor, administrator or any of the legal heirs, as the
case may be:
1. Within two (2) months after the decedent's death, or
2. Within a like period after qualifying as such executor
or administrator, shall give a written notice thereof to
the Commissioner.
Estate Tax Returns

The filing of notice of death is mandated under Sec. 90(A) of
the Code in the following cases:
1. In all cases of transfers subject to the tax imposed
herein, or
2. Where, though exempt from tax, the gross value
of the estate exceeds Two hundred thousand pesos
(P200,000.00), or
3. Regardless of the gross value of the estate, where the
said estate consists of registered or registrable property
such as real property, motor vehicle, shares of stock or
other similar property for which a clearance from the
Bureau of Internal Revenue is required as a condition
precedent for the transfer of ownership thereof in the
name of the transferee.
The executor, or the administrator, or any of the legal heirs,
as the case may be, shall file a return under oath in duplicate,
setting forth:
1. The value of the gross estate of the decedent at the time
of his death, or in case of a nonresident, not a citizen of
the Philippines, of that part of his gross estate situated
in the Philippines;
2. The deductions allowed from gross estate in determin-
ing the estate as defined in Sec. 86; and
Chapter 2 53
3. Such part of such information as may at the time be

ascertainable and such supplemental data as may be
necessary to establish the correct taxes.
Provided, however, That estate tax returns show-
ing a gross value exceeding Two million pesos
(P2,000,000.00) shall be supported with a statement
duly certified to by a Certified Public Accountant
containing the following:
a. Itemized assets of the decedent with their corre-
sponding gross value at the time of his death, or
in the case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate situ-
ated in the Philippines;
b. Itemized deductions from gross estate allowed in
Sec. 86; and
c. The amount of tax due whether paid or still due
and outstanding.
Time for Filing

For the purpose of determining the estate tax provided
for in Sec. 84 the Code, the estate tax return required under the
preceding Subsection (A) shall be filed within six (6) months
from the decedent's death.
A certified copy of the schedule of partition and the
order of the court approving the same shall be furnished the
Commissioner within thirty (30) after the promulgation of such
order. (Sec. 90[B])
Extension of Time
The Commissioner shall have authority to grant, in
meritorious cases, a reasonable extension not exceeding thirty
(30) days for filing the return. (Sec. 90[C])
Place of Filing
Except in cases where the Commissioner otherwise permits,
the estate tax return shall be filed with:
TAX 2 REVEALED
54
1. An authorized agent bank, or

2. Revenue District Officer, Collection Officer, or
3. Duly authorized Treasurer of the city or municipality
in which the decedent was domiciled at the time of his
death or if there be no legal residence in the Philippines,
with the Office of the Commissioner. (Sec. 90[D])
Payment of Tax (Sec. 91)

Time of Payment
The estate tax imposed by Sec. 84 of the Code shall be paid
at the time the return is filed by the executor, administrator or the
heirs or simply under the "pay as you file system." (Sec. 91[A])
Extension of Time for Payment

When the Commissioner finds that the payment on the due
date of the estate tax or of any part thereof would impose undue
hardship upon the estate or any of the heirs, he may extend the
time for payment of such tax or any part thereof not to exceed:
1. Judicial settlement — five (5) years
2. Extrajudicial settlement — two (2) years
In such case, the amount in respect of which the extension
is granted shall be paid on or before the date of the expiration
of the period of the extension, and the running of the Statute of
Limitations for assessment as provided in Sec. 203 (Assessment
and Collection) of the Code shall be suspended for the period of
any such extension.
Where the taxes are assessed by reason of negligence,

intentional disregard of rules and regulations, or fraud on the
part of the taxpayer, no extension will be granted by the Com-
missioner.
If an extension is granted, the Commissioner may require

the executor, or administrator, or beneficiary, as the case may
be, to furnish a bond in such amount, not exceeding double the
amount of the tax and with such sureties as the Commissioner
Chapter 2 55
deems necessary, conditioned upon the payment of the said tax

in accordance with the terms of the extension. (Sec. 91[B])
The application for extension of time to file the return and
extension of time to pay estate tax shall be filed with the Revenue
District Officer (RDO) where the estate is required to secure its
TIN and file the estate tax return. (Sec. 9[EJ, RR 2-03)
Payment of the estate tax by installment

In case the available cash of the estate is not sufficient to
pay its total estate tax liability, the estate may be allowed to
pay the tax by installment and a clearance shall be released
only with respect to the property the corresponding/computed
tax on which has been paid. There shall, therefore, be as many
clearances (Certificates Authorizing Registration) as there are as
many properties released because they have been paid for by the
installment payments of the estate tax. The computation of the
estate tax, however, shall always be on the cumulative amount of
the net taxable estate. Any amount paid after the statutory due
date of the tax shall be imposed the corresponding applicable
penalty thereto. However, if the payment of the tax after the due
date is approved by the Commissioner or his duly authorized
representative, the imposable penalty thereon shall only be
the interest. Nothing in this paragraph, however, prevents the
Commissioner from executing enforcement action against the
estate after the due date of the estate tax provided that all the
applicable laws and required procedures are followed/observed.
(Sec. 9[F], RR 2-03)
Liability for Payment

The estate tax imposed by Sec. 84 of the Code shall be paid by
the executor or administrator before delivery to any beneficiary
of his distributive share of the estate. Such beneficiary shall to
the extent of his distributive share of the estate, hp subsidiarily
liable for the payment of such portion of the estate tax as his
distributive share bears to the value of the total net estate.
[Emphasis supplied]
For the purpose of this Chapter, the term "executor" or
"administrator" means the executor or administrator of the
S 6 TAX 2 REVEALED
decedent, or if there is no executor or administrator appointed,

qualified, and acting within the Philippines, then any person in
actual or constructive possession of any property of the decedent.
(Sec. 91[CD
Where there are two or more executors or administrators,
all of them are severally liable for the payment of the tax. The
estate tax clearance issued by the Commissioner or the Revenue
District Officer (RDO) having jurisdiction over the estate, will
serve as the authority to distribute the remaining/distributable
properties/share in the inheritance to the heir or beneficiary. The
executor or administrator of an estate has the primary obligation
to pay the estate tax but the heir or beneficiary has subsidiary
liability for the payment of that portion of the estate which his
distributive share bears to the value of the total net estate. The
extent of his liability, however, shall in no case exceed the value
of his share in the inheritance. (Sec. 9[G], RR 2-03)
Discharge of Executor or Administrator from Personal

Liability
If the executor or administrator makes a written application
to the Commissioner for determination of the amount of the es-
tate tax and discharge from personal liability therefor, the Com-
missioner as soon as possible, and in any event within one (1)
year after the making of such application, or if the application is
made before the return is filed, within one (1) year after the re-
turn is filed, but not after the expiration of the period prescribed
for the assessment of the tax in Sec. 203 shall notify the executor
or administrator of the amount of the tax. The executor or ad-
ministrator, upon payment of the amount of which he is notified,
shall be discharged from personal liability for any deficiency in
the tax thereafter found to be due and shall be entitled to a re-
ceipt or writing showing such discharge. (Sec. 92)
Duties of Certain Officers and Debtors

1. Register of Deeds
The Registers of Deeds shall not register in the registry of
property any document transferring real property or real rights
therein or any chattel mortgage, by way of gifts inter vivos or
Chapter 2 57
mortis causa, legacy or inheritance, unless a certification from

the commissioner that the tax fixed in this Title and actually due
thereon had been paid is shown, and he shall immediately notify
the commissioner, regional director, revenue district officer, or
revenue collection officer or treasurer of the city or municipality
where their offices are located, of the non payment of the tax
discovered by him.
2. Lawyer, notary public, or any government officer

Any lawyer, notary public, or any government officer who,
by reason of his official duties, intervenes in the preparation or
acknowledgment of documents regarding partition or disposal
of donation inter vivos or mortis causa, legacy or inheritance,
shall have the duty of furnishing the commissioner, regional
director, revenue district officer or revenue collection officer of
the place where he may have his principal office, with copies of
such documents and any information whatsoever which may
facilitate the collection of the aforementioned tax.
3. Debtor
Neither shall a debtor of the deceased pay his debts to the
heirs, legatee, executor or administrator of his creditor, unless
the certification of the Commissioner that the tax fixed in this
Chapter had been paid is shown; but he may pay the executor
or judicial administrator without said certification if the credit is
included in the inventory of the estate of the deceased. (Sec. 95)
Restitution of Tax Upon Satisfaction of Outstanding

Obligations
If after the payment of the estate tax, new obligations of
the decedent shall appear, and the persons interested shall have
satisfied them by order of the court, they shall have a right to the
restitution of the proportional part of the tax paid. (Sec. 96)
Payment of Tax Antecedent to the Transfer of Shares, Bonds
or Rights
1. Corporation or juridical persons
There shall not be transferred to any new owner in the
books of any corporation, sociedad anonima, partnership,
TAX 2 REVEALED
58
business, or industry organized or established in the Philippines

any share, obligation, bond or right by way of gift inter vivos or
mortis causa, legacy or inheritance, unless a certification from the
Commissioner that the taxes fixed in this Title and due thereon
have been paid is shown.
2. Banking Institution
If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with
another, it shall not allow any withdrawal from the said deposit
account, unless the Commissioner has certified that the taxes
imposed thereon by this Title have been paid: Provided, however,
That the administrator of the estate or any one (1) of the heirs
of the decedent may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty thousand pesos
(P20,000.00) without the said certification. For this purpose, all
withdrawal slips shall contain a statement to the effect that all of
the joint depositors are still living at the time of withdrawal by
any one of the joint depositors and such statement shall be under
oath by the said depositors. (Sec. 97)
Definition of Deficiency
As used in this Chapter, the term "deficiency" means:
(a) The amount by which the tax imposed by this
Chapter exceeds the amount shown as the tax by the
executor, administrator or any of the heirs upon his return;
but the amounts so shown on the return shall first be
increased by the amounts previously assessed (or collected
without assessment) as a deficiency and decreased by the
amount previously abated, refunded or otherwise repaid in
respect of such tax; or
(b) If no amount is shown as the tax by the executor,
administrator or any of the heirs upon his return, or if no
return is made by the executor, administrator, or any heir,
then the amount by which the tax exceeds the amounts
previously assessed (or collected without assessment)
Chapter 3
TRANSFER TAXES ON DONATION
Donor's Tax
This is a tax imposed upon the right to gratuitously transfer
or transmit property, tangible or intangible between two or more
persons who are living at the time of the transfer. The tax is
imposed upon the donor.
"Donation is an act of liberality whereby a person

disposes gratuitously of a thing or right in favor of
another, who accepts it."
Note that the person who gratuitously disposes of a thing

must not receive any consideration whether money, service or
property on account of such transfer. It is given purely as a gift
that is why, the tax previously imposed is called a gift tax.
Exception (subject to donor's tax):
1. Transfer with insufficient consideration.
2. Condonation or remission of the debt, not due to
rendition of service.
3. Renunciation of inheritance in favor of identified
heir(s) to the exclusion of other co-heirs. (Sec. 11[4], RR
2-03)
Sec. 100 of the Code provides for the transfer for less than
adequate and full consideration, to wit:
"Where property, other than real property re-
ferred to in Section 24(D), is transferred for less than an
60
Chapter 3
61
i RANSf-ER TAXES ON DONATION
adequate and full consideration in money or money's

worth, then the amount by which the fair market value
of the property exceeded the value of the consideration
shall, for the purpose of the tax imposed by this Chap-
ter, be deemed a gift, and shall be included in com-
puting the amount of gifts made during the calendar
year."
In this view, if the property transferred is either real or

personal property not classified as capital asset under Sec. 24(D)
in relation to Sec. 39(A) of the Code and the transfer is less than
an adequate and full consideration, the transfer is subject to
donor's tax. However, it is only the difference between the fair
market value of the property and the value of the consideration
which is deemed as donation.
Note further that in relation to Sec. 85(G) of the Code on
transfer for insufficient consideration, the excess of the fair market
value at the time of death of the property over the value of the
consideration received by the decedent is included in the gross
estate. The distinction lies in that Sec. 100 of the Code speaks of
a transfer with insufficient consideration deemed as a gift. It is
therefore clear that the transfer contemplated in the latter takes
effect during the lifetime of the transferor or the donor, hence,
there is no conflict to speak of.
Kinds of Donation
1. Donation inter vivos - subject to donor's tax
2. Donation mortis causa - subject to estate tax
In Del Rosario v. Ferrer (G.R. No. 187056, September 20,
2010), it was held that the document in question in this case
captioned "Donation Mortis Causa" is not controlling. The Court
held that, if a donation by its terms is inter vivos, this character is
not altered by the fact that the donor styled it mortis causa.
In Austria-Magat v. Court of Appeals, the Court held that
"irrevocability" is a quality absolutely incompatible with the idea
of conveyances mortis causa, where "revocability" is precisely
TAX 2 REVEALED
62
the essence of the act. A donation mortis causa has the following
characteristics:
1. It conveys no title or ownership to the transferee
before the death of the transferor; or, what amounts
to the same thing, that the transferor should retain the
ownership (full or naked) and control of the property
while alive;
2. That before his death, the transfer should be revocable
by the transferor at will, ad nutum; but revocability
may be provided for indirectly by means of a reserved
power in the donor to dispose of the properties
conveyed;and
3. That the transfer should be void if the transferor should
survive the transferee. (Underscoring supplied)
The Court thus said in Austria-Magat that the express
"irrevocability" of the donation is the "distinctive standard that
identifies the document as a "donation inter vivos." Here, the
donors plainly said that it is "our will that this Donation Mortis
Causa shall be irrevocable and shall be respected by the surviving
spouse." The intent to make the donation irrevocable becomes
even clearer by the proviso that a surviving donor shall respect
the irrevocability of the donation. Consequently, the donation
was in reality a donation inter vivos.
The donors in this case of course reserved the "right,

ownership, possession, and administration of the property" and
made the donation operative upon their death. But the Court has
consistently held that such reservation (reddendum) in the context
of an irrevocable donation simply means that the donors parted
with their naked title, maintaining only beneficial ownership of
the donated property while they lived.
Notably, the three donees signed their acceptance of the
donation, which acceptance the deed required. The Court has
held that an acceptance clause indicates that the donation is inter
vivos, since acceptance is a requirement only for such kind of
donations. Donations mortis causa, being in the form of a will,
need not be accepted by the donee during the donor's lifetime.
Chapter 3 63
Finally, as Justice J.B.L. Reyes said in Puig v. Pefiaflorida, in

case of doubt, the conveyance should be deemed a donation inter
vivos rather than mortis causa, in order to avoid uncertainty as to
the ownership of the property subject of the deed.
C o n c e p t of D o n o r ' s Tax
In addition to the purpose of raising revenue for the

government, donor's tax is imposed to prevent the notion of
taxpayers in order to avoid higher rates imposed by estate tax,
they tend to make donations during their lifetime. It is legal but
it partakes of a revenue loss on the part of the government. Take
note that in estate tax the schedular tax rates range from 5%-20%,
whereas in donor's tax 2-15%.
Imposition
A. There shall be levied, assessed, collected and paid

upon the transfer by any person, resident or nonresident, of the
property by gift, a tax, computed as provided in Sec. 99 of the
Code.
B. The tax shall apply whether the transfer is in trust or
otherwise, whether the gift is direct or indirect, and whether the
property is real or personal, tangible or intangible. (Sec. 98)
Elements of D o n o r ' s Tax

1. The donation must be a gratuitous transfer.
2. It must take effect during the lifetime of the donor and
the donee.
In an overview, donor's tax due is computed based on the
taxable net gift, to wit:
First donation during the year:
Gross gift xx
Less: Allowed deduction or exemption xx
Taxable Net gift xx
Donor's tax due xx

M TAX 2 REVEALED
In case of second or subsequent donations within the same

calendar year:
Gross gift xx
Less: Allowed deduction or exemption XX
Net gift XX
Add: Prior net gifts within the same
calendar year XX
Total taxable net gifts XX
Donor's tax due on total net gifts XX
Less: Donor's tax due on prior gifts

within the same calendar year XX
Donor's tax due XX
Based on the foregoing formula, the donor's tax due on

the first donation is computed using the schedular donor's tax
rates provided under Sec. 99(A) of the Code based on the taxable
net gifts. In case there will be a second or subsequent donation
within the same calendar year, the donor's tax due is computed
on a cumulative basis. In other words, the prior net gifts in the
same calendar year are added to the subsequent donations made
within the same calendar year to arrive at the total net gifts. The
donor's tax due is then computed by using the said rates based
on the total taxable net gifts less the donor's tax due on prior
gifts within the same calendar year.
The donor's tax due on prior gifts within the same calendar
year is deducted for the simple reason that it has already been
paid. The donor's tax due on the total net gifts includes that of
the donor's tax due on prior gifts made within the same calendar
year.
A similar approach in Chapter 2, the tour of discussion will

be based on the foregoing formula. It is clear with the foregoing
formula that the first part of donor's tax is the gross gift. The
determination of the properties subject of donation whether
Chapter 3 65
included or excluded in the gross gift as well as its proper

valuation sets in.
T h e law that g o v e r n s the imposition of d o n o r ' s tax
The donor's tax is not a property tax, but is a tax imposed

on the transfer of property by way of gift inter vivos. (Lladoc v.
Commissioner of Internal Revenue, L-19201, June 16, 1965;
14 SCRA 292) The donor's tax shall not apply unless and until
there is a completed gift. The transfer of property by gift is
perfected from the moment the donor knows of the acceptance
by the donee; it is completed by the delivery, either actually
or constructively, of the donated property to the donee. Thus,
the law in force at the time of the perfection/completion of the
donation shall govern the imposition of the donor's tax. In order
that the donation of an immovable may be valid, it must be made
in a public document specifying therein the property donated.
The acceptance may be made in the same Deed of Donation or in
a separate public document, but it shall not take effect unless it is
done during the lifetime of the donor. If the acceptance is made
in a separate instrument, the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments.
A gift that is incomplete because of reserved powers,

becomes complete when either:
1. The donor renounces the power; or
2. His right to exercise the reserved power ceases because
of the happening of some event or contingency or the
fulfillment of some condition, other than the donor's
death.
Renunciation by the surviving spouse of his/her share
in the conjugal partnership or absolute community after the
dissolution of the marriage in favor of the heirs of the deceased
spouse or any other person/s is subject to donor's tax whereas
general renunciation by an heir, including the surviving spouse,
of his/her share in the hereditary estate left by the decedent is
not subject to donor's tax. On the other hand, specifically and
categorically done in favor of identified heir/s to the exclusion or
TAX 2 REVEALED
66
disadvantage of the other co-heirs in the hereditary estate. Where

property, other than a real property that has been subjected to the
final capital gains tax, is transferred for less than an adequate and
full consideration in money or money's worth, then the amount
by which the fair market value of the property at the time of the
execution of the Contract to Sell, or execution of the Deed of Sale
which is not preceded by a Contract to Sell exceeded the value
of the agreed or actual consideration or selling price shall be
deemed a gift, and shall be included in computing the amount of
gifts made during the calendar year. The law in force at the time
of the completion of the donation shall govern the imposition of
donor's tax.
For purposes of the donor's tax, "NET GIFT" shall mean the
net economic benefit from the transfer that accrues to the donee.
Accordingly, if a mortgaged property is transferred as a gift, but
imposing upon the donee the obligation to pay the mortgage
liability, then the net gift is measured by deducting from the fair
market value of the property the amount of mortgage assumed.
(Sec. 11, RR 2-03)
Gross Gift
If the gift is made in property, the fair market value thereof

at the time of the gift shall be considered the amount of the gift.
In case of real property, the provisions of Sec. 88(B) of the Code
shall apply to the valuation thereof. (Sec. 102) The determination
of gross gift, based on the formula, is the first step in arriving at
the donor's tax due.
Based on the foregoing there two factors affecting the

composition of the gross gift, namely:
1. Citizenship and residence of the donor at the time of
donation regardless where the gift is made or where
the property donated is located. In case of a juridical
person, the citizenship is determined in accordance
with the law where it was organized and incorporated.
2. Location of the property whether within or without
the Philippines.
Chapter 3 67
Classifications of donor:
1. Resident citizen donor [RCD]
2. Resident alien donor [RAD]
3. Nonresident citizen donor [NRCD]
4. Nonresident alien donor without reciprocity clause
[NRAD]
5. Nonresident alien donor with reciprocity clause
[NRAD]
Simplified:
Real and Tangible Intangible
Personal Property Personal Property
Within Without Within Without
1. RCD Yes Yes Yes Yes

2. RAD Yes Yes Yes Yes
3. NRCD Yes Yes Yes Yes
4. NRAD w/o reciprocity Yes No Yes No
5. NRAD with reciprocity Yes No No No
Note that similar to the discussion on estate tax on

nonresident alien, the same principle will apply in case there is a
reciprocity clause. Stated otherwise, if the donor is a nonresident
alien, he is taxable only on donations of property located within
the Philippines, subject to the rule of reciprocity if the donation
involves intangible personal properties located within the
Philippines. If there is a reciprocity clause then such intangible
personal property located within the Philippines is not subject to
donor's tax. It is not included in the gross gift.
Similar to estate tax, another significant consideration in
the computation of gross gift is the status of the donor, whether
married or single. Properties owned by the spouses whether
under conjugal partnership of gains or absolute community
regime are treated as a separate donation. The husband and the
TAX 2 REVEALED
68
wife are equally regarded as a separate donor. The computation

of the donor's tax due is likewise separate. The gross gift for each
spouse would be one half (1/2) of the conjugal or community
property donated. In case of exclusive property, the donor, either
the husband or the wife, is the owner of the property.
Valuation of donation
If the gift is property, the fair market value thereof at the
time of the gift shall be considered the amount of the gift. In case
of real property, the provisions of Sec. 88(B) shall apply to the
valuation thereof. (Sec. 102)
Simplified:
1. Cash — value or face amount of the currency.
2. Personal property — FMV at the time of donation.
3. Real property — FMV fixed by the Provincial and
City Assessor or the FMV as determined by the BIR
Commissioner, whichever is higher.
Allowed deductions or e x e m p t i o n s f r o m g r o s s gift
Sec. 99 of the Code provides that the tax for each calendar
year shall be computed on the basis of the total net gifts made
during the year. In this view, the said provision connotes two (2)
interpretations, namely:
1. Donor's tax due is computed on a cumulative basis;
and
2. The donor's tax due is based on the net gifts.
The Code therefore allows deductions from gross gifts.
Exemption of Certain Gifts
The following gifts or donations shall be exempt from

donor' tax:
A. In the Case of Gifts Made by a Resident

1. Dowries or gifts
Chapter 3
69
Made on account of marriage and before its

celebration or within one year thereafter by parents to
each of their legitimate, recognized natural, or adopted
children to the extent of the first Ten thousand pesos
(P10,000.00).
2. Gifts made to or for the use of:
a. The National Government or any entity created
by any of its agencies which is not conducted for
profit; or
b. To any political subdivision of the said Govern-
ment.
3. Gifts in favor of:
a. Educational and/or
b. Charitable,
c. Religious,
d. Cultural, or
e. Social welfare corporation, institution,
Accredited nongovernment organization, or
g- Trust or philanthropic organization or research

institution or organization.
Requisites:
1. The entity or institution must either or any of those
mentioned in a to e;
2. Not more than thirty percent (30%) of said gifts shall
be used by such donee for administration purposes;
3. Incorporated as a nonstock entity, paying no dividends,
governed by trustees who receive no compensation, and
devoting all its income, whether students' fees or gifts,
donation, subsidies or other forms of philanthropy, to
the accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation. (Sec.
101[AD
7 0 TAX 2 REVEALED
(A GUTDE TO PASSING THE BAR) VOLUME II
B. In the Case of Gifts Made by a Nonresident, Not a Citizen

of the Philippines
1. Gifts made to or for the use of the National Government
or any entity created by any of its agencies which is not
conducted for profit, or to any political subdivision of
the said Government.
2. Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation,
institution, foundation, trust or philanthropic
organization or research institution or organization:
Provided, however, That not more than thirty percent
(30%) of said gifts shall be used by such donee for
administration purposes. (Sec. 101[B])
Note that for an NRA, the third requirement for
donors other than NRA does not apply.
C. Other allowed deductions
1. Mortgage assumed by the donee
Imposing upon the donee the obligation to pay
the mortgage liability, then the net gift is measured by
deducting from the fair market value of the property
the amount of mortgage assumed. (Sec. 11, RR 2-03)
2. Diminutions specifically provided by the donor. E.g.,
If Bayani donated P500,000.00 to Tranquilino with the
instruction that the latter shall give P100,000.00 to San
Sebastian College, the taxable net gift would only be
P400,000.00.
Simplified:
RCD, RAD, NRCD NRAD

1. Dowry Yes No
2. Gifts to national govt. Yes Yes
3. Gifts to political subd. Yes Yes
Chapter 3 71
4. Gifts to educational, etc. Yes Yes

5. Mortgage assumed by
the donee Yes Yes
6. Diminutions Yes Yes
Donations to political party or coalition of parties (for

election c a m p a i g n )
Any contribution in cash or in kind to any candidate,

political party or coalition of parties for campaign purposes shall
be governed by the Election Code, as amended. (Sec. 99[C])
Congress approved RA 7166 on November 25, 1991,
providing in Sec. 13 thereof that political/electoral contributions,
duly reported to the Commission on Elections, are not subject to
the payment of any gift tax.
Rates of d o n o r ' s tax
Schedular rates of donor's tax imposable on donation made

to a donee who is not a stranger. The transfer of the total net
gifts made during the calendar year shall be subject to tax in
accordance with the schedule provided in Sec. 99 of the Code.
The entire value of the net gifts for each calendar year is divided
into brackets and each rate is imposed on the corresponding
brackets as shown below:
If the net gift is:
Over But not The tax Plus Of the

over shall be Excess
Over
— P100,000 Exempt
P100,000 200,000 0 2% P 100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000

TAX 2 REVEALED
(A GUIDE TO PASSING THE BAR) VOLUME 11
3,000,000 5,000,000 204,000 10% 3,000,000

,
5,000,000 10,000,000 404,000 12% 5,000,000

10,000,000 Over 1,004,000 15% 10,000,000
Tax payable by the donor if donee is a stranger (Sec. 99[B])
When the donee or beneficiary is a stranger, the tax payable

by the donor shall be thirty percent (30%) of the net gifts. For
purposes of the donor's tax, a "stranger" is a person who is not a:
1. Brother, sister (whether by whole or half blood),
spouse, ancestor, and lineal descendant; or
2. Relative by consanguinity in the collateral line within
the fourth degree of relationship.
A legally adopted child is entitled to all the rights and
obligations provided by law to legitimate children, and therefore,
donation to him shall not be considered as donation made to
stranger. Donation made between business organizations and
those made between an individual and a business organization
shall be considered as a donation made to a stranger.
Tax credit for donor's taxes paid to a foreign country (Sec.

101[C])
The tax imposed by this Title upon a donor who was a
citizen or a resident at the time of donation shall be credited with
the amount of any donor's tax of any character and description
imposed by the authority of a foreign country.
Limitations on Credit
The amount of the credit taken under this Section shall be

subject to each of the following limitations:
a. The amount of the credit in respect to the tax paid to
any country shall not exceed the same proportion of
the tax against which such credit is taken, which the
net gifts situated within such country taxable under
this Title bears to his entire net gifts; and
Chapter 3 73
TRANSFER TAXES ON CONATION
b. The total amount of the credit shall not exceed the

same proportion of the tax against which such credit is
taken, which the donor's net gifts situated outside the
Philippines taxable under this title bears to his entire
net gifts. (Sec. 1011C])
Simply put, the amount of tax credit is determined by:
Formula: [whichever is lower]
Limit A
Net Gifts (per foreign country) x Philippine = limit
Total Net gifts Donor's Tax
Limit B
Net Gifts (all foreign countries) x Philippine = limit
Total Net Gifts Donor's Tax
Note that if only one foreign country is involved, apply only

limit A. In case of two or more foreign countries limit A and B
should be applied.
Illustration:
Listed below were donations made by Tranquilino, a resi-
dent citizen for the taxable year 2010:
Donations of property located in:
1. USA - House and Lot P 500,000
2. Libya - Car 900,000
3. Philippines - Tennis Court 600,000
Total gross gift P 2,000,000
Donor's tax paid abroad (assumed figures only):
1. USA P 60,000
2. Libya 40,000
Total donor's tax paid abroad P 100,000
TAX 2 REVEALED
74
Tax credit computation

Step 1. Compute the donor's tax due in the Philippines
Total gross gift P 2,000,000
Based on the STR in Sec. 99(A):
First Phpl,000,000 P 44,000
Excess multiplied by 8%
P1,000,000 x 8% 80,000
Donor's tax due (before
tax credit) P124,000
Step 2. Compute for the allowable tax credit using Limit A

andB
Limit A
Net Gifts (per foreign country) x Philippine = limit
Total Net gifts Donor's Tax
USA P500,000/2,000,000 x 124,000 = P 31,000
Libya P900,000/2,000,000 x 124,000 = 55,800
Limit B
Net Gifts (all foreign countries) x Philippine = limit
Total Net Gifts Donor's Tax
USA plus Libya donations
P500.000+900.000 x P124,000 = P86,800
P2,000,000
Step 3. Determine the allowed value by comparing the actual

donor's tax paid per foreign country and limit A, whichever is
lower.
Actual Limit A Allowed

USA 60,000 31,000 31,000
Libya 40.000 55,800 40.000
Total 100,000 71,000
Chapter 3 75
Step 4. Compare the total actual donor's tax paid to foreign

countries, the value in limit B, whichever is lower.
P100,000 v. P86,800
Step 5. To compute for the allowable tax credit, compare
the total value allowed in step 3 and the actual total donor's tax
paid to foreign countries (being the lower amount in step 4),
whichever is lower.
P71,000 v. P86,800
Or simply determine the lowest of the following:

1. (Total) Actual donor's tax paid to foreign country
2. The (total) allowed tax credit per foreign country
3. The (total) allowed tax credit on all foreign countries
The allowable tax credit is the lower of the allowed credits
using the tax limit per foreign country using the formula in limit
A and the tax credit on all foreign countries using the formula in
limit B. As a result, the allowable tax credits on donor's tax due
for Tranquilino would be P71,000.
Step 6. Compute for the donor's tax still due
Donor's tax on total gross gift of P2,000,000 P124,000
Less: Donor's tax credit in step 4 71,000
Donor's tax still due and payable P53,000
Filing of returns a n d p a y m e n t of donor's tax (Sec. 103)
A. Requirements
Any person making a donation (whether direct or indirect),
unless the donation is specifically exempt under the Code or
other special laws, is required, for every donation, to accomplish
under oath a donor's tax return in duplicate. The return shall set
forth:
1. Each gift made during the calendar year which is to be
included in computing net gifts;
TAX 2 REVEALED
76
2. The deductions claimed and allowable;

3. Any previous net gifts made during the same calendar
year;
4. The name of the donee;
5. Relationship of the donor to the donee; and
6. Such further information as the Commissioner may
require.
B. Time and place of filing and payment

The donor's tax return shall be filed within thirty (30) days
after the date the gift is made or completed and the tax due
thereon shall be paid at the same time that the return is filed.
Unless the Commissioner otherwise permits, the return
shall be filed and the tax paid to either of the following:
1. An authorized agent bank,
2. The Revenue District Officer,
3. Revenue Collection Officer,
4. Duly authorized Treasurer of the city or municipality
where the donor was domiciled at the time of the
transfer, or
5. If there be no legal residence in the Philippines, with
the Office of the Commissioner,
6. In the case of gifts made by a non-resident, the return
may be filed with the Philippine Embassy or Consulate
in the country where he is domiciled at the time of the
transfer, or directly with the Office of the Commissioner.
(Sec. 103[A][B])
For this purpose, the term "OFFICE OF THE COMMIS-
SIONER" shall refer to the Revenue District Office (RDO) having
jurisdiction over the BIR-National Office Building which houses
the Office of the Commissioner, or presently, to the Revenue Dis-
trict Office No. 39-South Quezon City. (Sec. 13, RR 2-03)
Chapter 3 77
Notice of d o n a t i o n by a d o n o r e n g a g e d in business
In order to be exempt from donor's tax and to claim full

deduction of the donation the following must concur:
1. Accreditation
Given to qualified donee institutions duly accred-
ited by the Philippine Council for NGO Certification,
Inc. (PCNC),
2. Notice of Donation
The donor engaged in business shall give a notice
of donation on every donation worth at least Fifty
Thousand Pesos (P50,000.00) to the Revenue District
Office (RDO) which has jurisdiction over his place of
business within thirty (30) days after receipt of the
qualified donee institution's duly issued Certificate of
Donation, which shall be attached to the said Notice of
Donation.
3. Certificate of Donation
Stating that not more than thirty percent (30%) of
the said donation / gifts for the taxable year shall be used
by such accredited non-stock, non-profit corporation/
NGO institution (qualified-donee institution) for
administration purposes pursuant to the provisions of
Sec. 101(A)(3) and (B)(2) of the Code. (Sec. 13[C], RR
2-03)
Chapter 4
VALUE A D D E D TAX
Persons liable BELS GP,RS PI

Any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders services,
and any person who imports goods shall be subject to the value-
added tax (VAT) imposed in Sees. 106 to 108 of the Code.
The value-added tax is an indirect tax and the amount of tax
may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services
at the time of the effectivity of RA 7716.
The phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a
nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively
to members or their guests), or government entity. In Sec. 4.106-
1, RR 16-2005, non-resident persons who perform services in the
Philippines are deemed to be making sales in the course Of trade or
business, even if the performance of services is not regular.
The rule of regularity, to the contrary notwithstanding,

services as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being course
of trade or business. (Sec. 105)
However, in the case of importation of taxable goods, the
importer, whether individual or corporation and whether or not
78
Chapter 4 79
VALUEADDED TAX
made in the course of his trade or business, shall be liable to VAT

imposed in Sec. 107 of the Code.
"Person" as mentioned above refers to any individual, trust,
estate, partnership, corporation, joint venture, cooperative or
association. (Sec. 4.105-1, RR 16-2005)
In CIR v. CA (329 SCRA 237 [2000]), it was held that contrary
to COMASERCO's contention the above provision clarifies that
even a non-stock, non-profit, organization or government entity, is
liable to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process
on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable
thereto. The term "in the course of trade or business" requires
the regular conduct or pursuit of a commercial or an economic
activity regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or

business" in present law applies to all transactions even to those
made prior to its enactment. EO 273 stated that any person who,
in the course of trade or business, sells, barters or exchanges
goods and services, was already liable to pay VAT. The present
law merely stresses that even a nonstock, nonprofit organization
or government entity is liable to pay VAT for the sale of goods
and services.
Hence, it is immaterial whether the primary purpose of
a corporation indicates that it receives payments for services
rendered to its affiliates on a reimbursement-on-cost basis only,
without realizing profit, for purposes of determining liability
for VAT on services rendered. As long as the entity provides
service for a fee, remuneration or consideration, then the service
rendered is subject to VAT.
Nature a n d Characteristics of VAT

VAT is a tax on consumption levied on the sale, barter,
exchange or lease of goods or properties and services in the
Philippines and on importation of goods into the Philippines.
The seller is the one statutorily liable for the payment of the tax
8 0 TAX 2 REVEALED
but the amount of the tax may be shifted or passed on to the

buyer, transferee or lease of the goods, properties or services.
This rule shall likewise apply to existing contracts of sale or lease
of goods, properties or services at the time of the effectivity of RA
9337. However, in the case of importation, the importer is the one
liable for the VAT. (Sec. 4.105-2, RR 16-2005)
The VAT is a tax on consumption, an indirect tax that the
provider of goods or services may pass on to his customers.
Under the VAT method of taxation, which is invoice-based, an
entity can subtract from the VAT charged on its sales or outputs
the VAT it paid on its purchases, inputs and imports. For example,
when a seller charges VAT on its sale, it issues an invoice to the
buyer, indicating the amount of VAT he charged. For his part,
if the buyer is also a seller subjected to the payment of VAT on
his sales, he can use the invoice issued to him by his supplier
to get a reduction of his own VAT liability. The difference in tax
shown on invoices passed and invoices received is the tax paid
to the government. In case the tax on invoices received exceeds
that on invoices passed, a tax refund may be claimed. (Panasonic
Communications Imaging Corporation of the Philippines v.
CIR, G.R. No. 178090, February 8, 2010)
Under the 1997 NIRC, if at the end of a taxable quarter
the seller charges output taxes equal to the input taxes that his
suppliers passed on to him, no payment is required of him. It
is when his output taxes exceed his input taxes that he has to
pay the excess to the BIR. If the input taxes exceed the output
taxes, however, the excess payment shall be carried over to the
succeeding quarter or quarters. Should the input taxes result
from zero-rated or effectively zero-rated transactions or from
the acquisition of capital goods, any excess over the output taxes
shall instead be refunded to the taxpayer. (Supra)
VAT as an indirect tax
Value-added tax is an indirect tax. The tax liability may be

shifted or passed on by the person should have been liable, the
seller or lessor, or importer, to the buyer, transferee or the lessee
of the goods, properties or services.
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81
VALUE ADDED TAX
While the person liable to pay VAT may shift the burden to
the end user, the obligation to pay and file the VAT still primarily
rests upon the seller or lessor. It is only the burden or obligation
that is shifted but not the duty to remit the tax to the collecting
agency.
Imposition
1. VAT on sale of goods or properties (Sec. 106[A][1])

2. Sales by VAT-registered person subject to zero percent
(0%) rate
a. Export sales (Sec. 106[A][2][a])
b. Foreign currency denominated sale (Sec. 106[b])
c. By special laws or international agreements (Sec.
106[v])
d. Transaction subject to zero percent (0%) rate (Sec.
107[B])
3. Transaction deemed sale (Sec. 106[B])
4. VAT on importation of goods (Sec. 107[A])
5. Transfer of goods by tax-exempt person (Sec. 107[B])
6. VAT on sale of services and use or lease of properties
(Sec. 108[A])
7. Franchise grantees under Sec. 119
1. Vat on sale of goods or properties

There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, value-added tax
equivalent to twelve percent (12%) of the gross selling price or
gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor.
The term "goods" or "properties" shall mean all tangible and
intangible objects which are capable of pecuniary estimation and
shall include:
82 TAX 2 REVEALED
a. Real properties held primarily for sale to customers

or held for lease in the ordinary course of trade or
business;
b. The right or the privilege to use patent, copyright,
design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property
or right;
c. The right or the privilege to use in the Philippines of
any industrial, commercial or scientific equipment;
d. The right or the privilege to use motion picture films,
tapes and discs; and
e. Radio, television, satellite transmission and cable tele-
vision time.
The term "gross selling price" means the total amount of
money or its equivalent which the purchaser pays or is obligated
to pay to the seller in consideration of the sale, barter or exchange
of the goods or properties, excluding the value-added tax. The
excise tax, if any, on such goods or properties shall form part of
the gross selling price. (Sec. 106[A])
However, in computing the taxable base during the month
or quarter, the following under Sec. 106(D) of the Code are
allowed as deductions from gross selling price:
"Sales Returns, Allowances and Sales Discounts. —

The value of goods or properties sold and subsequently
returned or for which allowances were granted by a
VAT-registered person may be deducted from the
gross sales or receipts for the quarter in which a refund
is made or a credit memorandum or refund is issued.
Sales discount granted and indicated in the invoice
at the time of sale and the grant of which does not
depend upon the happening of a future event may be
excluded from the gross sales within the same quarter
it was given."
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VALUE ADDED TAX
Sale of Real Properties
Sale of real properties held primarily for sale to customers

or held for lease in the ordinary course of trade or business of the
seller shall be subject to VAT.
In the case of sale of real properties on the installment plan,
the real estate dealer shall be subject to VAT on the installment
payments, including interest and penalties, actually and/or
constructively received by the seller.
1,919,500
Sale of residential lot exceeding Pl,500,000.00, residential
house and lot or other residential dwellings exceeding
3,199,200
P2,500,000.00, where the instrument of sale (whether the
instrument is nominated as a deed of absolute sale, deed of
conditional sale or otherwise) is executed on or after July 1,2005,
shall be subject to 12% VAT.
Installment sale of residential house and lot or other
residential dwellings exceeding P1,000,000.00, where the
instrument of sale (whether the instrument is nominated as a
deed of absolute sale, deed of conditional sale or otherwise) was
executed prior to July 1, 2005, shall be subject to 10% VAT.
Sale of real property on "installment plan" means sale of real
property by a real estate dealer, the initial payments of which in
the year of sale do not exceed twenty-five percent (25%) of the
gross selling price.
However, in sale of real properties on the deferred-payment
basis, not on installment plan, the transaction shall be treated
as cash sale which makes the entire selling price taxable in the
month of sale. (Sec. 4.106-3, RR 16-2005)
2. Sales by VAT-registered person subject to zero percent

(0%) rate
The significance of the zero-rated sale is in the actual input
vat. Zero-rated sales consist mainly of export sales by VAT-
registered persons. The Output tax/VAT is zero because of the
rate. Thus, any input tax attributable to zero-rated sales by a
VAT-registered person may at his option be refunded or credited
against other internal revenue taxes within two (2) years after the
34 TAX 2 REVEALED
close of the taxable quarter when the sales were made. The input
tax attributable to zero-rated sales simply refers on the seller's
purchases of goods, properties or services related to such export
or zero-rated sale.
A zero-rated sale of goods or properties (by a VAT-registered
person) is a taxable transaction for VAT purposes, but shall not
result in any output tax. However, the input tax on purchases
of goods, properties or services, related to such zero-rated sale,
shall be available as tax credit or refund. (Sec. 4.106-5, RR 16-2005)
In Panasonic Communications Imaging Corporation of
the Philippines v. CIR (supra), zero-rated transactions generally
refer to the export sale of goods and services. The tax rate in this
case is set at zero. When applied to the tax base or the selling
price of the goods or services sold, such zero rate results in no tax
chargeable against the foreign buyer or customer. But, although
the seller in such transactions charges no output tax, he can claim
a refund of the VAT that his suppliers charged him. The seller
thus enjoys automatic zero rating, which allows him to recover
the input taxes he paid relating to the export sales, making him
internationally competitive.
For the effective zero rating of such transactions, however,
the taxpayer has to be VAT-registered and must comply with
invoicing requirements. Interpreting these requirements,
respondent CIR ruled that under Revenue Memorandum
Circular (RMC) 42-2003, the taxpayer's failure to comply with
invoicing requirements will result in the disallowance of his
claim for refund. RMC 42-2003 provides:
A-13. Failure by the supplier to comply with the invoicing
requirements on the documents supporting the sale of goods and
services will result to the disallowance of the claim for input tax
by the purchaser-claimant.
If the claim for refund/TCC is based on the existence of
zero-rated sales by the taxpayer but it fails to comply with the
invoicing requirements in the issuance of sales invoices (e.g.,
failure to indicate the TIN), its claim for tax credit/refund of
VAT on its purchases shall be denied considering that the invoice
Chapter 4
85
VALUE ADDED TAX
it is issuing to its customers does not depict its being a VAT-

registered taxpayer whose sales are classified as zero-rated sales.
Nonetheless, this treatment is without prejudice to the right of
the taxpayer to charge the input taxes to the appropriate expense
account or asset account subject to depreciation, whichever is
applicable. Moreover, the case shall be referred by the processing
office to the concerned BIR office for verification of other tax
liabilities of the taxpayer.
In Intel Technology Philippines, Inc. v. CIR (522 SCRA
657 [2007]), the issues to be resolved in the instant case are (1)
whether the absence of the BIR authority to print or the absence of
the TIN-V in petitioner's export sales invoices operates to forfeit
its entitlement to a tax refund / credit of its unutilized input VAT
attributable to its zero-rated sales; and (2) whether petitioner's
failure to indicate "TIN-V" in its sales invoices automatically
invalidates its claim for a tax credit certification.
In this connection, petitioner, in order to prove that it was

engaged in export sales during the second quarter of 1998, offered
in evidence copies of summary of export sales, sales invoices,
official receipts, airway bills, export declarations and certification
of inward remittances during the said period. In addition,
petitioner's Certificate of Registration with RDO Control No.
96-540-000713 issued by the BIR and Certificate of Registration
No. 95-133 issued by the PEZA were likewise offered in evidence
to prove that it is a VAT-registered entity as well as an Ecozone
export enterprise.
To the mind of the Court, these documentary evidence
submitted by petitioner, e.g., summary of export sales, sales
invoices, official receipts, airway bills and export declarations,
prove that it is engaged in the "sale and actual shipment of goods
from the Philippines to a foreign country." In short, petitioner is
considered engaged in export sales (a zero-rated transaction) if
made by a VAT-registered entity. Moreover, the certification of
inward remittances attests to the fact of payment "in acceptable
foreign currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations
of the BSP." Thus, petitioner's evidence, juxtaposed with the
TAX 2 REVEALED
requirements of Sees. 106(A)(2)(a)(l) and 112(A) of the Tax Code,

as enumerated earlier, sufficiently establish that it is entitled
to a claim for refund or issuance of a tax credit certificate for
creditable input taxes.
Significantly, the CTA and the CA have similarly found
petitioner to be legally entitled to a claim for refund or issuance
of tax credit certificate of its unutilized VAT input taxes on
domestic purchases of goods and services attributable to its
zero-rated sales. They denied petitioner's claim, however, on the
ground that it purportedly failed to comply with the invoicing
requirements under Sees. 113 and 237 of the Tax Code since its
sales invoices do not bear the BIR authority to print, and several
of the invoices do not indicate the TIN-V.
On the latter point, the Court disagrees with the CTA and
CA. As correctly argued by petitioner, there is no law or BIR rule
or regulation requiring petitioner's authority from the BIR to
print its sales invoices (BIR authority to print) to be reflected or
indicated therein.
a. Export sales
The following sales by VAT-registered persons shall be
subject to zero percent (0%) rate:
The term "export sales" means:
1. The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership
of the goods so exported and paid for in acceptable
foreign currency or its equivalent in goods or services,
and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
2. Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local
export-oriented enterprise to be used in manufacturing,
processing, packing or repacking in the Philippines
of the said buyer's goods and paid for in acceptable
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VALUE ADDED TAX
foreign currency and accounted for in accordance with

the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
3. Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;
In Atlas Consolidated Mining Development
Corporation v. CIR (318 SCRA 387 [1999]), it was
held that the totality of sales to an export-oriented
enterprise whose export sales exceed 70 percent of its
annual production are to be zero-rated, not merely
the proportion of such sales to the actual exports of
said enterprise. An examination of Sec. 4.100.2 of
RR 7-95 in relation to Sec. 102(b) (Now Sec. 106[A][2]
[a][3]) of the Tax Code shows that sales to an export-
oriented enterprise whose export sales exceed 70
percent of its annual production are to be zero-rated,
provided the seller complies with other requirements,
like registration with the BOI and the EPZA. The said
Regulation does not even hint, much less expressly
mention, that only a percentage of the sales would be
zero-rated. The internal revenue commissioner cannot,
by administrative fiat, amend the law by making
compliance therewith more burdensome.
4. Sale of gold to the Bangko Sentral ng Pilipinas (BSP);

and
5. Those considered export sales under Executive Order
No. 226, otherwise known as the Omnibus Investment
Code of 1987, and other special laws.
6. The sale of goods, supplies, equipment and fuel to per-
sons engaged in international shipping or internation-
al air transport operations. (Sec. 106[A][2][a])
"Considered export sales under Executive Order No. 226"
shall mean the Philippine port, F.O.B. value determined from:
1. Invoices, bills of lading, inward letters of credit, land-
ing certificates, and other commercial documents, of
TAX 2 REVEALED
88
export products exported directly by a registered ex-

port producer, or
2. The net selling price of export products sold by a
registered export producer to another export producer,
or to an export trader that subsequently exports the same.
Provided, That sales of export products to another producer
or to an export trader shall only be deemed export sales when
actually exported by the latter, as evidenced by landing
certificates or similar commercial documents; Provided, that
without actual exportation the following shall be considered
constructively exported for purposes of these provisions:
1. Sales to bonded manufacturing warehouses of export-
oriented manufacturers;
2. Sales to export processing zones;
3. Sales to registered export traders operating bonded
trading warehouses supplying raw materials in the
manufacture of export products under guidelines to
be set by the Board in consultation with the Bureau
of Internal Revenue (BIR) and the Bureau of Customs
(BOC);
4. Sales to diplomatic missions and other agencies and /or
instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products
whether paid for in foreign currency or not.
For purposes of zero-rating, the export sales of registered
export traders shall include commission income. The exportation
of goods on consignment shall not be deemed export sales
until the export products consigned are in fact sold by the
consignee; and Provided, finally, that sales of goods, properties
or services made by a VAT-registered supplier to a BOI registered
manufacturer /producer whose products are 100% exported are
considered export sales. A certification to this effect must be
issued by the Board of Investment (BOI) which shall be good for
one year unless subsequently re-issued by the BOI. (Sec 4.106-5, RR
16-2005)
Chapter 4
89
VALUE ADDED TAX
b. Foreign Currency Denominated Sale

The phrase "foreign currency denominated sale" means sale to
a nonresident of goods, except those mentioned in Sees. 149 and
150, assembled or manufactured in the Philippines for delivery
to a resident in the Philippines, paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP). (Sec. 106[A]
[2Kb])
Sales of locally manufactured or assembled goods for
household and personal use to Filipinos abroad and other non-
residents of the Philippines as well as returning Overseas
Filipinos under the Internal Export Program of the government
paid for in convertible foreign currency and accounted for in
accordance with the rules and regulations of the BSP shall also be
considered export sales. (Sec. 4.106-5[b], RR 16-2005)
c. By special laws or international agreement

Sales to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a
signatory effectively subjects such sales to zero rate. (Sec. 106[A]
[2][c]) e.g., sales to enterprises duly registered and accredited
with the Subic Bay Metropolitan Authority (SBMA) pursuant
to RA 7227, sales to enterprises duly registered and accredited
with the Philippine Economic Zone Authority (PEZA) or
international agreements to which the Philippines is signatory,
such as, Asian Development Bank (ADB), International Rice
Research Institute (IRRI), etc., shall be effectively subject to VAT at
zero-rate. (Sec 4.106-5[b], RR 16-2005)
In CIR v. Skisui Jushi Philippines, Inc., (496 SCRA 207
[2006]), it was held that an entity registered with the PEZA as
an ecozone may be covered by the VAT system. Sec. 23 of RA
7916, as amended, gives a PEZA-registered enterprise the
option to choose between two fiscal incentives: a) a five percent
preferential tax rate on its gross income under the said law; or
b) an income tax holiday provided under Executive Order No.
226 or the Omnibus Investment Code of 1987, as amended. If the
entity avails itself of the five percent preferential tax rate under
TAX 2 REVEALED
90
the first scheme, it is exempt from all taxes, including the VAT;
under the second, it is exempt from income taxes for a number
of years, but not from other national internal revenue taxes like
the VAT.
On the other hand, since 100 percent of the products of
respondent are exported, all its transactions are deemed export
sales and are thus VAT zero-rated. It has been shown that
respondent has no output tax with which it could offset its paid
input tax. Since the subject input tax it paid for its domestic
purchases of capital goods and services remained unutilized, it
ran claim a refund for the input VAT previously charged by its
suppliers. The amount of P4,377,102.26 is excess input taxes that
rlify a refund.
d. Transaction subject to zero percent (0%) rate

The following services performed in the Philippines by
VAT- registered persons shall be subject to zero percent (0%) rate:
1. Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines
which goods are subsequently exported, where the
services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
2. Services other than those mentioned in the preceding
paragraph rendered to a person engaged in business
conducted outside the Philippines or to a nonresident
person not engaged in business who is outside the
Philippines when the services are performed, the
consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
3. Services rendered to persons or entities whose exemp-

tion under special laws or international agreements to
which the Philippines is a signatory effectively subjects
the supply of such services to zero percent (0%) rate;
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91
VALUE ADDED TAX
4. Services rendered to persons engaged in international

shipping or international air transport operations,
including leases of property for use thereof;
5. Services performed by subcontractors and/or con
tractors in processing, converting, of manufacturing
goods for an enterprise whose export sales exceed
seventy percent (70%) of total annual production;
6. Transport of passengers and cargo by air or sea vessels
from the Philippines to a foreign country; and
7. Sale of power or fuel generated through renewable
sources such as, but not limited to, biomass, solar,
wind, hydropower, geothermal, ocean energy, and
other emerging energy sources using technologies
such as fuel cells and hydrogen fuels. (Sec. 108[B])
In CIR v. Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (512 SCRA 125 [2007]), the concept of Sec. 108
(B) (1) and (2) were discussed. The High Court explained that:
The Tax Code not only requires that the services be other
than "processing, manufacturing or repacking of goods" and
that payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential
condition for qualification to zero-rating under Sec. i.02(oj(2)
(now Sec. 108[B][2]) is that the recipient of such services is doing
business outside the Philippines.
This can only be the logical interpretation of Sec. 102(b)(2). If
the provider and recipient of the "other services" are both doing
business in the Philippines, the payment of foreign currency is
irrelevant. Otherwise, those subject to the regular VAT under
Sec. 102(a) can avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted by the recipient
of services. To interpret Sec. 102(b)(2) to apply to a payer-
recipient of services doing business in the Philippines is to make
the payment of the regular VAT under Sec. 102(a) dependent
on the generosity of the taxpayer. The provider of services can
choose to pay the regular VAT or avoid it by stipulating payment
in foreign currency inwardly remitted by the payer-recipient.
92 TAX 2 REVEALED
Such interpretation removes Sec. 102(a) as a tax measure in the

Tax Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
When Sec. 102(b)(2) stipulates payment in "acceptable
foreign currency" under BSP rules, the law clearly envisions
the payer-recipient of services to be doing business outside the
Philippines. Only those not doing business in the Philippines can
be required under BSP rules to pay in acceptable foreign currency
for their purchase of goods or services from the Philippines.
In a domestic transaction, where the provider and recipient
of services are both doing business in the Philippines, the BSP
cannot require any party to make payment in foreign currency.
Services covered by Sec. 102(b)(1) and (2) are in the nature
of export sales since the payer-recipient of services is doing
business outside the Philippines. Under BSP rules, the proceeds
of export sales must be reported to the Bangko Sentral ng
Pilipinas. Thus, there is reason to require the provider of services
under Sec. 102(b)(1) and (2) to account for the foreign currency
proceeds to the BSP. The same rationale does not apply if the
provider and recipient of the services are both doing business in
the Philippines since their transaction is not in the nature of an
export sale even if payment is denominated in foreign currency.
In this case, the payer-recipient of respondent's services is

the Consortium which is a joint-venture doing business in the
Philippines. While the Consortium's principal members are non-
resident foreign corporations, the Consortium itself is doing
business in the Philippines. This is shown clearly in BIR Ruling
No. 023-95 which states that the contract between the Consortium
and NAPOCOR is for a 15-year term.
Destination Principle
The Court in this case recognized the rule that the VAT
system generally follows the "destination principle" (exports are
zero-rated whereas imports are taxed). However, as the Court
stated in American Express, there is an exception to this rule.
This exception refers to the 0% VAT on services enumerated in
Sec. 102 and performed in the Philippines. For services covered
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VALUE ADDED TAX
bv Sec. 102(b)(1) and (2), the recipient of the service must be

a person doing business outside the Philippines. Thus, to be
exempt from the destination principle under Sec. 102(b)(1) and
(2), the services must be (a) performed in the Philippines; (b) for
a person doing business outside the Philippines; and (c) paid in
acceptable foreign currency accounted for in accordance with
BSP rules. (Supra)
M e a n i n g of the Term "Effectively Zero-rated Sale of G o o d s

and Properties"
The term "effectively zero-rated sale of goods and properties"

shall refer to the local sale of goods and properties by a VAT-
registered person to a person or entity who was granted indirect
tax exemption under special laws or international agreement. Under
these Regulations, transactions which, although not involving
actual export, are considered as "constructive export" shall be
entitled to the benefit of zero-rating, such as local sales of goods
and properties to persons or entities covered under sale to export-
oriented enterprises, sale of goods, supplies, equipment and fuel
to persons engaged in international shipping or international air
transport operations of Sec. 106(A)(2)(a)(3) and (6) of the Code,
(b) foreign currency denominated sale and (c) sales to tax-exempt
persons or entities.
Except for export sale and foreign currency denominated

sale, other cases of zero-rated sales shall require prior application
with the appropriate BIR office for effective zero-rating. Without
an approved application for effective zero-rating, the transaction
otherwise entitled to zero-rating shall be considered exempt.
The foregoing rule notwithstanding, the Commissioner may
prescribe such rules to effectively implement the processing of
applications for effective zero-rating. (Sec. 4.106-6, RR 16-2005)
Simply put, the following are required to file an application
with the appropriate BIR office for effective-zero-rating:
1. Sales to persons or entities whose exemption under
special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales
to zero rate under Sec. 106(2)(c); and,
TAX 2 REVEALED
94
2. Transactions subject to zero percent (0%) rate under

Sec. 108(B) of the Code.
Exemptions from VAT are granted by express provision of
the Tax Code or special laws. Under VAT, the transaction can
have preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale
of goods or properties and/or services and the use or
lease of properties is not subject to VAT (output tax)
and the seller is not allowed any tax credit on VAT
(input tax) previously paid. This is a case wherein the
VAT is removed at the exempt stage (i.e., at the point of
the sale, barter or exchange of the goods or properties).
The person making the exempt sale of goods,
properties or services shall not bill any output tax to his
customers because the said transaction is not subject to
VAT. On the other hand, a VAT-registered purchaser
of VAT-exempt goods/properties or services which are
exempt from VAT is not entitled to any input tax on
such purchase despite the issuance of a VAT invoice or
receipt.
(b) Zero-rated Sales. These are sales by VAT-registered

persons which are subject to 0% rate, meaning the tax
burden is not passed on to the purchaser. A zero-rat-
ed sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any
output tax. However, the input tax on his purchases of
goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund in accor-
dance with these regulations. (Contex Corporation v.
CIR, 433 SCRA [2004])
Under Zero-rating, all VAT is removed from the zero-rated
goods, activity or firm. In contrast, exemption only removes the
VAT at the exempt stage, and it will actually increase, rather than
reduce the total taxes paid by the exempt firm's business or non-
retail customers. It is for this reason that a sharp distinction must
Chapter 4 95
VALUE ADDED TAX
be made between zero-rating and exemption in designating a

value-added tax
In the case of Contex Corporation, apropos, the petitioner's
claim to VAT exemption in the instant case for its purchases of
supplies and raw materials is founded mainly on Section 12(b)
and (c) of RA 7227, which basically exempts them from all
national and local internal revenue taxes, including VAT and
Section 4(A)(a) of BIR RR 1-95.
On this point, petitioner rightly claims that it is indeed VAT-
Exempt and this fact is not controverted by the respondent. In fact,
petitioner is registered as a NON-VAT taxpayer per Certificate of
Registration issued by the BIR. As such, it is exempt from VAT on
all its sales and importations of goods and services.
Petitioner's claim, however, for exemption from VAT for its
purchases of supplies and raw materials is incongruous with its
claim that it is VAT-Exempt, for only VAT-Registered entities can
claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner
may claim a refund on the Input VAT erroneously passed on to
it by its suppliers.
While it is true that the petitioner should not have been
liable for the VAT inadvertently passed on to it by its supplier
since such is a zero-rated sale on the part of the supplier, the
petitioner is not the proper party to claim such VAT refund.
Since the transaction is deemed a zero-rated sale, peti-
tioner's supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently. no Output
VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that
the petitioner is registered as a NON-VAT taxpayer and thus, is
exempt from VAT. As an exempt VAT taxpayer, it is not allowed
any tax credit on VAT (input tax) previously paid. In fine, even
if it is to be assumed that exemption from the burden of VAT
on petitioner's purchases did exist, petitioner is still not entitled
to any tax credit or refund on the input tax previously paid as
petitioner is an exempt VAT taxpayer.
TAX 2 REVEALED
96
Rather, it is the petitioner's suppliers who are the proper

parties to claim the tax credit and accordingly refund the
petitioner of the VAT erroneously passed on to the latter. (Supra)
[Emphasis supplied]
In CIR v. Seagate Technology (Philippines) (451 SCRA133
[2005]), the Supreme Court reiterated the following discussions:
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at

present, from 0 percent to 10 percent (now 12%) levied on every
importation of goods, whether or not in the course of trade or
business, or imposed on each sale, barter, exchange or lease of
goods or properties or on each rendition of services in the course
of trade or business as they pass along the production and
distribution chain, the tax being limited only to the value added
to such goods, properties or services by the seller, transferor or
lessor. It is an indirect tax that may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. As
such, it should be understood not in the context of the person or
entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption. In either case,
though, the same conclusion is arrived at.
The law that originally imposed the VAT in the country, as

well as the subsequent amendments of that law, has been drawn
from the tax credit method. Such method adopted the mechanics
and self-enforcement features of the VAT as first implemented
and practiced in Europe and subsequently adopted in New
Zealand and Canada. Under the present method that relies on
invoices, an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.
If at the end of a taxable quarter the output taxes charged by
a seller are equal to the input taxes passed on by the suppliers,
no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid. If, however, the input
taxes exceed the output taxes, the excess shall be carried over to
Chapter 4 97
VALUE ADDED TAX
the succeeding quarter or quarters. Should the input taxes result

from zero-rated or effectively zero-rated transactions or from the
acquisition of capital goods, any excess over the output taxes
shall instead be refunded to the taxpayer or credited against
other internal revenue taxes.
Z e r o - R a t e d a n d Effectively Z e r o - R a t e d Transactions
Although both are taxable and similar in effect, zero-rated

transactions differ from effectively zero-rated transactions as to
their source.
Zero-rated transactions generally refer to the export sale of
goods and supply of services. The tax rate is set at zero. When
applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions
charges no output tax, but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the
sale of goods or supply of services to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such
transactions to a zero rate. Again, as applied to the tax base, such
rate does not yield any tax chargeable against the purchaser. The
seller who charges zero output tax on such transactions can also
claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.
Zero Rating a n d Exemption

In terms of the VAT computation, zero rating and exemption
are the same, but the extent of relief that results from either one of
them is not.
Applying the destination principle to the exportation of
goods, automatic zero rating is primarily intended to be enjoyed
by the seller who is directly and legally liable for the VAT, making
such seller internationally competitive by allowing the refund or
credit of input taxes that are attributable to export sales. Effective
zero rating, on the contrary, is intended to benefit the purchaser
9 8 TAX 2 REVEALED
who, not being directly and legally liable for the payment of the
VAT, will ultimately bear the burden of the tax shifted by the
suppliers.
In both instances of zero rating, there is total relief for the
purchaser from the burden of the tax. But in an exemption there
is only partial relief because the purchaser is not allowed any tax
refund of or credit for input taxes paid.
Exempt Transaction a n d E x e m p t Party
The object of exemption from the VAT may either be the

transaction itself or any of the parties to the transaction.
An exempt transaction, on the one hand, involves goods
or services which, by their nature, are specifically listed in and
expressly exempted from the VAT under the Tax Code, without
regard to the tax status — VAT-exempt or not — of the party to
the transaction. Indeed, such transaction is not subject to the VAT,
but the seller is not allowed any tax refund of or credit for any
input taxes paid.
An exempt party, on the other hand, is a person or entity
granted VAT exemption under the Tax Code, a special law or an
international agreement to which the Philippines is a signatory,
and by virtue of which its taxable transactions become exempt
from the VAT. Such party is also not subject to the VAT, but may be
allowed a tax refund of or credit for input taxes paid, depending
on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption,
the amount of which may be shifted or passed on by the seller
to the purchaser of the goods, properties or services. While the
liability is imposed on one person, the burden may be passed on
to another. Therefore, if a special law merely exempts a party as a
seller from its direct liability for payment of the VAT, but does not
relieve the same party as a purchaser from its indirect burden of
the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at
bar, the purchase transactions entered into by respondent are not
VAT-exempt.
Chapter 4
99
VALUE ADDED TAX
3. Transactions deemed sale

The following transactions shall be deemed sale:
1. 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, e.g., pull out of
goods for personal use;
2. Distribution or transfer to:
a. Shareholders or investors as share in the profits of
VAT-registered persons; or
b. Creditors in payment of debt;
3. Consignment of goods if actual sale is not made within
sixty (60) days following the date such goods were
consigned; and
4. Retirement from or cessation of business, with respect
to inventories of taxable goods existing as of such
retirement or cessation. (Sec. 106[B])
The following circumstances shall, among others, give
rise to transactions "deemed sale" for purposes of this Section:
1. Change of ownership of the business. There is a
change in the ownership of the business when a single
proprietorship incorporates; or the proprietor of a single
proprietorship sells his entire business.
2. Dissolution of a partnership and creation of a new
partnership which takes over the business. (Sec. 4.106-7,
RR 16-2005)
The Commissioner of Internal Revenue shall determine
the appropriate tax base in cases where a transaction is deemed
a sale, barter or exchange of goods or properties, or where the
gross selling price is unreasonably lower than the actual market
value. The gross selling price is unreasonably lower than the
actual market value if it is lower by more than 30% of the actual
market value of the same goods of the same quantity and quality
sold in the immediate locality on or nearest the date of sale.
TAX 2 REVEALED
100
For transactions deemed sale, the output tax shall be based

on the market value of the goods deemed sold as of the time of the
occurrence of the transactions. However, in the case of retirement
or cessation of business, the tax base shall be the acquisition cost or
the current market price of the goods or properties, whichever is
lower.
In the case of a sale where the gross selling price is
unreasonably lower than the fair market value, the actual market
value shall be the tax base. (Sec. 4.106-7[b], RR 16-2005)
The foregoing power of the commissioner is premised under
Sec. 106(E) of the Code which provides that:
"Authority of the Commissioner to Determine

the Appropriate Tax Base. — The Commissioner shall,
by rules and regulations prescribed by the Secretary
of Finance, determine the appropriate tax base in
cases where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection (B)
hereof, or where the gross selling price is unreasonably
lower than the actual market value."
4. VAT on importation of goods

There shall be levied, assessed and collected on every
importation of goods a value-added tax equivalent to twelve
percent (12%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties plus customs
duties, excise taxes, if any, and other charges, such tax to be paid
by the importer prior to the release of such goods from customs
custody: Provided, That where the customs duties are determined
on the basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise taxes, if
any. (Sec. 107[A])
Landed cost consists of the invoice amount, customs
duties, freight, insurance and other charges. If the goods
imported are subject to excise tax, the excise tax shall form part of
the tax base.
Chapter 4 i U l
VALUE ADDED TAX
VAT is imposed on goods brought into the Philippines,

whether for u s e in b u s i n e s s or not, e x c e p t those m e n t i o n e d
in Sec. 109(1) of the C o d e .
The VAT on importation shall be paid by the importer
prior to the release of such goods from customs custody.
"Importer" refers to any person who brings goods into the
Philippines, whether or not made in the course of his trade
or business. It includes non-exempt persons or entities who
acquire tax-free imported goods from exempt persons, entities or
agencies. (Sec. 4.107-1, RR 16-2005)
5. Transfer of goods by tax-exempt persons

In the case of tax-free importation of goods into the Phil-
ippines by persons, entities or agencies exempt from tax where
such goods are subsequently sold, transferred or exchanged
in the Philippines to non-exempt persons or entities, the pur-
chasers, transferees or recipients shall be considered the import-
ers thereof, who shall be liable for any internal revenue tax on
such importation. The tax due on such importation shall consti-
tute a lien on the goods superior to all charges or liens on the
goods, irrespective of the possessor thereof. (Sec. 107[B])
6. VAT on sale of services and use or lease of properties

There shall be levied, assessed and collected, a value-added
tax equivalent to twelve percent (12%) of g r o s s i e t _ e i p i s d e r i v e d
from the sale or exchange of services, including the use or lease
of properties.
The phrase "sale or exchange of services" means the perfor-
mance of all kinds of services in the Philippines for others for a
fee, remuneration or consideration, including those performed
or rendered by the following:
1. Construction and service contractors;
2. Stock, real estate, commercial, customs and immigration
brokers;
3. Lessors of property, whether personal or real; ware-
housing services;
TAX 2 REVEALED
102
4. Lessors or distributors of cinematographic films;

5. Persons engaged in milling processing, manufacturing
or repacking goods for others;
6. Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
7. Proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs
and caterers;
8. Dealers in securities;
9. Lending investors;
10. Transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers
by land relative to their transport of goods or cargoes;
11. Common carriers by air and sea relative to their trans-
port of passengers, goods or cargoes from one place in
the Philippines to another place in the Philippines;
12. Sales of electricity by generation companies, transmis-
sion, and distribution companies;
13. Services of franchise grantees of electric utilities, tele-
phone and telegraph, radio and television broadcast-
ing and all other franchise grantees except those under
Sec. 119 of the Code, radio and / o r television broad-
casting whose annual gross receipts of the preceding
year do not exceed PI0,000,000.00.
14. Non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and
bonding companies;
15. Similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties.
The phrase 'sale or exchange of services' shall likewise include:
1. The lease or the use of or the right or privilege to use
any copyright, patent, design or model, plan secret
Chapter 4
103
VALUE ADDED TAX
formula or process, goodwill, trademark, trade brand

or other like property or right;
2. The lease of the use of, or the right to use of any
industrial, commercial or scientific equipment;
3. The supply of scientific, technical, industrial or com-
mercial knowledge or information;
4. The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling
the application or enjoyment of any such property,
or right as is mentioned in subparagraph (2) or any
such knowledge or information as is mentioned in
subparagraph (3);
5. The supply of services by a nonresident person or his
employee in connection with the use of property or
rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased
from such nonresident person.
6. The supply of technical advice, assistance or services
rendered in connection with technical management
or administration of any scientific, industrial or com-
mercial undertaking, venture, project or scheme;
7. The lease of motion picture films, films, tapes and
discs; and
8. The lease or the use of or the right to use radio, televi-
sion, satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
Philippines.
The term "gross receipts" means the total amount of money
or its equivalent representing the contract price, compensation,
service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced
payments actually or constructively received during the taxable
104 TAX 2 REVEALED
quarter for the services performed or to be performed for another

person, excluding value-added tax. (Sec. 108[A])
7. Franchise grantees under Sec. 119

In Sec. 119 of the Code, it provides that, any provision of
general or special law to the contrary notwithstanding, there
shall be levied, assessed and collected in respect to all franchises
on radio and/or television broadcasting companies whose
annual gross receipts of the preceding year does not exceed Ten
million pesos (P10,000.00), subject to Sec. 236 of the Code, a tax of
three percent (3%) and on electric, gas and water utilities, a tax of
two percent (2%) on the gross receipts derived from the business
covered by the law granting the franchise: Provided, however, That
radio and television broadcasting companies referred to in this
Section shall have an option to be registered as a value-added
taxpayer and pay the tax due thereon: Provided, further, That once
the option is exercised, it shall not be revoked.
Simply put, all franchises on radio and/or television

broadcasting companies are liable to VAT if:
1. Opted to be registered as value-added taxpayer
regardless of the amount of sales; or
2. Total annual gross receipts exceeds P10,000,000.00.
Simplified:
VAT transactions are classified as follows:
1. Taxable transaction
a. Rate 12% — sale, barter, exchanges of goods or
properties, leases goods or properties, services
and importation are transactions subject to VAT
at rate of 12% called the output tax.
b. Rate 0% — sales by VAT-registered person subject
to zero percent (0%) called the zero-rated sale.
2. Exempt transactions — an exempt transaction means
that the transaction though involving sale, barter,
exchanges of goods or properties, leases of goods or
Chapter 4
105
VALUE ADDED TAX
properties, services and importation are not subject to

VAT. There is no output tax, the seller is not liable and
at the same time not allowed any tax credit on VAT or
input tax.
The person making the exempt sale or lease of goods,
properties or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT. On the other
hand, a VAT-registered purchaser or lessee of goods, properties
or services which are exempt from VAT is not entitled to any
input tax on such purchase or lease despite the issuance of VAT
invoice or receipt. (Sec 4.103-1, RR 7-95)
The important feature of the 12% and 0% VAT is the input
tax. If at the end of any taxable quarter the output tax exceeds
the input tax, the excess shall be paid by the VAT-registered
person. If the input tax exceeds the output tax, the excess shall
be carried over to the succeeding quarter or quarters. Provided,
however, that any input tax attributable to zero-rated sales by a
VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, subject to the provisions of
Sec. 112. (Sec. 110[BJ)
Kinds of Registration
In VAT, registration speaks of two (2) kinds, namely:

1. Optional registration
2. Mandatory registration
Optional registration
Persons engaged in trade or business, who sell, barter,

exchange, lease goods or properties, render services, and any
person who imports goods but not subject to VAT or otherwise
exempt from VAT have the option or privilege to register and
pay VAT.
Any person who is not required to register for VAT under
Sec. 236(G) of the Code may elect to register for VAT by registering
with the Revenue District Office that has jurisdiction over the
106 TAX 2 REVEALED
head office of that person, and by paying the annual registration

fee.
Any person who elects to register shall not be entitled to
cancel his registration for the next three (3) years. (Sec. 236[H] [1]
{21)
For this matter, any person who is VAT-registered and
for which he is obligated to pay shall be referred to as a VAT-
registered person who shall be assigned only one Taxpayer
Identification Number (TIN).
Mandatory registration
Persons engaged in the course of trade or business, who sells

barters, exchanges, leases goods or properties, renders services,
and any person who imports goods not otherwise exempt by law
are mandated to register for VAT purposes.
Any person who, in the course of trade or business, sells,
barters or exchanges good or properties, or engages in the sale or
exchange of services, shall be liable to register for VAT if:
1. His gross sales or receipts for the past twelve (12)
months, other than those that are exempt under Sec.
109(A) to (U), have exceeded One million five hundred
thousand pesos (Pl,500,000.00);
1,919,500 or
2. There are reasonable grounds to believe that his gross
sales or receipts for the next twelve (12) months, other
than those that are exempt under Sec. 109(A) to (U),
will exceed One million five hundred thousand pesos
(Pl,500,000.00).
1,919,500
Every person who becomes liable to be registered in the

preceding paragraph (1) shall register with the Revenue District
Office which has jurisdiction over the head office or branch of
that person, and shall pay the annual registration fee. If he fails
to register, he shall be liable to pay VAT as if he were a VAT-
registered person, but without the benefit of input tax credits for
the period in which he was not properly registered. (Sec. 236[G]
11U2J)
Chapter 4 107
VALUE ADDED TAX
Simplified:
Persons mandated to register not otherwise exempt under
Sec. 109(A) to (V), namely:
1. Where the annual gross sales or receipts exceeded
1,919,500
PI,5OO,OOO.OO.
2. Where there are reasonable grounds to believe that the

1,919,500
annual gross sales or receipts will exceed Pl,500,000.00.
3. Persons becoming liable to VAT where the annual
1,919,500
gross sales or receipts exceeded Pl,500,000.00.
Illustration:
A. Bayani will engage in the business of selling tennis

gadgets and paraphernalia. In his feasibility study, he
expects to realize a gross sales of P2,000,000.00 a year.
Bayani will be engaged in trade or business
which is a VAT transaction or VAT taxable activity.
Registration under Sec. 236(G)(2) is required consi-
dering that Bayani is expecting to realize a gross sales
beyond the minimum requirement of Pl,500,000.00.
He must likewise pay the annual registration fee before
the commencement of the business.
B. Tranquilino is the best tennis trainer in town. He put
up his tennis camp training and started January 1,
2010. Anticipating few students, he did not register as
a VAT person. Later, in July of the same year he was
able to realize gross receipts of PI,600,000.00.
Tranquilino is engaged in trade or business which
a VAT transaction or VAT taxable activity. Registration
under Sec. 236(G)(1) is required considering that Tran-
quilino realized gross receipts beyond the minimum
requirement of Pl,500,000.00. He must likewise pay
the annual registration fee before the commencement
of the business. Then, Tranquilino shall become liable
to VAT commencing on the first day of the month fol-
lowing his registration.
TAX 2 REVEALED
108
Concept of optional and mandatory registration

Prefatorily, the seller is liable to pay output tax and the
buyer-purchaser for input tax. There is VAT payable when the
output tax exceeds the input tax. Hence, the seller is obligated to
pay such excess of output tax or VAT payable.
Illustration:
Output tax / VAT on sales xxx
Less: Input tax/VAT on purchases
and services xxx
Vat payable xxx
Gross sales or gross receipts xxx
x VAT rate 12%
Output tax/VAT xxx
Purchases and services xxx
x VAT rate 12%
Input tax / VAT xxx
If Bayani is VAT-registered, he is entitled to claim or avail
of the benefit of the input tax credit. Thus, any input taxes in his
purchases may be used as an input tax credit to reduce his output
taxes resulting from his sales. In other words, VAT registration is
the pre-condition before one may utilize the input tax credit.
Note that VAT registration is not a requisite before a person
can be held liable for VAT. Whether registered or not, VAT liability
arises. However, to be liable for VAT is one thing and to be liable
for non-registration if mandatory is another.
If let us say, Bayani is engaged in business but is not VAT
registered, in his purchases, he will be liable to pay VAT, but will
not be given the privilege to claim such VAT as an input tax.
Output Tax
Output tax means the value-added tax due on the sale or

lease of goods, properties or services by any person registered or
Chapter 4
109
VALUE ADDED TAX
required to be registered under Sec. 236(G) of the Code. It is also

called the output VAT.
The value-added tax was restructured under RA 9337 which
took effect on November 1, 2005. Originally the rate of tax is ten
percent (10%) and was increased to twelve percent (12%).
Input tax
The term 'input tax' means the value-added tax due from
or paid by a VAT-registered person in the course of his trade or
business on importation of goods or local purchase of goods or
services, including lease or use of property, from a VAT-registered
person. It shall also include the transitional input tax and the
presumptive input tax determined in accordance with Sec. I l l of
the Code. (Sec. 8, RA 9337)
VAT Payable ( E x c e s s Output) or E x c e s s Input Tax
a. If at the end of any taxable quarter the output tax

exceeds the input tax, the excess shall be paid by the
VAT-registered person. (Sec. 4110-7, RR 16-2005)
b. If the input tax inclusive of input carried over
from the previous quarter exceeds the output tax,
the excess input tax shall be carried over to the
succeeding quarter or quarters; Provided, however,
that any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be
refunded or applied for a tax credit certificate which
may be used in the payment of internal revenue
taxes, subject to the limitations as may be provided
for by law, as well as, other implementing rules. (RR
No. 2-2007)
Exempt Transactions
In addition to the express provision of Sec. 109(A) to (U), the
following are VAT exempt persons:
1. Sees. 109(A) to (V).
TAX 2 REVEALED
110
2. Sec. (V), gross annual sales or receipts do not exceed

Pl,500,000.00.
3. Any business principally for subsistence or livelihood
provided that the aggregate gross sales or receipt during
the 12-month period shall not exceed P100,000.00.
(RMO 4-98)
4. VAT exempt under special laws or treaty.
Exempt transactions under Sec. 109 are exempt from
value-added tax. Thus, are not subject to the 12% output tax/
VAT regardless of the amount of sales, also not subject to other
percentage tax of 3%, and are likewise not entitled to the benefit
of claiming input tax credit or refund.
In Sec. 109, it provides that: [With excerpts from RR 16-2005]
(1) Subject to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the value-
added tax:
a. Sale or importation of agricultural and marine
food products in their original state, livestock and
poultry of a kind generally used as, or yielding
or producing foods for human consumption; and
breeding stock and genetic material therefore.
Products classified under this paragraph

shall be considered in their original state even
if they have undergone the simple processes of
preparation or preservation for the market, such
as freezing, drying, salting, broiling, roasting,
smoking or stripping. Polished and/or husked
rice, corn grits, raw cane sugar and molasses,
ordinary salt, and copra shall be considered in
their original state;
"Livestock" shall include cows, bulls and

calves, pigs, sheep, goats and rabbits. Poultry shall
include fowls, ducks, geese and turkey. Livestock
or poultry does not include fighting cocks, race
Chapter 4 111
VALUE ADDED TAX
horses, zoo animals and other animals generally

considered as pets.
"Marine food products" shall include fish
and crustaceans, such as, but not limited to, eels,
trout, lobster, shrimps, prawns, oysters, mussels and
clams.
Meat, fruit, fish, vegetables and other agri-
cultural and marine food products classified under
this paragraph shall be considered in their original
date even if they have undergone the simple
processes of preparation or preservation for
the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping, including
those using advanced technological means of
packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar
packaging methods.
Polished and/or husked rice, corn grits, raw

cane sugar and molasses, ordinary salt and copra
shall be considered as agricultural food products in
their original state.
Sugar whose content of sucrose by weight,
in the dry state, has a polarimeter reading of 99.5°
and above are presumed to be refined sugar.
Sale or importation of fertilizers; seeds, seedlings
and fingerlings; fish, prawn, livestock and poultry
feeds, including ingredients, whether locally
produced or imported, used in the manufacture
of finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals
and other animals generally considered as pets);
Importation of personal and household effects
belonging to the residents of the Philippines
returning from abroad and nonresident citizens
coming to resettle in the Philippines: Provided,
That such goods are exempt from customs
TAX 2 REVEALED
duties under the Tariff and Customs Code of the

Philippines;
d. Importation of professional instruments and
implements, wearing apparel, domestic animals,
and personal household effects (except any
vehicle, vessel, aircraft, machinery other goods
for use in the manufacture and merchandise of
any kind in commercial quantity) belonging to
persons coming to settle in the Philippines, for
their own use and not for sale, barter or exchange,
accompanying such persons, or arriving within
ninety (90) days before or after their arrival,
upon the production of evidence satisfactory to
the Commissioner, that such persons are actually
coming to settle in the Philippines and that the
change of residence is bona fide;
e. Services subject to percentage tax under Title V;

f. Services by agricultural contract growers and
milling for others of palay into rice, corn into grits
and sugar cane into raw sugar;
"Agricultural contract growers" refers to
those persons producing for others poultry, live-
stock or other agricultural and marine food pro-
ducts in their original state.
g. Medical, dental, hospital and veterinary services
except those rendered by professionals;
Laboratory services are exempted. If the hos-
pital or clinic operates a pharmacy or drug store,
the sale of drugs and medicine is subject to VAT.
h. Educational services rendered by private educa-
tional institutions, duly accredited by the Depart-
ment of Education (DepEd), the Commission on
Higher Education (CHED), the Technical Educa-
tion and Skills Development Authority (TESDA)
and those rendered by government educational
institutions;
Chapter 4 113
VALUE ADDED TAX
"Educational services" shall refer to aca-

demic, technical or vocational education pro-
vided by private educational institutions duly
accredited by the DepED, the CHED and TESDA
and those rendered by government educational
institutions and it does not include seminars, in-
service training, review classes and other similar
services rendered by persons who are not accred-
ited by the DepED, the CHED and/or the TESDA;
i. Services rendered by individuals pursuant to an
employer-employee relationship;
j. Services rendered by regional or area headquar-
ters established in the Philippines by multination-
al corporations which act as supervisory, com-
munications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-
Pacific Region and do not earn or derive income
from the Philippines;
k. Transactions which are exempt under internation-
al agreements to which the Philippines is a sig-
natory or under special laws, except those under
Presidential Decree No. 529;
1. Sales by agricultural cooperatives duly registered
with the Cooperative Development Authority to
their members as well as sale of their produce,
whether in its original state or processed form,
to non-members; their importation of direct farm
inputs, machineries and equipment, including
spare parts thereof, to be used directly and
exclusively in the production and/or processing
of their produce;
m. Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered with
the Cooperative Development Authority;
n. Sales by non-agricultural, non- electric and non-
credit cooperatives duly registered with the
TAX 2 REVEALED
Cooperative Development Authority: Provided,

That the share capital contribution of each
member does not exceed Fifteen thousand pesos
(P15,000.00) and regardless of the aggregate
capital and net surplus ratably distributed among
the members;
Export sales by persons who are not VAT-
registered; because it is not considered as
Sale of real properties: zero rated but excempt only.
1. Not primarily held for sale to customers or
held for lease in the ordinary course of trade
or business, or capital asset
2. Real property utilized for low-cost and
3. Socialized housing as defined by RA 7279,
otherwise known as the Urban Development
and Housing Act of 1992, and other related
laws, residential lot valued at One million
five hundred thousand pesos (Pl,500,000.00)
and below, house and lot, and other resi-
dential dwellings valued at Two million five
hundred thousand pesos (P2,500,000.00) and
below: Provided, That not later than January
31, 2009 and every three (3) years thereafter,
the amounts herein stated shall be adjusted
to their present values using the Consumer
Price Index, as published by the National
Statistics Office (NSO).
"Low-cost housing" refers to housing
projects intended for homeless low-income
family beneficiaries, undertaken by the Government
or private developers, which may either be a
subdivision or a condominium registered and
licensed by the Housing and Land Use Regulatory
Board /Housing (HLURB) under BP Big. 220, PD
No. 957 or any other similar law, wherein the unit
selling price is within the selling price ceiling per
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115
VALUE ADDED TAX
unit of P750,000.00 under RA 7279, otherwise

known as the "Urban Development and Housing
Act of 1992" and other laws, such as RA 7835 and
RA8763.
Sale of real properties utilized for socialized
housing as defined under RA 7279, and other
related laws, such as RA 7835 and RA 8763, wherein
the price ceiling per unit is P225,000.00 or as may
from time to time be determined by the HUDCC
and the NEDA and other related laws.
"Socialized housing" refers to housing
programs and projects covering houses and lots
or home lots only undertaken by the Government
or the private sector for the underprivileged
and homeless citizens which shall include sites
and services development, long-term financing,
liberated terms on interest payments, and such
other benefits in accordance with the provisions
of RA 7279, otherwise known as the "Urban
Development and Housing Act of 1992" and
RA 7835 and RA 8763. "Socialized housing"
shall also refer to projects intended for the
underprivileged and homeless wherein the
housing package selling price is within the
lowest interest rates under the Unified Home
Lending Program (UHLP) or any equivalent
housing program of the Government, the private
sector or non-government organizations.
q. Lease of a residential unit with a monthly rental
not exceeding Ten thousand pesos (P10,000.00):
Provided, That not later than January 31, 2009 and
every three (3) years thereafter, the amount herein
stated shall be adjusted to its present value using
the Consumer Price Index, as published by the
National Statistics Office (NSO);
The foregoing notwithstanding, lease of resi-
dential units where the monthly rental per unit
exceeds Ten Thousand Pesos (P10,000.00) but the
TAX 2 REVEALED
aggregate of such rentals of the lessor during the

year do not exceed One Million Five Hundred
Pesos (Pl,500,000.u0) shall likewise be exempt
from VAT, however, the same shall be subjected to
three percent (3%) percentage tax.
In cases where a lessor has several residential
units for lease, some are leased out for a monthly
rental per unit of not exceeding P10,000.00 while
others are leased out for more than P10,000.00 per
unit, his tax liability will be as follows:
1. The gross receipts from rentals not exceed-
ing P10,000.00 per month per unit shall be
exempt from VAT regardless of the aggregate
annual gross receipts.
2. The gross receipts from rentals exceeding
P10,000.00 per month per unit shall be sub-
ject to VAT if the aggregate annual gross
receipts from said units only (not includ-
ing the gross receipts from units leased
for not more than P10,000.00) exceeds
Pl,500,000.00. Otherwise, the gross receipts
will be subject to the 3% tax imposed under
Sec. 116 of the Tax Code.
Sale, importation, printing or publication of
books and any newspaper, magazine, review or
bulletin which appears at regular intervals with
fixed prices for subscription and sale and which is
not devoted principally to the publication of paid
advertisements;
Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine, equipment
and spare parts thereof for domestic and interna-
tional transport operations;
Importation of fuel, goods and supplies by
persons engaged in international shipping or air
transport operations;
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VALUE ADDED TAX
u. Services of banks, non-bank financial interme-

diaries performing quasi-banking functions and
other non-bank financial intermediaries; and
"With the enactment of RA 9238, it classified
pawnshops as other-non-bank financial interme-
diaries and the 0% to 5% percentage tax on gross
receipts was reimposed under Section 12 of the
Code. (Tambunting Pawnshop, Inc. v. CIR, G.R.
No. 179085 [2010])"
threshold = 1,919,500
v. Sale or lease of goods or properties or the
performance of services other than the transactions
mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the
amount of One million five hundred thousand
pesos (Pl,500,000.00): Provided, That not later
than January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer
Price Index, as published by the National Statistics
Office (NSO).
(2) A VAT-registered person may elect that Subsection (1)
not apply to its sale of goods or properties or services:
Provided, That an election made under this Subsection
shall be irrevocable for a period of three (3) years from
the quarter the election was made.
elect exemption not to apply.
VAT Registration a n d C o m p l i a n c e
In Sec. 236(A) of the Code, it provides that every person
subject to any internal revenue tax shall register once with the
appropriate Revenue District Officer, to wit:
1. Within ten (10) days from date of employment, or
2. On or before the commencement of business, or
3. Before payment of any tax due, or
4. Upon filing of a return, statement or declaration as
required in this Code.
TAX 2 REVEALED
118
The registration shall contain the taxpayer's name, style,

place of residence, business and such other information as may be
required by the Commissioner in the form prescribed therefore.
A person maintaining a head office, branch or facility shall
register with the Revenue District Officer having jurisdiction
over the head office, brand or facility. For purposes of this Sec-
tion, the term "facility" may include but not be limited to sales
outlets, places of production, warehouses or storage places.
Sec. 105 of the Code states that any person who, in the
course of trade or business, sells barters, exchanges, leases goods
or properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed in
Sees. 106 to 108 of the Code. It is clear therefore that any person,
natural or juridical subject to VAT shall register for VAT, shall
register as a VAT-taxable person. The registration requirement is
mandatory in character. Likewise, if the person is engaged in an
exempt business or business exempt from VAT, the registration
shall be as a non-VAT person. In case the business is partly
subject to VAT and partly exempt from VAT, the registration shall
be both for VAT-taxable person in relation to the business subject
to VAT and non-VAT person in relation to the exempt business.
The legal implication and tax consequence of being subject to
VAT but not registered or registered but not subject to VAT will
be discussed in the succeeding topics.
Annual Registration Fee
An annual registration fee in the amount of Five hundred

pesos (P500.00) for every separate or distinct establishment or
place of business, including facility types where sales transactions
occur, shall be paid upon registration and every year thereafter
on or before the last day of January.
Exception:
1. Cooperatives
2. Individuals earning purely compensation income,
whether locally or abroad
3. Overseas workers
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119
VALUE ADDED TAX
The registration fee shall be paid to an authorized agent bank

located within the revenue district, or to the Revenue Collection
Officer, or duly authorized Treasurer of the city of municipality
where each place of business or branch is registered. (Sec. 236[B])
Effect of non-registration
1. Failure to register for VAT purposes as required by the

Code is still liable to VAT.
2. The input taxes or the VAT on purchases cannot be used
as a credit or cannot be credited against the output tax.
3. Failure of any person to register as required
under Section 236 — The temporary closure of the
establishment shall be for the duration of not less than
five (5) days and shall be lifted only upon compliance
with whatever requirements prescribed by the
Commissioner in the closure order.
Cancellation of Registration
The registration of any person who ceases to be liable to a

tax type shall be cancelled upon filing with the Revenue District
Office where he is registered, an application for registration
information update in a form prescribed therefor.
A VAT registered person may cancel his registration for VAT
if:
1. He makes written application and can demonstrate to
the Commissioner's satisfaction that his gross sales or
receipts for the following twelve (12) months, other
than those that are exempt under Section 109(A) to (U),
will not exceed Phpl,500,000.00; or
2. He has ceased to carry on his trade or business, and
does not expect to recommence any trade or business
within the next twelve (12) months. (Sec. 236[F])
Note that in case of paragraph 1 above, while the taxpayer
may enjoy the satisfaction of the Commissioner, he is nonetheless
liable to the 3% percentage tax imposed under 116 of the Code.
TAX 2 REVEALED
120
Section 116 of the Code provides:

"Tax on Persons Exempt From Value-Added
Tax (VAT). — Any person whose sales or receipts are
exempt under Section 109(z) of this Code from the
payment of value-added tax and who is not a VAT-
registered person shall pay a tax equivalent to three
percent (3%) of his gross quarterly sales or receipts:
Provided, That cooperatives shall be exempt from the
three percent (3%)gross receipts tax herein imposed."
Tax Credits
A VAT registered person shall be entitled to creditable input
taxes against output taxes on sale or lease of goods, properties or
services.
Persons W h o C a n Avail of the Input Tax Credit
The input tax credit on importation of goods or local

purchases of goods, properties or services by a VAT registered
person shall be creditable:
a. To the importer upon payment of VAT prior to the
release of goods from customs custody;
b. To the purchaser of the domestic goods or properties
upon consummation of the sale; or
c. To the purchaser of services or the lessee or licensee
upon payment of the compensation, rental, royalty or
fee. (Sec. 4.110-2. RR 16-2005)
Creditable Input Tax
1. Any input tax evidenced by a VAT invoice or official

receipt issued in accordance with Section 113 hereof on
the following transactions shall be creditable against
the output tax:
a. Purchase or importation of goods:
1. For sale;
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121
VALUE ADDED TAX
no personal use.
2. For conversion into or intended to form part
of a finished product for sale including pack-
aging materials;
3. For use as supplies in the course of business;
4. For use as materials supplied in the sale of
service;
5. For use in trade or business for which de-
duction for depreciation or amortization is
allowed under th[e] Code.
b. Purchase of services on which a value-added tax
has been actually paid.
The input tax on domestic purchase of goods or
properties shall be creditable:
a. To the purchaser upon consummation of sale and
on importation of goods or properties; and
b. To the importer upon payment of the value-
added tax prior to the release of the goods from
the custodv of the Bureau of Customs.
Provided, That the input tax on goods purchased
or imported in a calendar month for use in trade or
business for which deduction for depreciation is
allowed under th[e] Code, shall be spread evenly
over the month of acquisition and the fifty-nine (59)
succeeding months if the aggregate acquisition cost
for such goods, excluding the VAT component thereof,
exceeds P1,000,000.00. Provided, however, That if the
estimated useful life of the capital good is less than
five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such shorter
period: Provided, finally, That in the case of purchase of
service, lease or use of properties, the input tax shall
be creditable to the purchaser, lessee or licensee upon
payment of the compensation, rental, royalty or fee.
A VAT-registered person who is also engaged in
transactions not subject to the value-added tax shall be
allowed tax credit as follows:
TAX 2 REVEALED
122
a. Total input tax which can be directly attributed to

transactions subject to value-added tax; and
b. A ratable portion of any input tax which cannot
be directly attributed to either activity.
The term "input tax" means the value-added tax
due from or paid by a VAT-registered person in the
course of his trade or business on importation of goods
or local purchase of goods or services, including lease
or use of property, from a VAT-registered person. It
shall also include the transitional input tax determined
in accordance with Sec. I l l of th[e] Code.
The term "output tax" means the value-added tax
due on the sale or lease of taxable goods or properties
or services by any person registered or required to
register under Sec. 236 of th[e] Code. (Sec. 110[A])
Excess Output or input Tax
If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person.
If the input tax exceeds the output tax, the excess shall be carried
over to the succeeding quarter or quarters. Provided, however,
anv input tax attributable to zero-rated sales by a VAT-registered
person may at his option be refunded or credited against other
internal revenue taxes, subject to the provisions of Sec. 112. (Sec.
110[B])
Determination of Creditable Input Tax
The sum of the excess input tax carried over from the
preceding month or quarter and the input tax creditable to a
VAT-registered person during the taxable month or quarter shall
be reduced by the amount of claim for refund or tax credit for
value-added tax and other adjustments, such as purchase returns
or allowances and input tax attributable to exempt sale.
The claim for tax credit referred to in the foregoing para-
graph shall include not only those filed with the Bureau of Inter-
nal Revenue but also those filed with other government agencies,
Chapter 4 123
VALUE ADDED TAX
such as the Board of Investments and the Bureau of Customs

(Sec. noici)
Transitional Input Tax Credits
A person who becomes liable to value-added tax or any

person who elects to be a VAT-registered person shall, subject
to the filing of an inventory according to rules and regulations
prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent [to] two
percent (2%) of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever
is higher, which shall be creditable against the output tax. (Sec.
1U[A])
P r e s u m p t i v e Input Tax Credits
A presumptive input tax, creditable against the output tax,

equivalent to four percent (4%) of the gross value in money of
their purchases of primary agricultural products which are used
as inputs to their production, to wit:
1. Persons or firms engaged in the processing of sardines,
mackerel and milk; and
2. In manufacturing refined sugar and cooking oil and
packed noodle based instant meals.
As used in this Subsection, the term "processing" shall mean
pasteurization, canning and activities which through physical
or chemical process alter the exterior texture or form or inner
substance of a product in such manner as to prepare it for special
use to which it could not have been put in its original form or
condition. (Sec. 111[B])
Zero-Rated or Effectively Zero-Rated Sales

Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of
the taxable quarter when the sales were made, apply for:
1. The issuance of a tax credit certificate; or
TAX 2 REVEALED
124
2. Refund of creditable input tax due or paid attributable

to such sales, except transitional input tax, to the extent
that such input tax has not been applied against output
tax.
Provided, however, That in the case of zero-rated sales under
Sec. 106(A)(2)(a)(l), (2) and (b) and Sec. 108(B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been
duly accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That
where the taxpayer is engaged in zero-rated or effectively
zero-rated sale and also in taxable or exempt sale of goods of
properties or services, and the amount of creditable input tax due
or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis
of the volume of sales. Provided, finally, That for a person making
sales that are zero-rated under Section 108(B)(6), the input taxes
shall be allocated ratably between his zero-rated and non-zero-
rated sales. (Sec. 112[A])
In Silicon Philippines, Inc., (formerly Intel Philippines
Manufacturing, Inc.) v. CIR (G.R. No. 172378, January 17,2011),
a claim for credit/refund of input VAT attributable to zero-rated
sales, Sec. 112(A) of the NIRC lays down four requisites, to wit:
1) The taxpayer must be VAT-registered;
2) The taxpayer must be engaged in sales which are zero-
rated or effectively zero-rated;
3) The claim must be filed within two years after the close
of the taxable quarter when such sales were made; and
4) The creditable input tax due or paid must be attributable
to such sales, except the transitional input tax, to the
extent that such input tax has not been applied against
the output tax.
Under Sec. 112(A) of the NIRC, a claimant must be engaged
in sales which are zero-rated or effectively zero-rated. To prove
this, duly registered invoices or receipts evidencing zero-rated
sales must be presented. However, since the ATP is not indicated
Chapter 4
125
VALUEADDED TAX
in the invoices or receipts, the only way to verify whether the

invoices or receipts are duly registered is by requiring the
claimant to present its ATP from the BIR. Without this proof,
the invoices or receipts would have no probative value for the
purpose of refund. In the case of Intel, [the Court] emphasized:
It bears reiterating that while the pertinent provisions of
the Tax Code and the rules and regulations implementing them
require entities engaged in business to secure a BIR authority to
print invoices or receipts and to issue duly registered invoices or
receipts, it is not specifically required that the BIR authority to
print be reflected or indicated therein. Indeed, what is important
with respect to the BIR authority to print is that it has been
secured or obtained by the taxpayer, and that invoices or receipts
are duly registered. (Emphasis supplied)
Failure to print the word "zero-rated" on the sales invoices
is fatal to a claim for refund of input VAT.
Similarly, failure to print the word "zero-rated" on the sales
invoices or receipts is fatal to a claim for credit/refund of input
VAT on zero-rated sales.
In Panasonic Communications Imaging Corporation
of the Philippines (formerly Matsushita Business Machine
Corporation of the Philippines) v. Commissioner of Internal
Revenue, the Court upheld the denial of Panasonic's claim for
tax credit/refund due to the absence of the word "zero-rated"
in its invoices. [The Court] explained that compliance with Sec.
4.108-1 of RR 7-95, requiring the printing of the word "zero
rated" on the invoice covering zero-rated sales, is essential as
this regulation proceeds from the rule-making authority of the
Secretary of Finance under Sec. 244 of the NIRC.
All told, the non-presentation of the ATP and the failure to
indicate the word "zero-rated" in the invoices or receipts are fatal
to a claim for credit/refund of input VAT on zero-rated sales. The
failure to indicate the ATP in the sales invoices or receipts, on
the other hand, is not. In this case, petitioner failed to present
its ATP and to print the word "zero-rated" on its export sales
invoices. Thus, [the Court] find[s] no error on the part of the CTA
126 TAX 2 REVEALED
in denying outright petitioner's claim tor credit/refund of input

VAT attributable to its zero-rated sales. (Supra)
Substantiation of Input Tax Credits

a. Input taxes for the importation of goods or the domestic
purchase of goods, properties or services is made in the
course of trade or business, whether such input taxes
shall be credited against zero-rated sale, non-zero-rated
sales, or subjected to the 5% Final Withholding VAT,
must be substantiated and supported by the following
documents, and must be reported in the information
returns required to be submitted to the Bureau:
1. For the importation of goods — import entry
or other equivalent document showing actual
payment of VAT on the imported goods.
2. For the domestic purchase of goods and properties
invoice showing the information required under
Sees. 113 and 237 of the Tax Code.
3. For the purchase of real property — public
instrument i.e., deed of absolute sale, deed of
conditional sale, contract/agreement to sell, etc.,
together with VAT invoice issued by the seller.
4. For the purchase of services — official receipt
showing the information required under Sees.
113 and 237 of the Tax Code.
A cash register machine tape issued to a registered
buyer shall constitute valid proof of substantiation of
tax credit only if it shows the information required
under Sees. 113 and 237 of the Tax Code.
b. Transitional input tax shall be supported by an
inventory of goods as shown in a detailed list to be
submitted to the BIR.
c. Input tax on "deemed sale" transactions shall be
substantiated with the invoice required under Sec.
4.113-2 of these Regulations.
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127
VALUE ADDED TAX
d. Input tax from payments made to non-residents (such

as for services, rentals and royalties) shall be supported
by a copy of the Monthly Remittance Return of Value
Added Tax Withheld (BIR Form 1600) filed by the
resident payor in behalf of the non-resident evidencing
remittance of VAT due which was withheld by the payor.
e. Advance VAT on sugar shall be supported by the
Payment Order showing payment of the advance VAT.
(Sec. 4.110-8 RR 16-2005)
Cancellation of VAT Registration
A person whose registration has been cancelled due to

retirement from or cessation of business, or due to changes in or
cessation of status under Sec. 106(C) of th[e] Code may, within
two (2) years from the date of cancellation, apply for the issuance
of a tax credit certificate for any unused input tax which may be
used in payment of his other internal revenue taxes. (Sec. 112[B])
Period within w h i c h R e f u n d or Tax Credit of Input Taxes

shall be m a d e
In proper cases, the Commissioner shall grant a refund or

issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission
of complete documents in support of the application filed in
accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund
or tax credit, or the failure on the part of the Commissioner to
act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of
the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals. (Sec. 112[C])
Manner of Giving Refund
Refunds shall be made upon warrants drawn by the Com-

missioner or by his duly authorized representative without the
128 TAX 2 REVEALED
necessity of being countersigned by the Chairman, Commission

on Audit, the provisions of the Administrative Code of 1987 to
the contrary notwithstanding: Provided, That refunds under this
paragraph shall be subject to post audit by the Commission on
Audit. (Sec. 112[D])
In Sec. 230, the provision for forfeiture of cash refund and of
tax credit provides:
"(A) Forfeiture of Refund. — A refund check or

warrant issued in accordance with the pertinent provisions
of this Code, which shall remain unclaimed or uncashed
within five (5) years from the date the said warrant or check
was mailed or delivered, shall be forfeited in favor of the
Government and the amount thereof shall revert to the
general fund.
(B) Forfeiture of Tax Credit. — A tax credit certificate
issued in accordance with the pertinent provisions of this
Code, which shall remain unutilized after five (5) years from
the date of issue, shall, unless revalidated, be considered
invalid, and shall not be allowed as payment for internal
revenue tax liabilities of the taxpayer, and the amount
covered by the certificate shall revert to the general fund."
Invoicing a n d A c c o u n t i n g R e q u i r e m e n t s for VAT-Registered

Persons (Sec. 113)
A. Invoicing Requirements
A VAT-registered person shall issue:
1. A VAT invoice for every sale, barter or exchange of
goods or properties; and
2. A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of
services.
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129
VALUE ADDED TAX
B. Information Contained in the VAT Invoice or VAT Official

Receipt
The following information shall be indicated in the VAT
invoice or VAT official receipt:
1. A statement that the seller is a VAT-registered person,
followed by his Taxpayer's Identification Number
(TIN);
2. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the value-added tax: Provided,
That:
a. The amount of the tax shall be shown as a separate
item in the invoice or receipt;
b. If the sale is exempt from value-added tax, the
term "VAT-exempt sale" shall be written or
printed prominently on the invoice or receipt;
c. If the sale is subject to zero percent (0%) value-
added tax, the term "zero-rated sale" shall be
written or printed prominently on the invoice or
receipt;
d. If the sale involves goods, properties or services
some of which are subject to and some of which
are VAT zero-rated or VAT-exempt, the invoice
or receipt shall clearly indicate the breakdown
of the sale price between its taxable, exempt and
zero-rated components, and the calculation of
the value-added tax on each portion of the sale
shall be shown on the invoice or receipt: Provided,
That the seller may issue separate invoices or
receipts for the taxable, exempt, and zero-rated
components of the sale.
3. The date of transaction, quantity, unit cost and descrip-
tion of the goods or properties or nature of the service;
and
130 TAX 2 REVEALED
4. In the case of sales in the amount of one thousand pesos

(P1,000.00) or more where the sale or transfer is made
to a VAT-registered person, the name, business style,
if any, address and Taxpayer Identification Number
(TIN) of the purchaser, customer or client.
Accounting Requirements
Notwithstanding the provisions of Sec. 233, all persons

subject to the value-added tax under Sees. 106 and 108 shall, in
addition to the regular accounting records required, maintain
a subsidiary sales journal and subsidiary purchase journal on
which the daily sales and purchases are recorded. The subsidiary
journals shall contain such information as may be required by
the Secretary of Finance.
C o n s e q u e n c e of Issuing E r r o n e o u s VAT Invoice or VAT

Official Receipt
1. If a person who is not a VAT-registered person issues an

invoice or receipt showing his Taxpayer Identification
Number (TIN), followed by the word "VAT":
a. The issuer shall, in addition to any liability to
other percentage taxes, be liable to:
i. The tax imposed in Sec. 106 or 108 without
the benefit of any input tax credit; and
ii. A 50% surcharge under Sec. 248(B) of th[e]
Code;
b. The VAT shall, if the other requisite information
required under Subsection (B) hereof is shown on
the invoice or receipt, be recognized as an input
tax credit to the purchaser under Sec. 110 of th[e]
Code.
2. If a VAT-registered person issues a VAT invoice or VAT
official receipt for a VAT-exempt transaction, but fails
to display prominently on the invoice or receipt the
term "VAT-exempt Sale," the issuer shall be liable to
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131
VALUE ADDED TAX
account for the tax imposed in Sec. 106 or 108 as if Sec.

109 did not apply.
For this matter, Sec. 237 of the Code mandates the issuance
of receipts or sales or commercial invoices, to wit:
"All persons subject to an internal revenue tax

shall, for each sale and transfer of merchandise or for
services rendered valued at Twenty-five pesos (P25.00)
or more, issue duly registered receipts or sales or
commercial invoices, prepared at least in duplicate,
showing the date of transaction, quantity, unit cost
and description of merchandise or nature of service:
Provided, however, That where the receipt is issued to
cover payment made as rentals, commissions, or fees,
receipts or invoices shall be issued which shall show
the name, business style, if any, and address of the
purchaser, customer or client.
The original of each receipt or invoice shall be

issued to the purchaser, customer or client at the time
the transaction is effected, who, if engaged in business
or in the exercise of profession, shall keep and preserve
the same in his place of business for a period of three
(3) years from the close of the taxable year in which
such invoice or receipt was issued, while the duplicate
shall be kept and preserved by the issuer, also in his
place of business, for a like period.
The Commissioner may, in meritorious cases,

exempt any person subject to internal revenue tax from
compliance with the provisions of this Section."
Printing of Receipts or Sales or Commercial Invoices

All persons who are engaged in business shall secure from
the Bureau of Internal Revenue an authority to print receipts or
sales or commercial invoices before a printer can print the same.
No authority to print receipts or sales or commercial invoices
shall be granted unless the receipts or invoices to be printed
132 TAX 2 REVEALED
are serially numbered and shall show, among other things, the
name, business style, Taxpayer Identification Number (TIN)
and business address of the person or entity to use the same,
and such other information that may be required by rules and
regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
All persons who print receipt or sales or commercial invoices
shall maintain a logbook/register of taxpayers who availed of
their printing services. The logbook/register shall contain the
following information:
1. Names, Taxpayer Identification Numbers of the per-
sons or entities for whom the receipts or sales or com-
mercial invoices were printed; and
2. Number of booklets, number of sets per booklet,
number of copies per set and the serial numbers of the
receipts or invoices in each booklet. (Sec. 238)
Simply put, no authority to print no printing of receipts or
invoices.
Return a n d P a y m e n t of V a l u e - A d d e d Tax
Every person liable to pay the value-added tax imposed

under this Title shall file a quarterly return of the amount of his
gross sales or receipts within twenty-five (25) days following
the close of each taxable quarter prescribed for each taxpayer:
Provided, however, That VAT-registered persons shall pay the
value-added tax on a monthly basis.
Any person, whose registration has been cancelled in
accordance with Section 236, shall file a return and pay the
tax due thereon within twenty-five (25) days from the date of
cancellation of registration: Provided, That only one consolidated
return shall be filed by the taxpayer for his principal place of
business or head office and all branches. (Sec 114[A])
W h e r e to File the Return a n d Pay the Tax
Except as the Commissioner otherwise permits, the return

shall be filed with and the tax paid to:
Chapter 4 133
VALUE ADDED TAX
1. An authorized agent bank,

2. Revenue Collection Officer or
3. Duly authorized city or municipal Treasurer in the
Philippines located within the revenue district where
the taxpayer is registered or required to register. (Sec.
HUB])
what happens to the remaining vat liability?
W i t h h o l d i n g of Creditable V a l u e - A d d e d Tax
The Government or any of its political subdivisions,

instrumentalities or agencies, including government-owned or
-controlled corporations (GOCCs) shall, before making payment
on account of each purchase of goods and services which are
subject to value-added tax imposed in Sees. 106 and 108 of th[e]
Code, deduct and withhold a final value-added tax at the rate
of five percent (5%) of the gross payment thereof: Provided that
the payment for lease or use of properties or property rights
to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this
section, the payor or person in control of the payment shall be
considered as the withholding agent. (Sec. 114[C])
The value-added tax withheld under this Section shall be

remitted within ten (10) days following the end of the month the
withholding was made. (Sec. 114[D])
Power of the C o m m i s s i o n e r to S u s p e n d the Business

Operations of a Taxpayer
The Commissioner or his authorized representative is here-
by empowered to suspend the business operations and tempo-
rarily close the business establishment of any person for any of
the following violations:
a. In the case of a VAT-registered Person
1. Failure to issue receipts or invoices;
2. Failure to file a value-added tax return as required
under Sec. 114; or
TAX 2 REVEALED
134
3. Understatement of taxable sales or receipts by

thirty percent (30%) or more of his correct taxable
sales or receipts for the taxable quarter.
b. Failure of any Person to Register as Required under
Sec. 236.
The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only
upon compliance with whatever requirements prescribed by the
Commissioner in the closure order. (Sec. 115)
VAT on Pawnshops
In First Planters Pawnshop, Inc. v. Commissioner of
Internal Revenue (G.R. No. 166732, July 30, 2008), the High
Court ruled that:
x x x Since petitioner is a non-bank financial

intermediary, it is subject to 10% VAT for the tax years
1996 to 2002; however, with the levy, assessment
and collection of VAT from non-bank financial
intermediaries being specifically deferred by law,
then petitioner is not liable for VAT during these tax
years. But with the full implementation of the VAT
system on non-bank financial intermediaries starting
January 1, 2003, petitioner is liable for 10% VAT for
said tax year. And beginning 2004 up to present, by
virtue of RA 9238, petitioner is no longer liable for VAT
but it is subject to percentage tax on gross receipts from
0% to 5%, as the case may be. (Emphasis in the original
text)
In Tambunting Pawnshop, Inc., v. CIR (G.R. No. 179085

January 21, 2010), petitioner protested the assessment arguing
that pawnshops are not subject to Value Added Tax pursuant
to Sec. 108 of the National Internal Revenue Code. On the issue
of whether pawnshops are liable to pay VAT, the Court, in First
Planters Pawnshop, Inc. v. Commissioner of Internal Revenue, held:
In fine, prior to the [passage of the] EVAT Law [in
1994], pawnshops were treated as lending investors subject
Chapter 4 135
VALUE ADDED TAX
to lending investor's tax. Subsequently, with the Court's

ruling in Lhuillier, pawnshops were then treated as VAT-
able enterprises under the general classification of "sale
or exchange of services" under Sec 108(A) of the Tax Code
of 1997, as amended. RA 9238 [which was passed in 2004]
finally classified pawnshops as Other Non-bank Financial
Intermediaries.
The Court finds that pawnshops should have been

treated as non-bank financial intermediaries from the very
beginning, subject to the appropriate taxes provided by law,
thus —
• Under the National Internal Revenue Code of 1977,

pawnshops should have been levied the 5% percentage
tax on gross receipts imposed on banks and non-bank
financial intermediaries under Sec. 119 (now Sec. 121
of the Tax Code of 1997);
• With the imposition of the VAT under RA 7716 or the

EVAT Law, pawnshops should have been subjected to
the 10% VAT imposed on banks and non-bank financial
intermediaries and financial institutions under Sec. 102
of the Tax Code of 1977 (now Sec. 108 of the Tax Code
of 1997);
• This was restated by RA 8241, which amended RA

7716, although the levy, collection and assessment of
the 10% VAT on services rendered by banks, non-bank
financial intermediaries, finance companies, and other
financial intermediaries not performing quasi-banking
functions, were made effective January 1, 1998;
• RA 8424 or the Tax Reform Act of 1997 likewise imposed
a 10% VAT under Sec. 108 but the levy, collection and
assessment thereof were again deferred until December
31,1999;
• The levy, collection and assessment of the 10% VAT
was further deferred by RA 8761 until December 31,
2000, and by RA 9010, until December 31, 2002;
136 TAX 2 REVEALED
• With no further deferments given by law, the levy,

collection and assessment of the 10% VAT on banks,
non-bank financial intermediaries, finance companies,
and other financial intermediaries not performing
quasi-banking functions were finally made effective
beginning January 1, 2003;
• Finally, with the enactment of RA 9238 in 2004. the
services of banks, non-bank financial intermediaries,
finance companies, and other financial intermediaries
not performing quasi-banking functions were
specifically exempted from VAT, and the 0% to 5%
percentage tax on gross receipts on other non-bank
financial intermediaries was reimposed under Sec. 122
of the Tax Code of 1997.
Tax Provisions on Cooperatives
RA 9520 (February 17, 2009), an Act amending the Coop-

erative Code of the Philippines to be known as the "Philippine
Cooperative Code of 2008" encompasses the following: x x x .
Tax Treatment of Cooperative
Duly registered cooperatives under this Code which do

not transact any business with non-members or the general
public shall not be subject to any taxes and fees imposed under
the internal revenue laws and other tax laws. Cooperatives not
falling under this article shall be governed by the succeeding
section. (Art. 60)
Tax and Other E x e m p t i o n s
Cooperatives transacting business with both members and

non-members shall not be subjected to tax on their transactions
with members. In relation to this, the transactions of members
with the cooperative shall not be subject to any taxes and fees,
including but not limited to final taxes on members' deposits
and documentary tax. Notwithstanding the provisions of any
law or regulation to the contrary, such cooperatives dealing with
nonmembers shall enjoy the following tax exemptions:
Chapter 4
137
VALUE ADDED TAX
Cooperatives with accumulated reserves and undi-

vided net savings of not more than Ten million pesos
(P10,000,000.00) shall be exempt from all national, city,
provincial, municipal or barangay taxes of whatever
name and nature. Such cooperatives shall be exempt
from customs duties, advance sales or compensating
taxes on their importation of machineries, equipment
and spare parts used by them and which are not avail-
able locally as certified by the Department of Trade
and Industry (DTI). All tax free importations shall not
be sold nor the beneficial ownership thereof be trans-
ferred to any person until after five (5) years, other-
wise, the cooperative and the transferee or assignee
shall be solidarily liable to pay twice the amount of the
imposed tax and/or duties.
Cooperatives with accumulated reserves and divi-
ded net savings of more than Ten million pesos
(P10,000,000.00) shall fee the following taxes at the full
rate:
a. Income Tax — On the amount allocated for
interest on capitals: Provided, That the same tax is
not consequently imposed on interest individually
received by members: Provided, further, That
cooperatives regardless of classification, are
exempt income tax from the date of registration
with the Authority;
b. Value-Added Tax — On transactions with non-
members: Provided, however, That cooperatives
duly registered with the Authority; are exempt
from the payment of value-added tax; subject to
Sec. 109, sub-sections L, M and N of Republic Act
No. 9337, the National Internal Revenue Code, as
amended: Provided, That the exempt transaction
under Sec. 109(L) shall include sales made by
cooperatives duly registered with the Authority
organized and operated by its member to
undertake the production and processing of raw
TAX 2 REVEALED
materials or of goods produced by its members

into finished or processed products for sale by the
cooperative to its members and non-members:
Provided, further, That any processed product
or its derivative arising from the raw materials
produced by its members, sold in then name and
for the account of the cooperative: Provided, finally,
That at least twenty-five per centum (25%) of the
net income of the cooperatives is returned to the
members in the form of interest and / or patronage
refunds;
c. All other taxes unless otherwise provided herein;
and
d. Donations to charitable, research and educational
institutions and reinvestment to socioeconomic
projects within the area of operation of the
cooperative may be tax deductible.
All cooperatives, regardless of the amount of
accumulated reserves and undivided net savings shall
be exempt from payment of local taxes and taxes on
transactions with banks and insurance companies:
Provided, That all sales or services rendered for non-
members shall be subject to the applicable percentage
taxes sales made by producers, marketing or service
cooperatives: Provided further, That nothing in this
article shall preclude the examination of the books of
accounts or other accounting records of the cooperative
by duly authorized internal revenue officers for
internal revenue tax purposes only, after previous
authorization by the Authority. (Art. 61)
Chapter 5
TAX REMEDIES
The disputes between the taxpayer and the government are

unavoidable. The difference of opinion, disagreement as to the
interpretation and application of tax laws and the discrepancy
as to the imposition of tax liabilities repeatedly attend the
levying, assessment, collection and payment of national internal
revenue taxes. Hence, under the principle of administrative
feasibility, certain avenues and approach are incorporated in the
Code to address the foregoing concern. It provides the rules of
procedures, statute of limitations, the rights and obligations of
the taxpayer and government as well as the proper tax remedies.
After all, the government in the exercise of their function enjoys
the presumption of regularity of work. For this part, the same
will not in any way confer an authority or license to carry
out and perform what are not provided for by the Code. The
Constitutional guarantee of due process must always be observed
both in substance and procedures.
Tax remedies speak of three (3) kinds, namely:

1. Remedies in general;
2. Remedies of the government; and
3. Remedies of the taxpayer.
1. Remedies in General
In Sec. 204 of the Code, it provides the power of the
Commissioner to compromise, abate and refund or credit taxes.
The Commissioner may:
139
TAX 2 REVEALED
140
A. Compromise the Payment of any Internal Revenue Tax,

when:
1. A reasonable doubt as to the validity of the claim
against the taxpayer exists; or
2. The financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax.
The compromise settlement of any tax liability
shall be subject to the following minimum amounts:
a. For cases of financial incapacity, a minimum
compromise rate equivalent to ten percent (10%)
of the basic assessed tax; and
b. For other cases, a minimum compromise rate
equivalent to forty percent (40%) of the basic
assessed tax.
Where the basic tax involved exceeds one million pesos
(P1,000,000.00) or where the settlement offered is less than the
prescribed minimum rates, the compromise shall be subject to
the approval of the Evaluation Board which shall be composed
of the Commissioner and the four (4) Deputy Commissioners.
Pursuant to Sec. 204(A), in relation to Sec. 7 of the Code,
as implemented by RR Nos. 6-2000, 7-2001 and 30-2002, recom-
mendation/ final report on the application for compromise shall
be signed/approved as herein stated:
1. Concerned Regional Evaluation Board (REB)
Regional office cases involving basic tax assessment
amounting to five hundred thousand pesos (P500,000.00) or less,
and minor criminal violations discovered by regional and dis-
trict officials which were already delegated to the REB.
2. CIR
a. Other cases which were not delegated
b. Cases which, by law, have been entrusted to the
CIR
3. National Evaluation Board (NEB)
Chapter 5
141
TAX REMEDIES
Cases where the basic tax exceeds one million pesos

(P1,000,000.00) or where the settlement offered is less than
the prescribed minimum amount (10% for cases of financial
incapacity; 40% for cases of doubtful validity of the assessment)
which, by law, have been entrusted to the NEB.
Prior to its approval/disapproval, application for
compromise settlement shall likewise be processed, evaluated
and recommended by the investigating offices having jurisdiction
over the taxpayer-applicant.
In all instances, application for compromise settlement shall
not be forwarded to the Technical Working Group without being
processed, evaluated and provided with recommendation by the
originating office.
The concerned RDO/head of the Large Taxpayer Service
investigating office is directed to require all applicants to pay
the basic tax assessed, for abatement cases, and the offers of
compromise, for compromise settlement, upon filing of the
application for abatement/compromise settlement before
the application can be initially processed. In case of ultimate
disapproval of the application by the approving authority,
payments already made pursuant to these applications shall be
treated as partial or installment payment s of the assessments.
(Par. II[b], RMO 20-07)
B. Abate or Cancel a Tax Liability, when:

1. The tax or any portion thereof appears to be unjustly or
excessively assessed; or
2. The administration and collection costs involved do
not justify the collection of the amount due.
All criminal violations may be compromised except:
a. Those already filed in court, or
b. Those involving fraud.
In People v. Sandiganbayan (467 SCRA 137 [2005]), it was
held that abatement is the 'diminution or decrease in the amount
of tax imposed, it refers to the act of eliminating or nullifying;
TAX 2 REVEALED
142
x x x of lessening or moderating x x x. To abate is 'to nullify or

reduce in value or amount; while to cancel is to obliterate, cross
out, or invalidate; and 'to strike out; x x x delete; x x x erase; x x
x make void or invalid; x x x annul; x x x destroy; x x x revoke or
recall.
The BIR may therefore abate or cancel the whole or any
unpaid portion of a tax liability, inclusive of increments, if its
assessment is excessive or erroneous; or if the administration
costs involved do not justify the collection of the amount due.
No mutual concessions need be made, because an excessive or
erroneous tax is not compromised; it is abated or canceled. Only
correct taxes should be paid.
Under existing rules, the BIR processes applications for
the abatement of only the surcharges, interests and compromise
penalties. Any application for the abatement of the basic tax
assessed or any portion thereof, if any, are not covered by any
existing regulations and therefore shall not be processed.
The RDO / investigating offices of the LTS having jurisdiction
over the taxpayer-applicant shall, upon receipt of the application
for abatement together with the required supporting documents,
process the application, make the necessary evaluation and
prepare a report containing its recommendation to the duly
constituted Technical Working Committee (TWC). The report
shall likewise state the basis of the recommendation as provided
under Sec. 204(B) of the Code and RR No. 13-2001. The TWC
shall review the report and recommendation of the investigating
offices and thereafter prepare the final recommendation for the
approval of the Commissioner. In all instances, no application
for abatement shall be initially processed /evaluated by the
investigating office without the payment of 100% of the basic tax.
(Par. Il[a], RMO 20-07)
C. Credit or refund taxes erroneously or illegally received or

penalties imposed without authority
Refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion,
redeem or change unused stamps that have been rendered unfit
Chapter 5 143
TAX REMEDIES
for use and refund their value upon proof of destruction. No

credit or refund of taxes or penalties shall be allowed unless
the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of thp
tax or penalty: Provided, however, That a return filed showing an
overpayment shall be considered as a written claim for credit or
refund.
A Tax Credit Certificate validly issued under the provisions
of th[e] Code may be applied against any internal revenue tax,
excluding withholding taxes, for which the taxpayer is directly
liable. Any request for conversion into refund of unutilized tax
credits may be allowed, subject to the provisions of Sec. 230
of the Code: Provided, That the original copy of the Tax Credit
Certificate showing a creditable balance is surrendered to the
appropriate revenue officer for verification and cancellation:
Provided, further, That in no case shall a tax refund be given
resulting from availment of incentives granted pursuant to
special laws for which no actual payment was made. (Emphasis
supplied)
A. Forfeiture of Refund
A refund check or warrant issued in accordance with the
pertinent provisions of this Code, which shall remain unclaimed
or uncashed within five (5) years from the date the said warrant
or check was mailed or delivered, shall be forfeited in favor of the
Government and the amount thereof shall revert to the general
fund.
B. Forfeiture of Tax Credit
A tax credit certificate issued in accordance with the
pertinent provisions of th[e] Code, which shall remain unutilized
after five (5) years from the date of issue, shall, unless revalidated,
be considered invalid, and shall not be allowed as payment for
internal revenue tax liabilities of the taxpayer, and the amount
covered by the certificate shall revert to the general fund. (Sec.
230[A]and IB])
As held in Pilipinas Shell Petroleum Corporation v. CIR
(541 SCRA 317 [2007]), a tax credit is not specifically defined
TAX 2 REVEALED
144 (A GUIDE TO PASSING THE BAR) VOLUME II
in our Tax Code, but Art. 21 of EO 226 defines a tax credit as

any of the credits against taxes and/or duties equal to those
actually paid or would have been paid to evidence which a tax
credit certificate shall be issued by the Secretary of Finance or his
representative, or the Board (of Investments), if so delegated by
the Secretary of Finance. Tax credits were granted under EO 226
as incentives to encourage investments in certain businesses. A
tax credit generally refers to an amount that may be subtracted
directly from ones total tax liability. It is therefore an allowance
against the tax itself or a deduction from what is owed by a
taxpayer to the government. In RR 5-2000, a tax credit is defined
as the amount due to a taxpayer resulting from an overpayment
of a tax liability or erroneous payment of a tax due.
A TCC is a certification, duly issued to the taxpayer
named therein, by the Commissioner or his duly authorized
representative, reduced in a BIR Accountable Form in accordance
with the prescribed formalities, acknowledging that the grantee-
taxpayer named therein is legally entitled a tax credit, the money
value of which may be used in payment or in satisfaction of any
of his internal revenue tax liability (except those excluded), or
may be converted as a cash refund, or may otherwise be disposed
of in the manner and in accordance with the limitations, if any, as
may be prescribed by the provisions of these Regulations.
Recovery of Tax Erroneously or Illegally Collected
No suit or proceeding shall be maintained in any court for

the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority,
of any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged
to have been excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under
protest or duress.
In any case, no such suit or proceeding shall be filed after

the expiration of two (2) years from the date of payment of the
Chapter 5 145
TAX REMEDIES
tax or penalty regardless of any supervening cause that may

arise after payment: Provided, however, That the Commissioner
may, even without a written claim therefor, refund or credit any
tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously
paid. (Sec. 229, NIRC) (Emphasis supplied)
The Commissioner shall submit to the Chairmen of the
Committee on Ways and Means of both the Senate and House
of Representatives, every six (6) months, a report on the exercise
of his powers under this Section, stating therein the following
facts and information, among others: names and addresses
of taxpayers whose cases have been the subject of abatement
or compromise; amount involved; amount compromised or
abated; and reasons for the exercise of power: Provided, That the
said report shall be presented to the Oversight Committee in
Congress that shall be constituted to determine that said powers
are reasonably exercised and that the government is not unduly
deprived of revenues.
However, in the case of zero-rated or effectively zero-rated

sales, the application for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such
sales must be within two (2) years after the close of the taxable
quarter. (Sec. 112[A]) (Emphasis supplied)
Noteworthy in the case of CIR v. Acosta (529 SCRA 177
[2007]), the requirements under Sec. 230 (now Sec. 229) for refund
claims are as follows:
1. A written claim for refund or tax credit must be filed by
the taxpayer with the Commissioner;
2. The claim for refund must be a categorical demand
for reimbursement;
3. The claim for refund or tax credit must be filed, or
the suit or proceeding therefor must be commenced
in court within two (2) years from date of payment of
the tax or penalty regardless of any supervening cause.
(Emphasis ours)
TAX 2 REVEALED
146
Refund for zero-rated transaction

It has always been the rule that those seeking tax refunds
or credits bear the burden of proving the factual bases of their
claims and of showing, by words too plain to be mistaken, that
the legislature intended to entitle them to such claims. The rule,
in this case, required petitioner to:
1. Show that its sales qualified for zero-rating under the
laws then in force and
2. Present sufficient evidence that those sales resulted
in excess input taxes. (Atlas Consolidated Mining
Development Corporation v. CIR, 518 SCRA 425
[2007])
A judicial claim for refund or tax credit in the CTA is by no
means an original action but rather an appeal by way of petition
for review of a previous, unsuccessful administrative claim.
Therefore, as in every appeal or petition for review, a petitioner
has to convince the appellate court that the quasi-judicial agency
a quo did not have any reason to deny its claims. (Supra)
The claim for refund must be within two (2) years after the
close of the taxable quarter when the sales were made. (Sec. 112
[AD
Refund for creditable w i t h h o l d i n g tax
A taxpayer must be able to do two things to be able to

successfully claim for tax refund:
1. Declare income payments it received as part of its gross
income and
2. Establish the fact of withholding. (Far East Bank v. CA,
477 SCRA 49 [2005])
A claim for tax refund may be based on a statute granting
tax exemption, or, as Commissioner of Internal Revenue v. Fortune
Tobacco Corporation would have it, the result of legislative grace.
In such case, the claim is to be construed strictissimi juris against
the taxpayer, meaning that the claim cannot be made to rest on
vague inference. Where the rule of strict interpretation against
Chapter 5
147
TAX REMEDIES
the taxpayer is applicable as the claim for refund partakes of the

nature of an exemption, the claimant must show that he clearly
falls under the exempting statute. On the other hand, a tax refund
may be, as usually it is, predicated on tax refund provisions
allowing a refund of erroneous or excess payment of tax. The
return of what was erroneously paid is founded on the principle
of solutio indebiti, a basic postulate that no one should unjustly
enrich himself at the expense of another. The caveat against
unjust enrichment covers the government. And as decisional law
teaches, a claim for tax refund proper, as here, necessitates only
the preponderance of evidence threshold like in any ordinary
civil case. (CIR v. Mirant Pagbilao Corporation, 565 SCRA 154
[2008])
The rule states that the taxpayer may file a claim for refund
or credit with the Commissioner of Internal Revenue, within
two (2) years after payment of tax, before any suit in CTA is
commenced. (Philippine Bank of Communications v. BIR, 302
SCRA 241 [1999])
In CIR v. Mcgeorge Food Industries, Inc. (G.R. No. 174157
[2010]), once the taxpayer opts to carry-over the excess income
tax against the taxes due for the succeeding taxable years,
such option is irrevocable for the whole amount of the excess
income tax, thus, prohibiting the taxpayer from applying for a
refund for that same excess income tax in the next succeeding
taxable years. The unutilized excess tax credits will remain in the
taxpayer's account and will be carried over and applied against
the taxpayer's income tax liabilities in the succeeding taxable
years until fully utilized.
In CIR v. Asian Transmission Corporation (G.R. No. 179617
[2011]), the Supreme Court cited the following:
In the case of Citibank N.A. v. Court of Appeals, the Supreme
Court emphasized that the burden of proving the factual basis of
his claim for tax credit or refund is upon the claimant. Thus, for
a claim [for] tax credit or refund be granted, the taxpayer must
establish that:
(i) The claim for refund was filed within two years as
prescribed in Sec. 230 (now 229) of the Tax Code;
148 TAX 2 REVEALED
(ii) The income upon which the taxes were withheld were
included in the return of the recipient; and
(iii) The fact of withholding is established by a copy of
statement (BIR Form 1743-A) duly issued by the payer
(withholding agent) to the payee showing the amount
paid and the amount of tax withheld therefrom.
Applying the above rule, the following are evident:
One, the petitioner complied with the first requirement.
The claim for refund of petitioner for the calendar years ended
December 31, 2000 and December 31, 2001 were filed within the
two-year prescriptive period reckoned from the date of payment
of the tax. The phrase "date of payment of tax" is construed to
mean the dates of the filing of the 2000 and 2001 annual income tax
returns. Petitioner filed its 2000 and 2001 original annual income
tax return on April 10, 2001 and April 15, 2002, respectively. The
administrative and judicial claims for refund were filed on April
9, 2003 and April 10, 2003, respectively. Both filings of claim for
refund and Petition for Review were made within the two year
prescriptive period.
Two, petitioner was able to establish its qualified compliance
with requirement numbers two and three. In the admitted 2000
and 2001 Certificates of Creditable Withholding at Source x x x .
Lastly, [the Court] do not agree with the respondent that
petitioner is required to prove that it incurred a net loss for the
years 2000 and 2001. The implied allegation of irregularity in the
declared operational losses is a matter which must be proven
by competent evidence. And the burden of proof as to whether
petitioner incurred net losses from its operations rests on the
respondent. This is the reason why respondent is authorized by
law to examine the books and accounting records to ascertain
the truthfulness of petitioner's declaration in its income tax
return. In the absence of any showing that there is irregularity in
claimed losses for 2000 and 2001 business operations and taking
into account that income tax returns are prepared under penalty
of perjury, [The Court] considers] the returns of petitioner to be
accurate and regular.
Chapter 5 149
TAX REMEDIES
XXX
At any rate, the CIR is correct in stating that the taxpayer

bears the burden of proof to establish not only that a refund is
justified under the law but also that the amount that should be
refunded is correct. In this case, however, the CTA First Division
and the CTA En Banc uniformly found that from the evidence
submitted, ATC has established its claim for refund or issuance
of a tax credit certificate for unutilized creditable withholding
taxes for the taxable year 2001 in the amount of P27,325,856.58.
The Court finds no cogent reason to rule differently. As correctly
noted by the CTA En Banc:
x x x proof of actual remittance by the respondent is

not needed in order to prove withholding and remittance
of taxes to petitioner. Sec. 2.58.3(B) of RR No. 2-98 clearly
provides that proof of remittance is the responsibility of
the withholding agent and not of the taxpayer-refund
claimant. It should be borne in mind by the petitioner that
payors of withholding taxes are by themselves constituted
as withholding agents of the BIR. The taxes they withhold
are held in trust for the government. In the event that the
withholding agents commit fraud against the government
by not remitting the taxes so withheld, such act should not
prejudice herein respondent who has been duly withheld
taxes by the withholding agents acting under government
authority. Moreover, pursuant to Sec. 57 and 58 of the NIRC
of 1997, as amended, the withholding of income tax and
the remittance thereof to the BIR is the responsibility of the
payor and not the payee. Therefore, respondent, x x x has
no control over the remittance of the taxes withheld from its
income by the withholding agent or payor who is the agent of
the petitioner. The Certificates of Creditable Tax Withheld at
Source issued by the withholding agents of the government
are prima facie proof of actual payment by herein respondent-
payee to the government itself through said agents. [The
Court] stress[es] that the pertinent provisions of law and the
established jurisprudence evidently demonstrate that there
is no need for the claimant, respondent in this case, to prove
actual remittance by the withholding agent (payor) to the
BIR.
TAX 2 REVEALED
150
Goodwill and Patriotism Doctrine

In CIR v. PNB (GR No. 161997 [2005]), an exception to the
2-year period was laid down by the High Court.
In early April 1991, respondent Philippine National Bank
(PNB) issued to the Bureau of Internal Revenue (BIR) PNB
Cashier's Check No. 109435 for P180,000,000.00. The check
represented PNB's advance income tax payment for the bank's
1991 operations and was remitted in response to then President
Corazon C. Aquino's call to generate more revenues for national
development. The BIR acknowledged receipt of the amount by
issuing Payment Order No. C-10151465 and BIR Confirmation
Receipt No. 22063553, both dated April 15,1991.
Here, respondent PNB requested the BIR to issue a TCC
on the remaining balance of the advance income tax payment
it made in 1991. It should be noted that the request was made
considering that, while PNB carried over such credit balance
to the succeeding taxable years, i.e., 1992 to 1996, its negative
tax position during said tax period prevented it from actually
applying the credit balance of P73,298,892.60. It is fairly correct
to say then that the claim for tax credit was specifically pursued
to enable the respondent bank to utilize the same for future tax
liabilities. However, petitioner ruled that the claim in question
is time-barred, the bank having filed such claim only in 1997,
or more than two (2) years from 1992 when the overpayment
of annual income tax for 1991 was realized by the bank and the
amount of excess payment ascertained with the filing of its final
1991 income tax return.
Like the CA, th[e] Court perceives no compelling reason

why the principle enunciated in Panay Electric and Commissioner
v. Phil-Am Life should not be applied in this case, more so since
the amount over which tax credit is claimed was theoretically
booked as advance income tax payment. It bears stressing that
respondent PNB remitted the PI80 Million in question as a
measure of goodwill and patriotism, a gesture noblesse oblige.
so to speak, to help the cash-strapped national government.
It would thus indeed, be unfair, as the CA correctly observed,
to leave respondent PNB to suffer losing millions of pesos
Chapter 5
151
TAX REMEDIES
advanced by it for future tax liabilities. The cut becomes all the
more painful when it is considered that PNB's failure to apply the
balance of such advance income tax payment from 1992 to 1996
was, to repeat, due to business downturn experienced by the
bank so that it incurred no tax liability for the period. (Emphasis
supplied)
2. Remedies of the Government

A. Assessment
1. Time of assessment
2. Exceptions as to period
B. Collection
1. Time of collection
2. Manner of collection
A. Assessment
In Lucas G. Adamson v. CIR (G.R. No. 124557 [2009]), an
assessment contains not only a computation of tax liabilities, but
also a demand for payment within a prescribed period. It also
signals the time when penalties and interests begin to accrue
against the taxpayer. To enable the taxpayer to determine his
remedies thereon, due process requires that it must be served on
and received by the taxpayer. Accordingly, an affidavit, which
was executed by revenue officers stating the tax liabilities of a
taxpayer and attached to a criminal complaint for tax evasion,
cannot be deemed an assessment that can be questioned before
the Court of Tax Appeals.
Neither the NIRC nor the revenue regulations governing
the protest of assessments provide a specific definition or form of
an assessment. However, the NIRC defines the specific functions
and effects of an assessment. To consider the affidavit attached
to the Complaint as a proper assessment is to subvert the nature
of an assessment and to set a bad precedent that will prejudice
innocent taxpayers.
True, as pointed out by the private respondents, an
assessment informs the taxpayer that he or she has tax liabilities.
1 5 2 TAX 2 REVEALED
But not all documents coming from the BIR containing a

computation of the tax liability can be deemed assessments.
To start with, an assessment must be sent to and received
by a taxpayer, and must demand payment of the taxes described
therein within a specific period. Thus, the NIRC imposes a 25
percent penalty, in addition to the tax due, in case the taxpayer
fails to pay the deficiency tax within the time prescribed for its
payment in the notice of assessment. Likewise, an interest of 20
percent per annum, or such higher rate as may be prescribed by
rules and regulations, is to be collected from the date prescribed
for its payment until the full payment.
The issuance of an assessment is vital in determining the
period of limitation regarding its proper issuance and the period
within which to protest it. Sec. 203 of the NIRC provides that
internal revenue taxes must be assessed within three years from
the last day within which to file the return. Sec. 222, on the other
hand, specifies a period of ten years in case a fraudulent return
with intent to evade was submitted or in case of failure to file a
return. Also, Sec. 228 of the same law states that said assessment
may be protested only within thirty days from receipt thereof.
Necessarily, the taxpayer must be certain that a specific document
constitutes an assessment. Otherwise, confusion would arise
regarding the period within which to make an assessment or to
protest the same, or whether interest and penalty may accrue
thereon.
It should also be stressed that the said document is a notice

duly sent to the taxpayer. Indeed, an assessment is deemed made
only when the collector of internal revenue releases, mails or
sends such notice to the taxpayer. (Supra)
It must be stressed that internal revenue taxes are self-
assessing and no further assessment by the government is
required to create the tax liability. An assessment, however, is not
altogether inconsequential; it is relevant in the proper pursuit of
judicial and extra judicial remedies to enforce taxpayer liabilities
and certain matters that relate to it, such as the imposition of
surcharges and interest[s], and in the application of statues of
limitations and in the establishment of tax liens.
Chapter 5 153
TAX REMEDIES
An assessment contains not only a computation of tax

liabilities, but also a demand for payment within a prescribed
period. The ultimate purpose of assessment is to ascertain the
amount that each taxpayer is to pay. An assessment is a notice
to the effect that the amount therein stated is due as tax and a
demand for payment thereof. Assessments made beyond the
prescribed period would not be binding on the taxpayer. (Tupaz
v. Ulep, 316 SCRA 119 [1999])
An assessment must be sent to and received by a taxpayer,
and must demand payment of the taxes described therein within
a specific period. Thus, the NIRC imposes a 25 percent penalty, in
addition to the tax due, in case the taxpayer fails to pay deficiency
tax within the time prescribed for its payment in the notice of
assessment. Likewise, an interest of 20 percent per annum, or such
higher rates as may be prescribed by rules and regulations, is to
be collected from the date prescribed for its payment until the
full payment.
The issuance of an assessment is vital in determining, the

period of limitation regarding its proper issuance and the period
within which to protest it.
An assessment is deemed made only when the collector
of internal revenue releases, mails or sends such notice to the
taxpayer. (CIR v. Pascor Realty and Development Corporation,
309 SCRA 403 [1999])
The purpose of tax assessment is to collect only what is
legally and justly due the government; not to overburden, much
less harass, the taxpayers. (People v. Sandiganbayan, supra)
Time of A s s e s s m e n t
a. 3-year period
Sec. 203 of the Code provides:
"Period of Limitation Upon Assessment and Collection.
— Except as provided in Section 222, internal revenue
taxes shall be assessed within three (3) years after the
last day prescribed by law for the filing of the return,
154 TAX 2 REVEALED
and no proceeding in court without assessment for

the collection of such taxes shall be begun after the
expiration of such period: Provided, That in a case
where a return is filed beyond the period prescribed by
law, the three (3) year period shall be counted from the
day the return was filed. For purposes of this Section,
a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such
last day."
Simply put, the 3-year period of assessment shall be

computed from:
1. If the return was filed on or before the deadline for
filing within 3 years after the last day prescribed by
law; and
2. If the return was filed beyond or after the deadline -
within 3 years from the date of such filing.
3. The tax may be assessed within the period agreed upon
by the taxpayer and the commissioner.
Further, Sec. 222 of the Code provides:
"b. If before the expiration of the time prescribed

in Sec. 203 for the assessment of the tax, both the
Commissioner and the taxpayer have agreed in writing
to its assessment after such time, the tax may be
assessed within the period agreed upon. The period so
agreed upon may be extended by subsequent written
agreement made before the expiration of the period
previously agreed upon."
In either case, the assessment is under normal or ordinary

condition. The return is not false or fraudulent.
b. 10-year period (Exception)

"Exceptions as to Period of Limitation of Assess-
ment and Collection of Taxes.
Chapter 5
155
TAX REMEDIES
a. In the case of a false or fraudulent return

with intent to evade tax or of failure to file a return, the
tax may be assessed, or a proceeding in court for the
collection of such tax may be filed without assessment,
at any time within ten (10) years after the discovery of
the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the
fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof.
x x x."
Simply put, the 10-year period of assessment shall
be computed from:
1. For false or fraudulent return with intent to

evade tax or of failure to file a return — at any time
within ten (10) years after the discovery of the falsity,
fraud or omission.
2. When the government opted to collect by a

proceeding in court, there is no prescriptive period for
assessment. Note however, the period for collection
must be within 10 years from the discovery of falsity,
fraud or omission. (Sec. 222[a])
c. Waiver of Period of Assessment

In CIR v. Kudos Metal Corporation (G.R. No. 178087 [2010]),
the issue on a valid waiver was raised. Thus, the Supreme Court
said that, the prescriptive period on when to assess taxes benefits
both the government and the taxpayer. Exceptions extending the
period to assess must, therefore, be strictly construed.
In this case, petitioner argues that the government's right
to assess taxes is not barred by prescription as the two waivers
executed by respondent, through its accountant, effectively
tolled or extended the period within which the assessment can
be made. In disputing the conclusion of the CTA that the waivers
are invalid, petitioner claims that respondent is estopped from
adopting a position contrary to what it has previously taken.
Petitioner insists that by acquiescing to the audit during the
156 TAX 2 REVEALED
period specified in the waivers, respondent led the government

to believe that the "delay" in the process would not be utilized
against it. Thus, respondent may no longer repudiate the validity
of the waivers and raise the issue of prescription.
On the other hand, the respondent maintains that
prescription had set in due to the invalidity of the waivers
executed by Pasco (accountant), who executed the same without
any written authority from it, in clear violation of RDAO No.
5-01. As to the doctrine of estoppel by acquiescence relied upon
by petitioner, respondent counters that the principle of equity
comes into play only when the law is doubtful, which is not
present in the instant case.
Due to the defects in the waivers, the period to assess or
collect taxes was not extended. Consequently, the assessments
were issued by the BIR beyond the three-year period and are
void.
Conversely, in this case, the assessments were issued beyond
the prescribed period. Also, there is no showing that respondent
made any request to persuade the BIR to postpone the issuance
of the assessments.
The doctrine of estoppel cannot be applied in this case as an
exception to the statute of limitations on the assessment of taxes
considering that there is a detailed procedure for the proper
execution of the waiver, which the BIR must strictly follow. As
[the Court ha[s] often said, the doctrine of estoppel is predicated
on, and has its origin in, equity which, broadly denned, is justice
according to natural law and right. As such, the doctrine of
estoppel cannot give validity to an act that is prohibited by law
or one that is against public policy. It should be resorted to solely
as a means of preventing injustice and should not be permitted
to defeat the administration of the law, or to accomplish a
wrong or secure an undue advantage, or to extend beyond them
requirements of the transactions in which they originate. Simply
put, the doctrine of estoppel must be sparingly applied.
Moreover, the BIR cannot hide behind the doctrine of

estoppel to cover its failure to comply with RMO 20-90 and
Chapter 5
157
TAX REMEDIES
RDAO 05-01, which the BIR itself issued. As stated earlier, the
BIR failed to verify whether a notarized written authority was
given by the respondent to its accountant, and to indicate the date
of acceptance and the receipt by the respondent of the waivers.
Having caused the defects in the waivers, the BIR must bear the
consequence. It cannot shift the blame to the taxpayer. To stress,
a waiver of the statute of limitations, being a derogation of the
taxpayer's right to security against prolonged and unscrupulous
investigations, must be carefully and strictly construed.
As to the alleged delay of the respondent to furnish the
BIR of the required documents, this cannot be taken against
respondent. Neither can the BIR use this as an excuse for issuing
the assessments beyond the three-year period because with or
without the required documents, the CIR has the power to make
assessments based on the best evidence obtainable.
In Philippine Journalists, Inc. v. CIR (G.R. No. 162852
[2004]), the requirements for a valid waiver was well discussed.
RMO No. 20-90 implements these provisions of the NIRC
relating to the period of prescription for the assessment and
collection of taxes. A cursory reading of the Order supports
petitioner's argument that the RMO must be strictly followed,
thus:
In the execution of said waiver, the following procedures
should be followed:
1. The waiver must be in the form identified hereof. This
form may be reproduced by the Office concerned but
there should be no deviation from such form. The
phrase "but not after 19 " should be
filled up x x x.
2. Soon after the waiver is signed by the taxpayer, the
Commissioner of Internal Revenue or the revenue
official authorized by him, as hereinafter provided,
shall sign the waiver indicating that the Bureau has
accepted and agreed to the waiver. The date of such
acceptance by the Bureau should be indicated x x x .
TAX 2 REVEALED
158
3. The following revenue officials are authorized to sign

the waiver.
A. In the National Office x x x .
3. Commissioner For tax cases
involving more
than P1M
B. In the Regional Offices

1. The Revenue District Officer with respect to tax cases
still pending investigation and the period to assess is
about to prescribe regardless of amount.
xxx.
5. The foregoing procedures shall be strictly followed.
Any revenue official found not to have complied
with this Order resulting in prescription of the right
to assess/collect shall be administratively dealt with.
(Emphasis supplied)
A waiver of the statute of limitations under the NIRC, to a
certain extent, is a derogation of the taxpayers' right to security
against prolonged and unscrupulous investigations and must
therefore be carefully and strictly construed. The waiver of the
statute of limitations is not a waiver of the right to invoke the
defense of prescription as erroneously held by the Court of
Appeals. It is an agreement between the taxpayer and the BIR
that the period to issue an assessment and collect the taxes
due is extended to a date certain. The waiver does not mean
that the taxpayer relinquishes the right to invoke prescription
unequivocally particularly where the language of the document
is equivocal. For the purpose of safeguarding taxpayers from
any unreasonable examination, investigation or assessment,
our tax law provides a statute of limitations in the collection of
taxes. Thus, the law on prescription, being a remedial measure,
should be liberally construed in order to afford such protection.
As a corollary, the exceptions to the law on prescription should
perforce be strictly construed. RMO No. 20-90 explains the
rationale of a waiver:
Chapter 5
159
TAX REMEDIES
x x x . The phrase "but not after 19 "

should be filled up. This indicates the expiry date of
the period agreed upon to assess/collect the tax after
the regular three-year period of prescription. The
period agreed upon shall constitute the time within
which to effect the assessment/collection of the tax
in addition to the ordinary prescriptive period.
(Emphasis supplied)
As found by the CTA, the Waiver of Statute of Limitations,
signed by petitioner's comptroller on September 22, 1997 is
not valid and binding because it does not conform with the
provisions of RMO No. 20-90. It did not specify a definite agreed
date between the BIR and petitioner, within which the former
may assess and collect revenue taxes. Thus, petitioner's waiver
became unlimited in time, violating Sec. 222(b) of the NIRC.
The waiver is also defective on the part of the government
because it was signed only by a revenue district officer, not the
Commissioner, as mandated by the NIRC and RMO No. 20-90.
The waiver is not a unilateral act by the taxpayer or the BIR, but
is a bilateral agreement between two parties to extend the period
to a date certain. The conformity of the BIR must be made by
either the Commissioner or the Revenue District Officer. This
case involves taxes amounting to more than One Million Pesos
(P1,000,000.00) and executed almost seven months before the
expiration of the three-year prescription period. For this, RMO
No. 20-90 requires the Commissioner of Internal Revenue to sign
for the BIR.
The case of Commissioner of Internal Revenue v. Court of
Appeals, dealt with waivers that were not signed by the Com-
missioner but were argued to have been given implied consent
by the BIR. The High Court invalidated the subject waivers and
ruled:
Petitioner's submission is inaccurate x x x .
The Court of Appeals itself also passed upon the validity of
the waivers executed by Carnation, observing thus:
[The Court] cannot go along with the petitioner's
theory. Sec. 319 of the Tax Code earlier quoted is clear and
160 TAX 2 REVEALED
explicit that the waiver of the five-year prescriptive period

must be in writing and signed by both the BIR Commissioner
and the taxpayer.
Here, the three waivers signed by Carnation do not
bear the written consent of the BIR Commissioner as re-
quired by law.
[Thee Court] agree[s] with the CTA in holding "these
'waivers' to be invalid and without any binding effect on
petitioner (Carnation) for the reason that there was no
consent by the respondent (Commissioner of Internal
Revenue)."
xxx.
For sure, no such written agreement concerning the
said three waivers exists between the petitioner and private
respondent Carnation.
xxx.
What is more, the waivers in question reveal that they
are in no wise unequivocal, and therefore necessitates for
its binding effect the concurrence of the Commissioner
of Internal Revenue x x x . On this basis neither implied
consent can be presumed nor can it be contended that
the waiver required under Sec. 319 of the Tax Code is one
which is unilateral nor can it be said that concurrence to
such an agreement is a mere formality because it is the
very signatures of both the Commissioner of Internal
Revenue and the taxpayer which give birth to such a valid
agreement. (Emphasis supplied)
The other defect noted in this case is the date of acceptance

which makes it difficult to fix with certainty if the waiver
was actually agreed before the expiration of the three-year
prescriptive period. The Court of Appeals held that the date
of the execution of the waiver on September 22, 1997 could
reasonably be understood as the same date of acceptance by the
BIR. Petitioner points out, however, that Revenue District Officer
Sarmiento could not have accepted the waiver yet because she
Chapter 5 161
TAX REMEDIES
was not the Revenue District Officer of RDO No. 33 on such date.
Ms. Sarmiento's transfer and assignment to RDO No. 33 was only
signed by the BIR Commissioner on January 16, 1998 as shown
by the Revenue Travel Assignment Order No. 14-98. The Court
of Tax Appeals noted in its decision that it is unlikely as well that
Ms. Sarmiento made the acceptance on January 16,1998 because
"Revenue Officials normally have to conduct first an inventory
of their pending papers and property responsibilities."
Finally, the records show that petitioner was not furnished

a copy of the waiver. Under RMO No. 20-90, the waiver must be
executed in three copies with the second copy for the taxpayer.
The Court of Appeals did not think this was important because
the petitioner need not have a copy of the document it knowingly
executed. It stated that the reason copies are furnished is for
a party to be notified of the existence of a document, event or
proceeding.
The flaw in the appellate court's reasoning stems from its
assumption that the waiver is a unilateral act of the taxpayer
when it is in fact and in law an agreement between the taxpayer
and the BIR. When the petitioner's comptroller signed the waiver
on September 22, 1997, it was not yet complete and final because
the BIR had not assented. There is compliance with the provision
of RMO No. 20-90 only after the taxpayer received a copy of
the waiver accepted by the BIR. The requirement to furnish the
taxpayer with a copy of the waiver is not only to give notice of
the existence of the document but of the acceptance by the BIR
and the perfection of the agreement.
The waiver document is incomplete and defective and thus
the three-year prescriptive period was not tolled or extended
and continued to run until April 17, 1998. Consequently, the
Assessment/Demand No. 33-1-000757-94 issued on December 9,
1998 was invalid because it was issued beyond the three (3) year
period. In the same manner, Warrant of Distraint and/or Levy
No. 33-06-046 which petitioner received on March 28, 2000 is
also null and void for having been issued pursuant to an invalid
assessment.
TAX 2 REVEALED
162
Simply put, to constitute a valid waiver, the following

requirements must be met:
A. Valid form in conformity with RMO 20-90;
B. Before the expiration of the ordinary prescriptive
periods for assessment and collection;
C. For a definite period beyond the ordinary prescriptive
periods for assessment and collection;
D. Signed by the taxpayer and the CIR or authorized RDO
indicating that the bureau has accepted and agreed to
the waiver;
E. The date of such acceptance by the Bureau should
be indicated specify a definite agreed date between
the BIR and petitioner, within which the former may
assess and collect revenue taxes; and
F. Notice to the taxpayer or the second copy must be
furnished to the taxpayer.
B. Collection
1. Time of collection
In Sec. 222(c) of the Code, it provides:
"b. If before the expiration of the time prescribed

in Section 203 for the assessment of the tax, both the
Commissioner and the taxpayer have agreed in writing
to its assessment after such time, the tax may be assessed
within the period agreed upon. The period so agreed upon
may be extended by subsequent written agreement made
before the expiration of the period previously agreed upon.
c. Any internal revenue tax which has been assessed
within the period of limitation as prescribed in paragraph
(a) hereof may be collected by distraint or levy or by a
proceeding in court within five (5) years following the
assessment of the tax. (Referring to false or fraudulent
return with intent to evade tax or failure to file return.)
Chapter 5
163
TAX REMEDIES
d. Any internal revenue tax, which has been assessed

within the period agreed upon as provided in paragraph
(b) hereinabove, may be collected by distraint or levy or
by a proceeding in court within the period agreed upon
in writing before the expiration of the five (5) year period.
The period so agreed upon may be extended by subsequent
written agreements made before the expiration of the period
previously agreed upon."
Collection w i t h o u t a s s e s s m e n t (Exception)
Collection without assessment is a proceeding in court for

the collection of taxes without assessment. Thus, in Lucas G.
Adamson v. CIR (supra), the High Court ruled:
Sec. 269 of the NIRC (now Sec. 222 of the Tax Reform Act of
1997) provides:
Sec. 269. Exceptions as to period of limitation of assessment
and collection of taxes. — (a) In the case of a false or fraudulent
return with intent to evade tax or of failure to file a return,
the tax may be assessed, or a proceeding in court after the
collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity,
fraud or omission: Provided, That in a fraud assessment
which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal
action for collection thereof x x x .
The law is clear. When fraudulent tax returns are involved
as in the cases at bar, a proceeding in court after the collection
of such tax may be begun without assessment. Here, the private
respondents had already filed the capital gains tax return and
the VAT returns, and paid the taxes they have declared due
therefrom. Upon investigation of the examiners of the BIR,
there was a preliminary finding of gross discrepancy in the
computation of the capital gains taxes due from the sale of two
lots of AAI shares, first to APAC and then to APAC Philippines,
Limited. The examiners also found that the VAT had not been
paid for VAT-liable sale of services for the third and fourth
quarters of 1990. Arguably, the gross disparity in the taxes due
TAX 2 REVEALED
164
and the amounts actually declared by the private respondents

constitutes badges of fraud.
Thus, the applicability of Ungab v. Cusi is evident to the
cases at bar. In this seminal case, th[e] Court ruled that there was
no need for precise computation and formal assessment in order
for criminal complaints to be filed against him. It quoted Merten's
Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus:
An assessment of a deficiency is not necessary to a criminal
prosecution for willful attempt to defeat and evade the income
tax. A crime is complete when the violator has knowingly
and willfully filed a fraudulent return, with intent to evade
and defeat the tax. The perpetration of the crime is grounded
upon knowledge on the part of the taxpayer that he has made
an inaccurate return, and the government's failure to discover
the error and promptly to assess has no connections with the
commission of the crime.
Simplified:
Period
Assessment Collection
Normal return 3 years 5 years

If w/ waiver Period agreed upon 5 years
Fraudulent or
False return/
Fraudulent/
Omission
1. C & A 10 years 5 years
2. Cw/oA No prescription 10 years
2. Manner of collection
A. Administrative procedure
1. Distraint
2. Levy
Chapter 5
165
TAX REMEDIES
B. Judicial action
1. Civil
2. Criminal
In Sec. 205 of the Code, it provides:
"Remedies for the Collection of Delinquent Taxes. —

The civil remedies for the collection of internal revenue
taxes, fees or charges, and any increment thereto
resulting from delinquency shall be:
a. By distraint of goods, chattels, or effects,

and other personal property of whatever character,
including stocks and other securities, debts, credits,
bank accounts and interest in and rights to personal
property, and by levy upon real property and interest
in rights to real property."
A. Administrative procedure
Under Sec. 11 of RA 1125, as amended by RA 9282, no appeal
[shall be] taken to the Court of Tax Appeals (CTA) from the
decision of the Commissioner of Internal Revenue, on a disputed
assessment [that] shall suspend the payment, levy, distraint, and /
or sale of any property of the taxpayer for the satisfaction of his
tax liability, unless the CTA suspends the collection under certain
conditions. Also, under Sec. 13 of said law, upon the issuance ot
any ruling, order or decision of the CTA favorable to the national
government, the CTA shall issue an order authorizing the Bureau
of Internal Revenue to seize and distraint any goods, chattels,
or effects, and the personal property, including stocks and other
securities, debts, credits, bank accounts, and interests in and
rights to personal property and / or levy the real property of the
taxpayer in sufficient quantity to satisfy the tax together with
any increment thereto incident to delinquency. Moreover, under
Sec. 218 of the Tax Code, no court (except the CTA) shall have
the authority to grant an injunction to restrain the collection of
any national internal revenue tax, fee or charge imposed by said
Code. (Par. I, RMO 39-07)
166 TAX 2 REVEALED
Simply put, the coverage for the issuance and service

of warrants of distraint and garnishment, and/or levy are as
follows:
1. Disputed assessments finally decided by the Commis-
sioner or Regional Director, as the case may be, against
the taxpayer.
2. Assessments upheld by the CTA in Division whether
appealed to the CTA En Banc or not, or upheld by the
CTA En Banc whether appealed to the Supreme Court
or not.
Issuance and Service of Warrants of Distraint a n d G a r n i s h -

ment, and/or Levy
Upon issuance by the Commissioner or Regional Director

of the final decision on the disputed assessment against the
taxpayer or upon issuance by the CTA in Division or En Banc
of its decision upholding the assessment, Warrants of Distraint
and Garnishment, and/or Levy shall forthwith be immediately
issued and served. (Par. Ill, RMO 39-07)
1. Distraint — covers all kind of personal property,
tangible or intangible like goods, chattels, or effects, and other
personal property of whatever character, including stocks and
other securities, debts, credits, bank accounts and interest in and
rights to personal property.
Two (2) kinds of distraint:
1. Constructive distraint
2. Actual distraint
Constructive Distraint of the Property of a Taxpayer
To safeguard the interest of the Government, the Commis-

sioner may place under constructive distraint the property of a
delinquent taxpayer or any taxpayer who, in his opinion, is:
1. Retiring from any business subject to tax;
2. Intending to leave the Philippines;
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TAX REMEDIES
3. Intending to remove his property therefrom or to hide

or conceal his property; or
4. To perform any act tending to obstruct the proceedings
for collecting the tax due or which may be due from
him.
The constructive distraint of personal property shall be af-
fected by requiring the taxpayer or any person having posses-
sion or control of such property to:
1. Sign a receipt covering the property distrained;
2. Obligate himself to preserve the same intact and
unaltered; and
3. Not to dispose of the same in any manner without the
express authority of the Commissioner.
In case the taxpayer or the person having the possession and
control of the property sought to be placed under constructive
distraint refuses or fails to sign the receipt herein referred to, the
revenue officer effecting the constructive distraint shall proceed
to:
1. Prepare a list of such property in the presence of two
(2) witnesses; and
2. Leave a copy thereof in the premises where the
property distrained is located, after which the said
property shall be deemed to have been placed under
constructive distraint. (Sec. 206)
Specific C a s e s W h e n a Notice or Warrant of Constructive

Distraint over the Property/ies of a Taxpayer may be Issued
a. When a taxpayer who applies for retirement from
business has a huge amount of assessment pending with the
Bureau of Internal Revenue (BIR). An assessment is huge if the
amount thereof is equal to or bigger than the networth or equity
of the taxpayer;
b. When a taxpayer who is under tax investigation has a
record of leaving the Philippines at least twice a year, unless such
168 TAX 2 REVEALED
trips are justified and /or connected with his business, profession
or employment;
c. When a taxpayer, other than a banking institution,
who is under tax investigation has a record of transferring his
bank deposits and other valuable personal property/ ies from the
Philippines to any foreign country;
d. When the taxpayer uses aliases in bank accounts, other
than the name for which he is legally and /or popularly known;
e. When the taxpayer keeps bank deposits and owns
other property/ies under the name of other persons, whether
or not related to him, and the same are not under any lawful
fiduciary or trust capacity;
f. When a taxpayer's big amount of undeclared income
is known to the public or to the BIR by credible means and there
is a strong reason to believe that the taxpayer, in the natural
course of events, will have a great tendency to hide or conceal
his property/ies. For this purpose, the term "big amount of
undeclared income" means an amount exceeding thirty percent
(30%) of the gross sales, gross receipts or gross revenue declared
per return;
g. When the BIR receives information or complaint
pertaining to undeclared income in an amount exceeding 30% of
gross sales, gross receipts or gross revenue declared per return
of a particular taxpayer and there is enough reason to believe
that the said information is correct as when the complaint or
information is supported by substantial and credible evidence.
(Sec. 2, RMO 05-01)
Persons W h o M a y C o n d u c t the Constructive Distraint
In general, it is only the Commissioner who may decide

whether a notice of constructive distraint on the personal property
of any taxpayer may be issued. However, the Commissioner may
delegate this power by specific orders since this power is not one
of those which cannot be delegated as enunciated in Sec. 7 of
the Tax Code of 1997. Thus, pursuant to aforesaid section, this
Chapter 5 169
TAX REMEDIES
power can be delegated to any subordinate official with the rank

equivalent to a Division Chief or higher. (Sec. 3, RMO 05-01)
S u m m a r y R e m e d y on Distraint of Personal Property
Upon the failure of the person owing any delinquent tax

or delinquent revenue to pay the same at the time required,
the Commissioner or his duly authorized representative, if the
amount involved is in excess of One million pesos (P1,000,000),
or the Revenue District Officer, if the amount involved is One
million pesos (P1,000,000) or less, shall seize and distraint any
goods, chattels or effects, and the personal property, including
stocks and other securities, debts, credits, bank accounts, and
interests in and rights to personal property of such persons; in
sufficient quantity to satisfy the tax, or charge, together with any
increment thereto incident to delinquency, and the expenses of
the distraint and the cost of the subsequent sale.
A report on the distraint shall, within ten (10) days from
receipt of the warrant, be submitted by the distraining officer
to the Revenue District Officer, and to the Revenue Regional
Director: Provided, That the Commissioner or his duly authorized
representative shall, subject to rules and regulations promulgated
by the Secretary of Finance, upon recommendation of the
Commissioner, have the power to lift such order of distraint:
Provided, further, That a consolidated report by the Revenue
Regional Director may be required by the Commissioner as often
as necessary. (Sec. 207 [A])
Procedure for Distraint a n d Garnishment

The officer serving the warrant of distraint shall make or
cause to be made:
1. An account of the goods, chattels, effects or other
personal property distrained, a copy of which, signed
by himself, shall be left:
a. Either with the owner;
b. Person from whose possession such goods, chat-
tels, or effects or other personal property were
taken;
TAX 2 REVEALED
c. At the dwelling; or
d. Place of business of such person and with someone
of suitable age and discretion, to which list shall
be added a statement of the sum demanded and
note of the time and place of sale.
Stocks and other securities shall be distrained by
serving a copy of the warrant of distraint upon:
a. The taxpayer; and
b. Upon the president, manager, treasurer or other
responsible officer of the corporation, company
or association, which issued the said stocks or
securities.
Debts and credits shall be distrained by leaving with:
a. The person owing the debts;
b. Having in his possession;
c. Under his control such credits; or
d. With his agent, a copy of the warrant of distraint.
The warrant of distraint shall be sufficient
authority to the person owning the debts or
having in his possession or under his control
any credits belonging to the taxpayer to pay to
the Commissioner the amount of such debts or
credits.
Bank accounts shall be garnished by serving a warrant

of garnishment upon:
a. The taxpayer; and
b. Upon the president, manager, treasurer or other
responsible officer of the bank. Upon receipt of
the warrant of garnishment, the bank shall turn
over to the Commissioner so much of the bank
accounts as may be sufficient to satisfy the claim
of the Government. (Sec. 208)
Chapter 5
171
TAX REMEDIES
Sale of Property Distrained a n d Disposition of Proceeds
The Revenue District Officer or his duly authorized

representative, other than the officer referred to in Sec. 208 of this
Code shall, according to rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner,
forthwith cause a notification to be exhibited in not less than two
(2) public places in the municipality or city where the distraint
is made, specifying; the time and place of sale and the articles
distrained. The time of sale shall not be less than twenty (20)
days after notice. One place for the posting of such notice shall
be at the Office of the Mayor of the city or municipality in which
the property is distrained.
At the time and place fixed in such notice, the said revenue
officer shall sell the goods, chattels, or effects, or other personal
property, including stocks and other securities so distrained, at
public auction, to the highest bidder for cash, or with the approval
of the Commissioner, through duly licensed commodity or stock
exchanges.
In the case of stocks and other securities, the officer making
the sale shall execute a bill of sale which he shall deliver to the
buyer, and a copy thereof furnished the corporation, company
or association which issued the stocks or other securities. Upon
receipt of the copy of the bill of sale, the corporation, company
or association shall make the corresponding entry in its books,
transfer the stocks or other securities sold in the name of the buyer,
and issue, if required to do so, the corresponding certificates of
stock or other securities.
Any residue over and above what is required to pay the
entire claim, including expenses, shall be returned to the owner
of the property sold. The expenses chargeable upon each seizure
and sale shall embrace only the actual expenses of seizure and
preservation of the property pending the sale, and no charge
shall be imposed for the services of the local internal revenue
officer or his deputy. (Sec. 209)
172 TAX 2 REVEALED
Release of Distrained Property Upon Payment Prior to Sale

If at any time prior to the consummation of the sale, all
proper charges are paid to the officer conducting the sale, the
goods or effects distrained shall be restored to the owner. (Sec.
210)
Report of Sale to Bureau of Internal Revenue
Within two (2) days after the sale, the officer making the
same shall make a report of his proceedings in writing to the
Commissioner and shall himself preserve a copy of such report
as an official record. (Sec. 211)
Purchase by G o v e r n m e n t at Sale U p o n Distraint
When the amount bid for the property under distraint is not
equal to the amount of the tax or is very much less than the actual
market value of the articles offered for sale, the Commissioner
or his deputy may purchase the same in behalf of the National
Government for the amount of taxes, penalties and costs due
thereon.
Property so purchased may be resold by the Commissioner
or his deputy, subject to the rules and regulations prescribed
by the Secretary of Finance, the net proceeds therefrom shall be
remitted to the National Treasury and accounted for as internal
revenue. (Sec. 212)
Remedy for E n f o r c e m e n t of Forfeitures
The forfeiture of chattels and removable fixtures of any sort

shall be enforced by the seizure and sale, or destruction, of the
specific forfeited property. The forfeiture of real property shall
be enforced by a judgment of condemnation and sale in a legal
action or proceeding, civil or criminal, as the case may require.
(Sec. 224)
W h e n Property to be Sold or D e s t r o y e d
Sales of forfeited chattels and removable fixtures shall be

effected, so far as practicable, in the same manner and under the
Chapter 5 173
TAX REMEDIES
same conditions as the public notice and the time and manner of
sale as are prescribed for sales of personal property distrained
for the non-payment of taxes.
Distilled spirits, liquors, cigars, cigarettes, other manufac-
tured products of tobacco, and all apparatus used or about the
illicit production of such articles may, upon forfeiture, be de-
stroyed by order of the Commissioner, when the sale of the same
for consumption or use would be injurious to public health or
prejudicial to the enforcement of the law.
All other articles subject to excise tax, which have been
manufactured or removed in violation of th[e] Code, as well as
dies for the printing or making of internal revenue stamps and
labels which are in imitation of or purport to be lawful stamps, or
labels may, upon forfeiture, be sold or destroyed in the discretion
of the Commissioner.
Forfeited property shall not be destroyed until at least
twenty (20) days after seizure. (Sec. 225)
Disposition of f u n d s R e c o v e r e d in Legal Proceedings or

O b t a i n e d f r o m Forfeitures
All judgments and monies recovered and received for

taxes, costs, forfeitures, fines and penalties shall be paid to the
Commissioner or his authorized deputies as the taxes themselves
are required to be paid, and except as specially provided, shall be
accounted for and dealt with the same way. (Sec. 226)
2. Levy
S u m m a r y remedy on Levy on Real Property
After the expiration of the time required to pay the
delinquent tax or delinquent revenue as prescribed in this
section, real property may be levied upon, before simultaneously
or after the distraint of personal property belonging to the
delinquent. To this end, any internal revenue officer designated
by the Commissioner or his duly authorized representative shall
prepare a duly authenticated certificate showing the name of the
taxpayer and the amounts of the tax and penalty due from him.
TAX 2 REVEALED
174
Said certificate shall operate with the force of a legal execution

throughout the Philippines.
Levy shall be affected by:
1. Writing upon said certificate a description of the
property upon which levy is made.
2. Written notice of the levy shall be mailed to or served
upon:
i. The Register of Deeds for the province or city
where the property is located and
ii. Upon the delinquent taxpayer, or if he be absent
from the Philippines, to his agent or the manager
of the business in respect to which the liability
arose, or
iii. If there be none, to the occupant of the property in
question.
In case the warrant of levy on real property is not issued
before or simultaneously with the warrant of distraint on
personal property, and the personal property of the taxpayer is
not sufficient to satisfy his tax delinquency, the Commissioner
or his duly authorized representative shall, within thirty (30)
days after execution of the distraint, proceed with the levy on the
taxpayer's real property.
Within ten (10) days after receipt of the warrant, a report
on any levy shall be submitted by the levying officer to the
Commissioner or his duly authorized representative: Provided,
however, That a consolidated report by the Revenue Regional
Director may be required by the Commissioner as often as
necessary: Provided, further, That the Commissioner or his duly
authorized representative, subject to rules and regulations
promulgated by the Secretary of Finance, upon recommendation
of the Commissioner, shall have the authority to lift warrants of
levy issued in accordance with the provisions hereof.
Advertisement a n d Sale
Within twenty (20) days after levy, the officer conducting

the proceedings shall proceed to advertise the property or a us-
Chapter 5
175
TAX REMEDIES
able portion thereof as may be necessary to satisfy the claim and

cost of sale; and such advertisement shall cover a period of a
least thirty (30) days. It shall be effectuated by posting a notice
at the main entrance of the municipal building or city hall and in
a public and conspicuous place in the barrio or district in which
the real estate lies and by publication once a week for three (3)
weeks in a newspaper of general circulation in the municipality
or city where the property is located. The advertisement shall
contain a statement of the amount of taxes and penalties so due
and the time and place of sale, the name of the taxpayer against
whom taxes are levied, and a short description of the property to
be sold. At any time before the day fixed for the sale, the taxpayer
may discontinue all proceedings by paying the taxes, penalties
and interest. If he does not do so, the sale shall proceed and shall
be held either at the main entrance of the municipal building or
city hall, or on the premises to be sold, as the officer conducting
the proceedings shall determine and as the notice of sale shall
specify.
Within five (5) days after the sale, a return by the distraining
or levying officer of the proceedings shall be entered upon the
records of the Revenue Collection Officer, the Revenue District
officer and the Revenue Regional Director. The Revenue Collection
Officer, in consultation with the Revenue district Officer, shall
then make out and deliver to the purchaser a certificate from
his records, showing the proceedings of the sale, describing the
property sold stating the name of the purchaser and setting out
the exact amount of all taxes, penalties and interest: Provided,
however, That in case the proceeds of the sale exceeds the claim
and cost of sale, the excess shall be turned over to the owner of
the property.
The Revenue Collection Officer, upon approval by the
Revenue District Officer may, out of his collection, advance an
amount sufficient to defray the costs of collection by means of
the summary remedies provided for in th[e] Code, including; the
preservation or transportation in case of personal property, and
the advertisement and subsequent sale, both in cases of personal
and real property including improvements found on the latter. In
176 TAX 2 REVEALED
his monthly collection reports, such advances shall be reflected

and supported by receipts. (Sec. 213)
Redemption of Property Sold

Within one (1) year from the date of sale, the delinquent
taxpayer, or any one for him, shall have the right of paying to the
Revenue District Officer the amount of the public taxes, penalties,
and interest thereon from the date of delinquency to the date of
sale, together with interest on said purchase price at the rate of
fifteen percent (15%) per annum from the date of purchase to the
date of redemption, and such payment shall entitle the person
paying to the delivery of the certificate issued to the purchaser
and a certificate from the said Revenue District Officer that
he has thus redeemed the property, and the Revenue District
Officer shall forthwith pay over to the purchaser the amount by
which such property has thus been redeemed, and said property
thereafter shall be free form the lien of such taxes and penalties.
The owner shall not, however, be deprived of the possession

of the said property and shall be entitled to the rents and other
income thereof until the expiration of the time allowed for its
redemption. (Sec. 214)
Forfeiture to G o v e r n m e n t for W a n t of Bidder
In case there is no bidder for real property exposed for sale

as herein above provided, or if the highest bid is for an amount
insufficient to pay the taxes, penalties and costs, the Internal
Revenue Officer conducting the sale shall declare the property
forfeited to the Government in satisfaction of the claim in
question and within two (2) days thereafter, shall make a return
of his proceedings and the forfeiture which shall be spread upon
the records of his office. It shall be the duty of the Register of
Deeds concerned, upon registration with his office of any such
declaration of forfeiture, to transfer the title of the property
forfeited to the Government without the necessity of an order
from a competent court.
Within one (1) year from the date of such forfeiture, the
taxpayer, or any one for him may redeem said property by
paying to the Commissioner or the latter's Revenue Collection
Chapter 5 177
TAX REMEDIES
Officer the full amount of the taxes and penalties, together with
interest thereon and the costs of sale, but if the property be not
thus redeemed, the forfeiture shall become absolute. (Sec. 215)
Resale of Real Estate Taken for Taxes
The Commissioner shall have charge of any real estate

obtained by the Government of the Philippines in payment or
satisfaction of taxes, penalties or costs arising under th[e] Code
or in compromise or adjustment of any claim therefore, and said
Commissioner may, upon the giving of not less than twenty (20)
days notice, sell and dispose of the same [at] public auction or
with prior approval of the Secretary of Finance, dispose of the
same at private sale. In either case, the proceeds of the sale shall
be deposited with the National Treasury, and an accounting of
the same shall [be] rendered to the Chairman of the Commission
on Audit. (Sec. 216)
Further Distraint or L e v y
The remedy by distraint of personal property and levy on

realty may be repeated if necessary until the full amount due,
including all expenses, is collected. (Sec. 217)
B. Judicial action
Again, in Sec. 205 of the Code, it provides:
"Remedies for the Collection of Delinquent Taxes. —
The civil remedies for the collection of internal revenue
taxes, fees or charges, and any increment thereto
resulting from delinquency shall be:
a. xxx.
b. By civil or criminal action.
Either of these remedies or both simultaneously
may be pursued in the discretion of the authorities
charged with the collection of such taxes: Provided,
however, That the remedies of distraint and levy shall
not be availed of where the amount of tax involve is
not more than one hundred pesos (PI 00).
178 TAX 2 REVEALED
The judgment in the criminal case shall not only

impose the penalty but shall also order payment of the
taxes subject of the criminal case as finally decided by
the Commissioner.
The Bureau of Internal Revenue shall advance the
amounts needed to defray costs of collection by means
of civil or criminal action, including the preservation
or transportation of personal property distrained and
the advertisement and sale thereof, as well as of real
property and improvements thereon."
Necessity of the Approval of the C o m m i s s i o n e r
Civil and criminal actions and proceedings instituted in

behalf of the Government under the authority of th[e] Code or
other law enforced by the Bureau of Internal Revenue shall be
brought in the name of the Government of the Philippines and
shall be conducted by legal officers of the Bureau of Internal
Revenue but no civil or criminal action for the recovery of taxes
or the enforcement of any fine, penalty or forfeiture under
thfel Code shall be filed in court without the approval of the
Commissioner. (Sec. 220) (Emphasis supplied)
The remedy for enforcement of statutory penalties of all sorts
shall be by criminal or civil action, as the particular situation may
require, subject to the approval of the Commissioner. (Sec. 221)
A judicial action for the collection of a tax may be initiated
by the filing of a complaint with the proper regular trial court; or
where the assessment is appealed to the CTA, by filing an answer
to the taxpayer's petition for review wherein payment of the tax
is prayed for. (Philippine National Oil Company v. Court of
Appeals [G.R. No. 109976,26 April 2005]; Fernandez Hermanos,
Inc. v. Commissioner of Internal Revenue [G.R. No. L-21551,30
September 1969,29 SCRA 552]; Palanca, et al. v. Commissioner
of Internal Revenue, Ibid.)
1. Civil Action
In pursuing a civil action against the taxpayer, the ordinary
rules on civil procedure may find application (e.g., action for
Chapter 5 179
TAX REMEDIES
sum of money). In tax cases, the obligation of the taxpayer to

pay taxes arises from law. The civil liability to pay taxes arises
not because a crime or a felony has been committed, but upon
failure of the taxpayer to pay taxes as mandated by the law. Since
the Code mandates payment of taxes, non-payment results to
the violation of the Code. And violation of the Code results to
criminal liability in taxation. However, RA 9282 encompasses
that any provision of law or the Rules of Court to the contrary
notwithstanding, the criminal action and the corresponding civil
action for the recovery of civil liability for taxes and penalties
shall at all times be simultaneously instituted with, and jointly
determined in the same proceeding by the CTA. the filing of
the criminal action being deemed to necessarily carry with it
the filing of the civil action, and no right to reserve the filling
of such civil action separately from the criminal action will be
recognized. (Emphasis supplied)
2. Criminal Action
All violations of any provision of th[e] Code shall prescribe
after five (5) years.
Prescription shall begin to run from the day of the com-
mission of the violation of the law, and if the same be not known
at the time, from the discovery thereof and the institution of
judicial proceedings for its investigation and punishment.
The prescription shall be interrupted when proceedings are
instituted against the guilty persons and shall begin to run again
if the proceedings are dismissed for reasons not constituting
jeopardy.
The term of prescription shall not run when the offender is
absent from the Philippines. (Sec. 281)
A. Institution of Criminal Cases

1. All criminal actions before the Court of Tax Appeals
(CTA) Division in the exercise of its original jurisdiction
shall be instituted by the filing of an information in the
name of the People of the Philippines.
180 TAX 2 REVEALED
2. Prior to the filing of criminal cases, the approval of the

CIR must be obtained.
3. Institution of the criminal actions shall interrupt the
running of the period of prescription.
4. Civil action is deemed instituted upon filing of the
criminal action.
B. Prosecution of Criminal Actions

It is well-settled that prosecution of crimes pertains to the
executive department of the government whose principal power
and responsibility is to insure that laws are faithfully executed.
Corollary to this power is the right to prosecute violators.
All criminal actions commenced by complaint or informa-
tion are prosecuted under the direction and control of public
prosecutors. In the prosecution of special laws, the exigencies of
public service sometimes require the designation of special pros-
ecutors from different government agencies to assist the public
prosecutor. The designation does not, however, detract from the
public prosecutor having control and supervision over the case.
(BOC v. Peter Sherman, G.R. No. 190487 [2011])
The judgment in the criminal case shall not only impose the
penalty but shall also order payment of the taxes subject of the
criminal case as finally decided by the Commissioner. (Sec. 205)
a. Any person convicted of a crime penalized by th[e]
Code shall, in addition to being liable for the payment
of the tax, be subject to the penalties imposed herein:
Provided, That payment of the tax due after apprehension
shall not constitute a valid defense in any prosecution
for violation of any provision of th[e] Code or in any
action for the forfeiture of untaxed articles.
b. Any person who willfully aids or abets in the com-
mission of a crime penalized herein or who causes the
commission of any such offense by another shall be
liable in the same manner as the principal.
Chapter 5 181
TAX REMEDIES
c. If the offender is not a citizen of the Philippines,

he shall be deported immediately after serving the
sentence without further proceedings for deportation.
If he is a public officer or employee, the maximum
penalty prescribed for the offense shall be imposed
and, in addition, he shall be dismissed from the public
service and perpetually disqualified from holding any
public office, to vote and to participate in any election.
If the offender is a Certified Public Accountant, his
certificate as a Certified Public Accountant shall, upon
conviction, be automatically revoked or cancelled.
d. In the case of associations, partnerships or corporations,

the penalty shall be imposed on the partner, president,
general manager, branch manager, treasurer, officer-
in-charge, and the employees responsible for the
violation.
e. The fines to be imposed for any violation of the
provisions of this Code shall not be lower than the fines
imposed herein or twice the amount of taxes, interest
and surcharges due from the taxpayer, whichever is
higher.
Subsidiary Penalty
If the person convicted for violation of any of the provisions

of th[e] Code has no property with which to meet the fine imposed
upon him by the court, or is unable to pay such fine, he shall be
subject to a subsidiary personal liability at the rate of one (1) day
for each eight pesos and fifty centavos (P8.50) subject to the rules
established in Article 39 of the Revised Penal Code. (Sec. 280)
Acquittal of the Taxpayer

Under the Penal Code, the civil liability is incurred by
reason of the offender's criminal act. Stated differently, the
criminal liability gives birth to the civil obligation such that
generally, if one is not criminally liable under the Penal Code, he
cannot become civilly liable thereunder. The situation under the
TAX 2 REVEALED
182
income tax law is the exact opposite. Civil liability to pay taxes
arises from the fact, for instance, that one has engaged himself in
business, and not because of any criminal act committed by him.
The criminal liability arises upon failure of the debtor to satisfy
his civil obligation. The incongruity of the factual premises and
foundation principles of the two cases is one of the reasons for not
imposing civil indemnity on the criminal infractor of the income
tax law. Another reason, of course, is found in the fact that while
Sec. 73 of the National Internal Revenue Code (Old Code) has
provided the imposition of the penalty of imprisonment or fine,
or both, for refusal or neglect to pay income tax or to make a
return thereof, it failed to provide the collection of said tax in
criminal proceedings. The only civil remedies provided, for
the collection of income tax, in Chapters I and II, Title IX of the
Code and Sec. 316 thereof, are distraint of goods, chattels, etc.
or by judicial action, which remedies are generally exclusive in
the absence of a contrary intent from the legislator. (People v.
Arnault [G.R. No. L-4288, November 20,19521; People v. Tierra
[G.R. Nos. L-17177-17180, December 28,19641) Considering that
the Government cannot seek satisfaction of the taxpayer's civil
liability in a criminal proceeding under the tax law or, otherwise
stated, since the said civil liability is not deemed included in
the criminal action, acquittal of the taxpayer in the criminal
proceeding does not necessarily entail exoneration from his
liability to pay the taxes. It is error to hold, as the lower court has
held, that the judgment in criminal cases nos. 2089 and 2090 bars
the action in the present case. The acquittal in the said criminal
cases cannot operate to discharge defendant appellee from the
duty of paying the taxes which the law requires to be paid, since
that duty is imposed by statute prior to and independently of
any attempts by the taxpayer to evade payment. Said obligation
is not a consequence of the felonious acts charged in the criminal
proceeding, nor is it a mere civil liability arising from crime that
could be wiped out by the judicial declaration of non-existence
of the criminal acts charged. (Castro v. The Collector of Internal
Revenue, G.R. No. L-12174, April 20,1962) (RP v. Pantanao, 20
SCRA 712, G.R. No. L-22356 [1967]) (Emphasis supplied)
Chapter 5
183
TAX REMEDIES
S u b s e q u e n t Satisfaction of Tax Liability
The filing of a false and fraudulent income tax return and

the failure to pay the tax necessarily makes the delinquent
taxpayer amenable to the penal provisions of Sec. 73 of the Code
(Old Code). Any subsequent satisfaction of the tax liability, by
payment or prescription, will not operate to extinguish such criminal
liability, since the duty to pay the tax is imposed by statute
independent of any attempt on the part of the taxpayer to evade
payment. Whether under the National Internal Revenue Code or
under the Revised Penal Code, the satisfaction of civil liability is
not one of the grounds for the extinction of criminal action. The
failure of the government, therefore, to enforce by appropriate
civil remedies the collection of the taxes, does not detract from its
right criminally to prosecute violations of the Code. The criminal
actions subsist so long as there are no legal grounds that would
bar their prosecution. (People v. Tierra, G.R. No. L-17177-80
[1964])
Criminal C o m p l a i n t
The issuance of an assessment must be distinguished from

the filing of a complaint. Before an assessment is issued, there
is, by practice, a pre-assessment notice sent to the taxpayer. The
taxpayer is then given a chance to submit position papers and
documents to prove that the assessment is unwarranted. If the
commissioner is unsatisfied, an assessment signed by him or her
is then sent to the taxpayer informing the latter specifically and
clearly that an assessment has been made against him or her. In
contrast, the criminal charge need not go through all these. The
criminal charge is filed directly with the DOJ. Thereafter, the
taxpayer is notified that a criminal case had been filed against
him, not that the commissioner has issued an assessment. It must
be stressed that a criminal complaint is instituted not to demand
payment, but to penalize the taxpayer for violation of the Tax
Code. (CIR v. Pascor Realty and Development Corporation,
supra)
In BIR v. BPI (411 SCRA 457 [2003]), the petitioner (BIR)
failed to make a valid assessment on it since the notice of
assessment was sent to the Paramount Acceptance Corporation's

(PAC) old (and therefore improper) office address. PAC already
indicated its new address in its 1986 tax return filed with the
BIR Makati office. This notwithstanding, petitioner CIR sent
the notice of assessment to PACs old business address instead
of its new address, which was also BPIs (PACs liquidator) office
address.
Since there was a failure to effect a timely valid assessment,
the period for filing a criminal case for PACs tax liabilities had
prescribed by the time petitioner instituted the criminal cases
against its former officers. Thus, Poblador and Albert were
correctly acquitted by the trial court.
Run After Tax Evader (RATE) P r o g r a m
To qualify under the RATE Program, a case must conform to

the following conditions:
a. Cases representing violations under any of:
1. Section 254 - Attempt to evade or defeat tax;
2. Section 255 - Failure to file return, supply correct
and accurate information, pay tax, withhold and remit tax
and refund excess taxes withheld on compensation;
3. Section 257 - Making false entries, records report
or using falsified or fake accountable forms;
4. Sections 258 - Unlawful pursuit of business.
5. Including One-Time Transactions, etc.
b. High-profile taxpayers or taxpayers well-known
within the community, industry or sector to which the taxpayers
belong; and
c. Estimated tax deficiency is at least One Million Pesos

(P1,000,000) per year and per tax type, but priority should be
given to tax cases where the aggregate basic tax deficiencies for
all tax types per year is Fifty Million Pesos (P50,000,000). (Par. D,
RMO 24-2008)
Chapter 5
185
TAX REMEDIES
3. Tax Lien
If any person, corporation, partnership, joint-account (cuentas
en participation), association or insurance company liable to pay
an internal revenue tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of the Government
of the Philippines from the time when the assessment was made
by the Commissioner until paid, with interests, penalties, and
costs that may accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: Provided, That
this lien shall not be valid against any mortgagee purchaser
or judgment creditor until notice of such lien shall be filed by
the Commissioner in the office of the Register of Deeds of the
province or city where the property of the taxpayer is situated or
located. (Sec. 219)
4. Injunction
Injunction not Available to Restrain Collection of Tax
No court shall have the authority to grant an injunction to

restrain the collection of any national internal revenue tax, fee or
charge imposed by th[e] Code. (Sec. 218)
This provision is premised that taxes are the lifeblood of
the government and an injunction is not available to restrain the
collection of tax.
However, in Talento v. Escalada, Jr. (556 SCRA 491 [2008]),
a petition for writ of preliminary injunction was filed enjoining
the sale by public auction of the properties of Petron amounting
to PI.7 billion representing deficiency real property tax due from
1994 up to the first and second quarters of 2007. The Supreme
Court said, [the Court is] not aware of the doctrine that taxes
are the lifeblood of the government, without which it cannot
properly perform its functions and that appeal shall not suspend
the collection of realty taxes. However, there is an exception
to the foregoing rule. That is, where the taxpayer has shown a
clear and unmistakable right to refuse or to hold in abeyance the
payment of taxes.
In this case, the subject properties amounting to PI.7
billion are vital to its business operation. The repercussions and
] 8 6 TAX 2 REVEALED
far-reaching implications of the sale of these properties on the

operation of Petron merit the issuance of a writ of preliminary
injunction in its favor. (Supra)
Also in this case, Sec. 11 of RA 9282, which amended RA
1125 (The Law Creating the Court of Tax Appeals) was cited. The
same provides:
"Sec. 11. Who may appeal; Mode of Appeal; Effect of

Appeal; —
xxx.
No appeal taken to the Court of Appeals from the
Collector of Internal Revenue x x x shall suspend the
payment, levy, distraint, and/or sale of any property
for the satisfaction of his tax liability as provided by
existing law. Provided, however, that when in the opinion
of the court the collection by the aforementioned
government agencies may jeopardize the interest of
the Government and/or taxpayer, the Court at any
stage of the processing may suspend the collection
and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than
double the amount with the Court." (Emphasis sup-
plied)
Authority of Internal R e v e n u e Officers to M a k e A r r e s t s a n d

Seizures
The Commissioner, the Deputy Commissioners, the

Revenue Regional Directors, the Revenue District Officers and
other internal revenue officers shall have authority to make
arrests and seizures for the violation of any penal law, rule or
regulation administered by the Bureau of Internal Revenue. Any
person so arrested shall be forthwith brought before a court,
there to be dealt with according to law. (Sec. 15)
The author submits that the aforementioned provision is
similar to the concept of warrantless arrest. Thus, Sec. 5, Rule 113
of the Rules of Court provides:
Chapter 5
187
TAX REMEDIES
A lawful arrest without a warrant may be made by a

peace officer or a private individual under any of the following
circumstances:
Sec 5. Arrest without warrant, when lawful - A peace officer or
a private person may, without a warrant, arrest a person:
a. When, in his presence, the person to be arrested
has committed, is actually committing or is attempting to
commit an offense;
b. When an offense has just been committed and he
has probable cause to believe based on personal knowledge
of facts or circumstances that the person to be arrested has
committed it; and
c. When the person to be arrested is a prisoner who
has escaped from a penal establishment or place where he
is serving final judgment or is temporarily confined while
his case is pending, or has escaped while being transferred
from one confinement to another.
In cases falling under paragraphs (a) and (b) hereof, the
person arrested without a warrant shall be forthwith delivered to
the nearest police station or jail and he shall be proceeded against
in accordance with Sec. 7, Rule 112.
3. Remedies of the Taxpayer

After filing the related tax return, the Commissioner under
Sec. 2 of the Code or his authorized representative is empowered
to ascertain the correctness of the return filed. He may authorize
the examination and the assessment of the tax liability of the
taxpayer. The examination and assessment is normally done
through an audit or investigation.
Rules of Procedures A c c o r d e d to the Taxpayer

In Sec. 228 of the Code, it speaks of two (2) steps for
assessment:
1. Pre-assessment Notice
2. Final Assessment Notice
l g 8 TAX 2 REVEALED
However, RR No. 12-99 provides for three (3) steps:

1. Notice of Informal Conference
2. Pre assessment Notice
3. Final assessment Notice
Simplified:
Notice of
U I Informal Conference
1 (15days)
Pre-Assessment Notice (PAN)

iset
I
(15 days)
Final Assessment Notice (FAN)

LSSC
I
(30 days)
Protest
1 (30 days)
Appeal to CTA Division

Dea
1 (15 days)
MR to CTA Division
(R1
1 (15 days)
Appeal to CTA En Banc

pej
I
(15 days)
PFR to SC
In RCBC v. CIR (G.R. No. 168498 [2006]), it was held that, it

is basic that as long as a party is given the opportunity to defend
his interests in due course, he would have no reason to complain,
for it is this opportunity to be heard that makes up the essence of
due process. In Batongbakal v. Zafra, the Court held:
Chapter 5
189
TAX REMEDIES
There is no question that the "essence of due process

is a hearing before conviction and before an impartial and
disinterested tribunal" but due process as a constitutional
precept does not, always and in all situations, require a trial-
type proceeding. The essence of due process is to be found in
the reasonable opportunity to be heard and submit any evidence
one may have in support of one's defense. "To be heard" does
not only mean verbal arguments in court; one may be heard
also through pleadings. Where opportunity to be heard, either
through oral arguments or pleadings, is accorded, there is no
denial of procedural due process. (Emphasis supplied)
Either way, the tour of discussions in this chapter will cover
Sec. 228 and RR 12-99.
1. Notice of Informal Conference
The Revenue Officer who audited the taxpayer's records

shall, among others, state in his report whether or not the
taxpayer agrees with his findings that the taxpayer is liable for
deficiency tax or taxes. If the taxpayer is not amenable, based on
the said Officer's submitted report of investigation, the taxpayer
shall be informed, in writing, by the Revenue District Office or by
the Special Investigation Division, as the case may be (in the case
Revenue Regional Offices) or by the Chief of Division concerned
(in the case of the BIR National Office) of the discrepancy or
discrepancies in the taxpayer's payment of his internal revenue
taxes, for the purpose of "Informal Conference," in order to
afford the taxpayer with an opportunity to present his side of the
case. If the taxpayer fails to respond within fifteen (15) days from
date of receipt of the notice for informal conference, he shall be
considered in default, in which case, the Revenue District Officer
or the Chief of the Special Investigation Division of the Revenue
Regional Office, or the Chief of Division in the National Office,
as the case may be, shall endorse the case with the least possible
delay to the Assessment Division of the Revenue Regional Office
or to the Commissioner or his duly authorized representative,
as the case may be, for appropriate review and issuance of a
deficiency tax assessment, if warranted. (Sec. 3.1.1, RR 12-99)
190 TAX 2 REVEALED
In a notice of informal conference (NIC) which must be in

writing, the taxpayer is apprised of the findings of the revenue
officer (examiner) who audited the taxpayer's record. The
examiner is duty bound to state in his report whether or not the
taxpayer agrees in his finding of deficiency tax or taxes. In other
words, prior to the issuance of notice of informal conference, the
taxpayer and the examiner under the supervision of the group
head (group supervisor) had been in an engagement already for
audit, examination or investigation as the case may be. A notice
of informal conference presupposes an audit.
The primary purpose of NIC is to give the taxpayer ample
opportunity to present his side of the case. The NIC must like-
wise enclose the discrepancy or discrepancies in the taxpayer's
payment of his internal revenue taxes and that the taxpayer may
address the said discrepancy in an informal conference. An in-
formal conference is non-litigious in nature. Hence, the taxpayer
may be assisted or represented by non-lawyer or an accountant.
The taxpayer is given fifteen (15) days from date of receipt
of the notice for informal conference to file an answer or response
stating that he will be presenting his record that will clear out
the discrepancies and is thus, willing to be scheduled for an
informal conference. Otherwise, he will be considered in default
and his case shall be endorsed with the least possible delay to
the Assessment Division of the Revenue Regional Office or to the
Commissioner or his duly authorized representative, as the case
may be, for appropriate review and issuance of a deficiency tax
assessment, if warranted.
2. Pre Assessment Notice (PAN)

When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall
first notify the taxpayer of his findings: Provided, however, That
a pre-assessment notice shall not be required in the following
cases:
a. When the finding for any deficiency tax is the

result of mathematical error in the computation of the tax as
appearing on the face of the return; or
Chapter 5
191
TAX REMEDIES
b. When a discrepancy has been determined

between the tax withheld and the amount actually remitted
by the withholding agent; or
c. When a taxpayer who opted to claim a refund
or tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over and
automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of
the succeeding taxable year; or
d. When the excise tax due on exciseable articles has
not been paid; or
e. When the article locally purchased or imported
by an exempt person, such as, but not limited to, vehicles,
capital equipment, machineries and spare parts, has been
sold, traded or transferred to non-exempt persons. (Sec. 228)
In a-e, PAN is not required. These are exceptions to prior
notice of informal conference and PAN. As such, a final assessment
notice can be issued against the taxpayer for the payment of
the taxpayer's deficiency tax liability without violating the due
process.
If after review and evaluation by the Assessment Division
or by the Commissioner or his duly authorized representative,
as the case may be, it is determined that there exists sufficient
basis to assess the taxpayer for any deficiency tax or taxes, the
said Office shall issue to the taxpayer, at least by registered
mail, a Preliminary Assessment Notice (PAN) for the proposed
assessment, showing in detail, the facts and the law, rules and
regulations, or jurisprudence on which the proposed assessment
is based. If the taxpayer fails to respond within fifteen (15)
days from date of receipt of the PAN, he shall be considered in
default, in which case, a formal letter of demand and assessment
notice shall be caused to be issued by the said Office, calling for
payment of the taxpayer's deficiency tax liability, inclusive of the
applicable penalties. (Sec. 3.1.2 RR 12-99)
The taxpayers shall be informed in writing of the law
and the facts on which the assessment is made; otherwise, the
assessment shall be void. (Emphasis supplied)
192 TAX 2 REVEALED
Within a period to be prescribed by implementing rules and

regulations, the taxpayer shall be required to respond to said
notice. If the taxpayer fails to respond, the Commissioner or his
duly authorized representative shall issue an assessment based
on his findings. (Sec. 228)
The service of PAN may either be via registered mail, the
minimum service requirement or through personal service.
Constructive Service
If the notice to the taxpayer herein required is served by
registered mail, and no response is received from the taxpayer
within the prescribed period from date of the posting thereof in
the mail, the same shall be considered actually or constructively
received by the taxpayer. If the same is personally served
on the taxpayer or his duly authorized representative who,
however, refused to acknowledge receipt thereof, the same shall
be constructively served on the taxpayer. Constructive service
thereof shall be considered effected by leaving the same in the
premises of the taxpayer and this fact of constructive service
is attested to, witnessed and signed by at least two (2) revenue
officers other than the revenue officer who constructively served
the same. The revenue officer who constructively served the
same shall make a written report of this matter which shall form
part of the docket of this case. (Sec. 3.1.7, RR 12-99)
The failure of the taxpayer to respond within fifteen (15)

days from date of receipt of the PAN, he shall be considered in
default, in which case, a formal letter of demand and assessment
notice shall be caused to be issued by the said Office, calling for
payment of the taxpayer's deficiency tax liability, inclusive of the
applicable penalties.
In CIR v. Reyes (480 SCRA 385 [2006]), the petitioner
violated the cardinal rule in administrative law that the taxpayer
be accorded due process. Not only was the law here disregarded,
but no valid notice was sent, either. A void assessment bears no
valid fruit.
The law imposes a substantive, not merely a formal,

requirement. To proceed heedlessly with tax collection without
Chapter 5 193
TAX REMEDIES
first establishing a valid assessment is evidently violative of the

cardinal principle in administrative investigations: that taxpayers
should be able to present their case and adduce supporting
evidence. In the instant case, respondent has not been informed
of the basis of the estate tax liability. Without complying with
the unequivocal mandate of first informing the taxpayer of the
government's claim, there can be no deprivation of property,
because no effective protest can be made. The haphazard shot at
slapping an assessment, supposedly based on estate taxation's
general provisions that are expected to be known by the taxpayer,
is utter chicanery.
Even a cursory review of the preliminary assessment notice,

as well as the demand letter sent, reveals the lack of basis for
— not to mention the insufficiency of — the gross figures and
details of the itemized deductions indicated in the notice and
the letter. Th[e] Court cannot countenance an assessment based
on estimates that appear to have been arbitrarily or capriciously
arrived at. Although taxes are the lifeblood of the government,
their assessment and collection should be made in accordance
with law as any arbitrariness will negate the very reason for
government itself.
Tax laws are civil in nature. Under our Civil Code, acts
executed against the mandatory provisions of law are void,
except when the law itself authorizes the validity of those
acts. Failure to comply with Sec. 228 does not only render the
assessment void, but also finds no validation in any provision in
the Tax Code. [The Court] cannot condone errant or enterprising
tax officials, as they are expected to be vigilant and law-abiding.
(supra)
In CIR v. Metro Star Superama, Inc. (G.R. No. 185371
[2010]), it was opined that:
On the matter of service of a tax assessment, a further
perusal of [the Court's] ruling in Barcelon is instructive, viz:
Jurisprudence is replete with cases holding that if
the taxpayer denies ever having received an assessment
from the BIR, it is incumbent upon the latter to prove by
competent evidence that such notice was indeed received by
TAX 2 REVEALED
194
the addressee. The onus probandi was shifted to respondent

to prove by contrary evidence that the petitioner received
the assessment in the due course of mail. The Supreme
Court has consistently held that while a mailed letter is
deemed received by the addressee in the course of mail, this
is merely a disputable presumption subject to controversion
and a direct denial thereof shifts the burden to the party
favored by the presumption to prove that the mailed letter
was indeed received by the addressee (Republic v. Court
of Appeals, 149 SCRA 351). Thus as held by the Supreme
Court in Gonzalo R Nava v. Commissioner of Internal
Revenue (13 SCRA 104, January 30,1965):
"The facts to be proved to raise this presumption are:
a. that the letter was properly addressed with
postage prepaid; and
b. that it was mailed.
Once these facts are prove[n], the presumption is that the
letter was received by the addressee as soon as it could have been
transmitted to him in the ordinary course of the mail. But if one
of the said facts fails to appear, the presumption does not lie.
(VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing
Enriquez v. Sunlife Assurance of Canada, 41 Phil. 269)."
x x x . What is essential to prove the fact of mailing is the
registry receipt issued by the Bureau of Posts or the registry
return card which would have been signed by the petitioner
or its authorized representative. And if said documents
cannot be located, respondent at the very least, should
have submitted to the Court a certification issued by the
Bureau of Posts and any other pertinent document which
is executed with the intervention of the Bureau of Posts.
Th[e] Court does not put much credence to the self serving
documentations made by the BIR personnel especially if
they are unsupported by substantial evidence establishing
the fact of mailing. Thus:
"While [the Court] ha[s] held that an assessment

is made when sent within the prescribed period, even if
Chapter 5
195
TAX REMEDIES
received by the taxpayer after its expiration (Collector

of Internal Revenue v. Bautista, L-12250 and L-12259,
May 27,1959), this ruling makes it the more imperative
that the release, mailing or sending of the notice be
clearly and satisfactorily proved. Mere notations
made without the taxpayer's intervention, notice or
control, without adequate supporting evidence cannot
suffice; otherwise, the taxpayer would be at the mercy
of the revenue offices, without adequate protection
or defense." (Nava v. CIR, 13 SCRA 104, January 30,
1965)
xxx.
The failure of the respondent to prove receipt of the
assessment by the petitioner leads to the conclusion that no
assessment was issued. Consequently, the government's right to
issue an assessment for the said period has already prescribed.
(Industrial Textile Manufacturing Co. of the Phils., Inc. v. CIR,
CTA Case 4885, August 22,1996).
The Court agrees with the CTA that the CIR failed to
discharge its duty and present any evidence to show that Metro
Star indeed received the PAN dated January 16, 2002. It could
have simply presented the registry receipt or the certification
from the postmaster that it mailed the PAN, but failed. Neither
did it offer any explanation on why it failed to comply with the
requirement of service of the PAN. It merely accepted the letter
of Metro Star's chairman dated April 29, 2002, [stating] that he
had received the FAN dated April 3, 2002, but not the PAN; that
he was willing to pay the tax as computed by the CIR; and that
he just wanted to clarify some matters with the hope of lessening
its tax liability.
xxx.
It is clear that the sending of a PAN to taxpayer to inform
him of the assessment made is but part of the "due process
requirement in the issuance of a deficiency tax assessment," the
absence of which renders nugatory any assessment made by the
tax authorities. The use of the word "shall" in subsection 3.1.2
196 TAX 2 REVEALED
(RR 12-99) describes the mandatory nature of the service of a

PAN. The persuasiveness of the right to due process reaches both
substantial and procedural rights and the failure of the CIR to
strictly comply with the requirements laid down by law and its
own rules is a denial of Metro Star's right to due process. Thus,
for its failure to send the PAN stating the facts and the law on
which the assessment was made as required by Sec. 228 of RA
8424, the assessment made by the CIR is void.
Under Sec. 203 of the National Internal Revenue Code
(NIRC), respondent had three (3) years from the last day for the
filing of the return to send an assessment notice to petitioner.
In the case of Collector of Internal Revenue v. Bautista, th[e] Court
h e l d that an assessment is made within the prescriptive period
if notice to this effect is released, mailed or sent by the CIR to
the taxpayer within said period. Receipt thereof by the taxpayer
within the prescriptive period is not necessary. At this point,
it should be clarified that the rule does not dispense with the
requirement that the taxpayer should actually receive, even
beyond the prescriptive period, the assessment notice which was
timely released, mailed and sent. (Barcelon Roxas Securities,
Inc. v. CIR, 498 SCRA 127 [2006])
3. Final Assessment Notice (FAN)
Formal Letter o f D e m a n d a n d A s s e s s m e n t Notice
The formal letter of demand and assessment notice

shall be issued by the Commissioner or his duly authorized
representative. The letter of demand calling for payment of the
taxpayer's deficiency tax or taxes shall state the facts, the law,
rules and regulations, or jurisprudence on which the assessment
is based, otherwise, the formal letter of demand and assessment
notice shall be void. The same shall be sent to the taxpayer only
by registered mail or by personal delivery. If sent by personal
delivery, the taxpayer or his duly authorized representative shall
acknowledge receipt thereof in the duplicate copy of the letter of
demand, showing the following: (a) his name; (b) signature; (c)
designation and authority to act for and in behalf of the taxpayer,
Chapter 5
197
TAX REMEDIES
if acknowledged received by a person other than the taxpayer

himself; and (d) date of receipt thereof. (Sec. 3.1.4, RR 12-99)
In Barcelon Roxas Securities, Inc. v. CIR (Supra), indepen-
dent evidence, such as the registry receipt of the assessment no-
tice, or a certification from the Bureau of Posts, could have easily
been obtained. Yet respondent failed to present such evidence.
In the case of Nava v. Commissioner of Internal Revenue, th[e]
Court stressed on the importance of proving the release, mailing
or sending of the notice.
While [the Court] x x x held that an assessment is made
when sent within the prescribed period, even if received by the
taxpayer after its expiration (Collector of Internal Revenue v.
Bautista, L-12250 and L-12259, May 27,1959), this ruling makes
it the more imperative that the release, mailing, or sending of the
notice be clearly and satisfactorily proved. Mere notations made
without the taxpayer's intervention, notice, or control, without
adequate supporting evidence, cannot suffice; otherwise, the
taxpayer would be at the mercy of the revenue offices, without
adequate protection or defense.
In this case, the evidence offered by the respondent fails to
convince th[e] Court that Formal Assessment Notice No. FAN-1-
87-91-000649 was released, mailed, or sent before 15 April 1991,
or before the lapse of the period of limitation upon assessment
and collection prescribed by Sec. 203 of the NIRC. Such evidence,
therefore, is insufficient to give rise to the presumption that the
assessment notice was received in the regular course of mail.
Consequently, the right of the government to assess and collect
the alleged deficiency tax is barred by prescription.
4. Protest
Such assessment may be protested administratively by filing
a request for reconsideration or reinvestigation within thirty (30)
days from receipt of the assessment in such form and manner as
may be prescribed by implementing rules and regulations.
Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the
assessment shall become final.
TAX 2 REVEALED
198
If the protest is denied in whole or in part, or is not acted

upon within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of
one hundred eighty (180)-day period; otherwise, the decision
shall become final, executory and demandable. (Sec. 228)
In case the Commissioner failed to act on the disputed
assessment within the 180-day period from date of submission
of documents, a taxpayer can either:
1) File a petition for review with the Court of Tax
Appeals within 30 days after the expiration of the 180-day
period; or
2) Await the final decision of the Commissioner on
the disputed assessments and appeal such final decision to
the Court of Tax Appeals within 30 days after receipt of a
copy of such decision. However, these options are mutually
exclusive, and resort to one bars the application of the other.
(RCBC v. CIR, G.R. No. 168498 [2007])
In BPI v. CIR (G.R. No. 139736 [2005]), the High Court
gave credence to the argument of petitioner BPI that there
is a distinction between a request for reconsideration and a
request for reinvestigation. Revenue Regulations (RR) No. 12-
85, issued on 27 November 1985 by the Secretary of Finance,
upon the recommendation of the BIR Commissioner, governs
the procedure for protesting an assessment and distinguishes
between the two types of protest, as follows:
Protest to A s s e s s m e n t
Sec. 6. Protest. The taxpayer may protest administratively

an assessment by filing a written request for reconsideration or
reinvestigation x x x .
For the purpose of the protest herein:
(a) Request for reconsideration refers to a plea for a re-
evaluation of an assessment on the basis of existing records
Chapter 5
199
TAX REMEDIES
without need of additional evidence. It may involve both a

question of fact or of law or both.
(b) Request for reinvestigation refers to a plea for re-
evaluation of an assessment on the basis of newly-discovered
or additional evidence that a taxpayer intends to present in
the reinvestigation. It may also involve a question of fact or
law or both.
With the issuance of RR No. 12-85 on 27 November 1985
providing the above-quoted distinctions between a request
for reconsideration and a request for reinvestigation, the two
types of protest can no longer be used interchangeably and
their differences so lightly brushed aside. It bears to emphasize
that under Sec. 224 of the Tax Code of 1977, as amended, the
running nt the prescriptive period for collection of taxes can only
be suspended by a request for reinvestigation, not a request for
reconsideration. Undoubtedly, a reinvestigation, which entails
the reception and evaluation of additional evidence, will take
more time than a reconsideration of a tax assessment, which will
be limited to the evidence already at hand; this justifies why the
former can suspend the running of the statute of limitations on
collection of the assessed tax, while the latter can not.
It noteworthy however that the 60-day period applies only

when a request for reinvestigation is filed.
Disputed A s s e s s m e n t
The taxpayer or his duly authorized representative may
protest administratively against the aforesaid formal letter of
demand and assessment notice within thirty (30) days from
date of receipt thereof. If there are several issues involved in
the formal letter of demand and assessment notice but the
taxpayer only disputes or protests against the validity of some
of the issues raised, the taxpayer shall be required to pay the
deficiency tax or taxes attributable to the undisputed issues, in
which case, a collection letter shall be issued to the taxpayer
calling for payment of the said deficiency tax, inclusive of the
applicable surcharge and/or interest. No action shall be taken
on the taxpayer's disputed issues until the taxpayer has paid the
200 TAX 2 REVEALED
deficiency tax or taxes attributable to the said undisputed issues.

The prescriptive period for assessment or collection of the tax
or taxes attributable to the disputed issues shall be suspended.
The taxpayer shall state the facts, the applicable law, rules
and regulations, or jurisprudence on which his protest is based,
otherwise, his protest shall be considered void and without force
and effect. If there are several issues involved in the disputed
assessment and the taxpayer fails to state the facts, the applicable
law, rules and regulations, or jurisprudence in support of his
protest against some of the several issues on which the assessment
is based, the same shall be considered undisputed issue or
issues, in which case, the taxpayer shall be required to pay the
corresponding deficiency tax or taxes attributable thereto.
The taxpayer shall submit the required documents in
support of his protest within sixty (60) days from date of filing of
his letter of protest, otherwise, the assessment shall become final,
executory and demandable. The phrase "submit the required
documents" includes submission or presentation of the pertinent
documents for scrutiny and evaluation by the Revenue Officer
conducting the audit. The said Revenue Officer shall state this
fact in his report of investigation.
If the taxpayer fails to file a valid protest against the formal
letter of demand and assessment notice within thirty (30) days
from date of receipt thereof, the assessment shall become final,
executory and demandable. (Sec. 3.1.5 RR 12-99)
While an assessment is pending with the commissioner of
internal revenue, it cannot yet serve as the basis of collection
by distraint or levy or by judicial action. No grave abuse of
discretion can be attributed to the SB for upholding private
respondent's act of reinvestigation upon SMC's request. (People
v. Sandiganbayan, supra)
Suspension of R u n n i n g of Statute of Limitations
The running of the Statute of Limitations provided in Sees.

203 and 222 on the making of assessment and the beginning of
distraint or levy, a proceeding in court for collection, in respect of
any deficiency, shall be suspended for the period:
Chapter 5
201
TAX REMEDIES
1. During which the Commissioner is prohibited from

making the assessment; or
2. Beginning of distraint or levy or a proceeding in court
and for sixty (60) days thereafter;
3. When the taxpayer requests for a reinvestigation which
is granted by the Commissioner;
4. When the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is
being assessed or collected.
No suspension on the following cases:
1. The taxpayer informs the Commissioner of any change
in address;
2. When the warrant of distraint or levy is duly served
upon the taxpayer, his authorized representative, or
a member of his household with sufficient discretion,
and no property could be located; and
3. When the taxpayer is out of the Philippines. (Sec. 223)
In addition, for the extension of time of payment of estate
tax, Sec. 91 of the Code provides that the running of the Statute of
Limitations for assessment shall likewise be suspended.
In CIR v. Hambrecht & Quist Philippines, Inc. (G.R. No.
169225 [2010]), it was held that the plain and unambiguous
wording of the said provision dictates that two requisites must
concur before the period to enforce collection may be suspended:
a. That the taxpayer requests for reinvestigation;
and
b. That petitioner grants such request.
On this point, the Supreme Court said that they have
previously held that:
The above section is plainly worded. In order to sus-
pend the running of the prescriptive periods for assessment
and collection, the request for reinvestigation must be
granted by the CIR. (Emphasis supplied.)
TAX 2 REVEALED
202
Consequently, the mere filing of a protest letter which is not

granted does not operate to suspend the running of the period to
collect taxes. In the case at bar, the records show that respondent
tiled a request for reinvestigation on December 3,1993, however,
there is no indication that petitioner acted upon respondent's
protest. As the CTA Original Division in C T A . Case No. 6362
succinctly pointed out in its Decision, to wit:
It is evident that the respondent did not conduct a
reinvestigation, the protest having been dismissed on the
ground that the assessment has become final and executory.
There is nothing in the record that would show what action
was taken in connection with the protest of the petitioner. In
fact, petitioner did not hear anything from the respondent nor
received any communication from the respondent relative to its
protest, not until eight years later when the final decision of the
Commissioner was issued (TSN, March 7, 2002, p. 24). In other
words, the request for reinvestigation was not granted, x x x .
(Emphasis supplied.)
Since the CIR failed to disprove the aforementioned findings

of fact of the CTA, which are borne by substantial evidence on
record, th[e] Court is constrained to uphold them as binding and
true. This is in consonance with [the Court's] oft-cited ruling
that instructs th[e] Court to not lightly set aside the conclusions
reached by the CTA, which, by the very nature of its functions, is
dedicated exclusively to the resolution of tax problems and has
accordingly developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority.
In BPI v. CIR (G.R. No. 139736 [2005]), the Supreme Court
said that under Sec. 223(c) of the Tax Code of 1977, as amended,
it is not essential that the Warrant of Distraint and/or Levy be
fully executed so that it can suspend the running of the statute
of limitations on the collection of the tax. It is enough that the
proceedings have validly began or commenced and that their
execution has not been suspended by reason of the voluntary
desistance of the respondent BIR Commissioner. Existing
jurisprudence establishes that distraint and levy proceedings
are validly begun or commenced by the issuance of the Warrant
Chapter 5
203
TAX REMEDIES
and service thereof on the taxpayer. It is only logical to require

that the Warrant of Distraint and/or Levy be, at the very least,
served upon the taxpayer in order to suspend the running of the
prescriptive period for collection of an assessed tax, because it
may only be upon the service of the warrant that the taxpayer is
informed of the denial by the BIR of any pending protest of the
said taxpayer, and the resolute intention of the BIR to collect the
tax assessed. (Emphasis supplied)
In this case, if the service of the Warrant of Distraint and/
or Levy on petitioner BPI on 23 October 1992 was already
beyond the prescriptive period for collection of the deficiency
DST, which had expired on 19 October 1992, then what more
the letter of respondent BIR Commissioner, dated 13 August
1997 and received by the counsel of the petitioner BPI only on
11 September 1997, denying the protest of petitioner BPI and
requesting payment of the deficiency DST? Even later and more
unequivocally barred by prescription on collection was the
demand made by respondent BIR Commissioner for payment of
the deficiency DST in her Answer to the Petition for Review of
petitioner BPI before the CTA, filed on 08 December 1997.
Administrative Decision on a Disputed A s s e s s m e n t
The decision of the Commissioner or his duly authorized

representative shall:
a. State the facts, the applicable law, rules and
regulations, or jurisprudence on which such decision is
based, otherwise, the decision shall be void, in which case,
the same shall not be considered a decision on a disputed
assessment; and
b. That the same is his final decision. (Sec. 3.1.6 RR
12-99)
A final demand letter from the Bureau of Internal Revenue,
reiterating to the taxpayer the immediate payment of a tax
deficiency assessment previously made, is tantamount to a
denial of the taxpayer's request for reconsideration. Such letter
amounts to a final decision on a disputed assessment and is thus
appealable to the Court of Tax Appeals (CTA).
204 TAX 2 REVEALED
The Final Notice before seizure cannot but be considered

as the Commissioner's decision disposing of the request for
reconsideration filed by respondent, who received no other
response to its request. Not only was the notice the only response
received; its content and tenor supported the theory that it was
the CIR's final act regarding the request for reconsideration. The
very title expressly indicated that it was a final notice prior to
seizure of property. The letter itself clearly stated that respondent
was being given "this LAST OPPORTUNITY" to pay; otherwise,
its properties would be subjected to distraint and levy. (CIR v.
Isabela Cultural Corporation, 361 SCRA 71 [2001])
Demand Letter Considered a Decision on Disputed A s s e s s -

ment
A demand letter for payment of delinquent taxes may be
considered a decision on a disputed or protested assessment.
The determination on whether or not a demand letter is final is
conditioned upon the language used or the tenor of the letter
being sent to the taxpayer.
Thus, in the case of Oceanic Network, Inc. v. CIR (477 SCRA
205 [2005]), the Supreme Court said, [the Court] laid down the
rule that the Commissioner of Internal Revenue should always
indicate to the taxpayer in clear and unequivocal language what
constitutes his final determination of the disputed assessment,
thus:
x x x [The Court] deem[s] it appropriate to state that
the Commissioner of Internal Revenue should always
indicate to the taxpayer in clear and unequivocal language
whenever his action on an assessment questioned by a
taxpayer constitutes his final determination on the disputed
assessment, as contemplated by Sees. 7 and 11 of RA 1125,
as amended. On the basis of his statement indubitably
showing that the Commissioner's communicated action is
his final decision on the contested assessment, the aggrieved
taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty,
the taxpayer would be able to determine when his right to
appeal to the tax court accrues.
Chapter 5 205
TAX REMEDIES
The rule of conduct would also obviate all desire and

opportunity on the part of the taxpayer to continually
delay the finality of the assessment and, consequently, the
collection of the amount demanded as taxes by repeated
requests for recomputation and reconsideration. On
the part of the Commissioner, this would encourage his
office to conduct a careful and thorough study of every
questioned assessment and render a correct and definite
decision thereon in the first instance. This would also deter
the Commissioner from unfairly making the taxpayer grope
in the dark and speculate as to which action constitutes the
decision appealable to the tax court. Of greater import, this
rule of conduct would meet a pressing need for fair play,
regularity, and orderliness in administrative action.
Thus, the main issue is whether or not a demand letter for

tax deficiency assessments issued and signed by a subordinate
officer who was acting in behalf of the Commissioner of Internal
Revenue, is deemed final and executory and subject to an appeal
to the Court of Tax Appeals.
In this case, the letter of demand dated January 24, 1991,
unquestionably constitutes the final action taken by the Bureau
of Internal Revenue on petitioner's request for reconsideration
when it reiterated the tax deficiency assessments due from
petitioner and requested its payment. Failure to do so would result
in the issuance of a warrant of distraint and levy to enforce its
collection without further notice. In addition, the letter contained
a notation indicating that petitioner's request for reconsideration
had been denied for lack of supporting documents.
5. Appeal to the Court of Tax Appeals

If the protest is denied in whole or in part, or is not acted
upon within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of
one hundred eighty (180)-day period; otherwise, the decision
shall become final, executory and demandable. (Sec. 228)
TAX 2 REVEALED
206
If the protest is denied, in whole or in part, by the

Commissioner, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from date of receipt of the
said decision, otherwise, the assessment shall become final,
executory and demandable. In general, if the protest is denied,
in whole or in part, by the Commissioner or his duly authorized
representative, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from date of receipt of the said
decision, otherwise, the assessment shall become final, executory
and demandable: Provided, however, that if the taxpayer elevates
his protest to the Commissioner within thirty (30) days from
date of receipt of the final decision of the Commissioner's duly
authorized representative, the latter's decision shall not be
considered final, executory and demandable, in which case, the
protest shall be decided by the Commissioner.
If the Commissioner or his duly authorized representative
fails to act on the taxpayer's protest within one hundred eighty
(180) days from date of submission, by the taxpayer, of the
required documents in support of his protest, the taxpayer may
appeal to the Court of Tax Appeals within thirty (30) days from
the lapse of the said 180-day period, otherwise, the assessment
shall become final, executory and demandable. (Sec. 3.15, RR 12-
99)
Simply put, upon filing of the protest, there are two
possibilities. The Commissioner may either:
1. Deny the protest, in whole or in part; or
2. Inaction on the part of the CIR within 180 days.
Either case, the taxpayer may elevate his case or file his
appeal to the CTA within thirty (30) days upon receipt of the
decision denying the protest or within thirty (30) days from the
lapse of the said 180-day period, otherwise, the assessment shall
become final, executory and demandable.
The Court of Tax Appeals was created under RA 1125. It is a
special court of limited jurisdiction particularly in the field of tax
collection cases. RA 9282 expanded the jurisdiction of the CTA,
elevating its rank to the level of a collegiate court (e.g., Court of
Chapter 5 207
TAX REMEDIES
Appeals) with special jurisdiction and likewise expanding its

membership.
Thus, Section 7 of the same Act is hereby amended to read
as follows:
Sec. 7. Jurisdiction. — The CTA shall exercise:

"a. Exclusive appellate jurisdiction to review by
appeal, as herein provided:
1. Decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising
under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal
Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges,
penalties in relations thereto, or other matters arising
under the National Internal Revenue Code or other
laws administered by the Bureau of Internal Revenue,
where the National Internal Revenue Code provides
a specific period of action, in which case the inaction
shall be deemed a denial;
x x x."
In this view, the same law provides that, an appeal with the
CTA within thirty (30) days after the receipt of such decision or
ruling or after the expiration of the period fixed by law for action
xxx.
"Appeal shall be made by filing a petition for review under
a procedure analogous to that provided for under Rule 42 of the
1997 Rules of Civil Procedure with the CTA within thirty (30)
days from the receipt of the decision or ruling or in the case of
inaction as herein provided, from the expiration of the period
fixed by law to act thereon. A Division of the CTA shall hear the
appeal:
208 TAX 2 REVEALED
All other cases involving rulings, orders or decisions

filed with the CTA as provided for in Section 7 shall be
raffled to its Divisions. A party adversely affected by a
ruling, order or decision of a Division of the CTA may file
a motion for reconsideration of new trial before the same
Division of the CTA within fifteens (15) days from notice
thereof: Provided, however, That in criminal cases, the general
rule applicable in regular Courts on matters of prosecution
and appeal shall likewise apply.
No appeal taken to the CTA from the decision of the
Commissioner of Internal Revenue or the Commissioner
of Customs or the Regional Trial Court, provincial, city or
municipal treasurer or the Secretary of Finance, the Secretary
of Trade and Industry and Secretary of Agriculture, as the
case may be shall suspend the payment, levy, distraint, and/
or sale of any property of the taxpayer for the satisfaction of
his tax liability as provided by existing law: Provided, however,
That when in the opinion of the Court, the collection by the
aforementioned government agencies may jeopardize the
interest of the Government and/or the taxpayer the Court
any stage of the proceeding may suspend the said collection
and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than double
the amount with the Court."
Section 11. Sec. 18 of the same Act is hereby amended as
follows:
"Sec. 18. Appeal to the Court of Tax Appeals En Banc. —
No civil proceeding involving matters arising under the
National Internal Revenue Code, the Tariff and Customs
Code or the Local Government Code shall be maintained,
except as herein provided, until and unless an appeal has
been previously filed with the CTA and disposed of in
accordance with the provisions of this Act.
A party adversely affected by a resolution of a Division
of the CTA on a motion for reconsideration or new trial, may
file a petition for review with the CTA En Banc."
Chapter 5 209
TAX REMEDIES
The amendments introduced by RA 9282 to RA 1125

elevated the rank of the CTA to a collegiate court, with the same
rank as the Court of Appeals, and increased the number of its
members to one Presiding Justice and five Associate Justices. The
CTA is now allowed to sit en banc or in two Divisions with each
Division consisting of three Justices. Four Justices shall constitute
a quorum for sessions en banc, and the affirmative votes of four
members of the Court en banc are necessary for the rendition
of a decision or resolution; while two Justices shall constitute a
quorum for sessions of a Division and the affirmative votes of
two members of the Division shall be necessary for the rendition
of a decision or resolution. (Judy Anne L. Santos v. People of the
Philippines and BIR, G.R. No. 173176, August 26,2008)
In Rizal Commercial Banking Corporation v. CIR (G.R.

No. 168498 [2006]), it was held that the 30-day period in
filing a petition for review before the Court of Tax Appeals is
jurisdictional. Thus,
The CTA Second Division held:
Following the periods provided for in the

aforementioned laws, from July 20, 2001, that is, the date
of petitioner's filing of protest, it had until September 18,
2001 to submit relevant documents and from September
18, 2001, the Commissioner had until March 17, 2002 to
issue his decision. As admitted by petitioner, the protest
remained unacted by the Commissioner of Internal
Revenue. Therefore, it had until April 16, 2002 within which
to elevate the case to th[e] court. Thus, when petitioner filed
its Petition for Review on April 30,2002, the same is outside
the thirty (30) period.
As provided in Sec. 228, the failure of a taxpayer to
appeal from an assessment on time rendered the assessment
final, executory and demandable. Consequently, petitioner is
precluded from disputing the correctness of the assessment.
In Ker & Company, Ltd. v. Court of Tax Appeals, the Court held
that while the right to appeal a decision of the Commissioner
to the Court of Tax Appeals is merely a statutory remedy,
210 TAX 2 REVEALED
nevertheless the requirement that it must be brought within 30

days is jurisdictional. If a statutory remedy provides as a condition
precedent that the action to enforce it must be commenced within
a prescribed time, such requirement is jurisdictional and failure
to comply therewith may be raised in a motion to dismiss.
In fine, the failure to comply with the 30-day statutory period
would bar the appeal and deprive the Court of Tax Appeals of
its jurisdiction to entertain and determine the correctness of the
assessment. (Emphasis supplied)
The appellate jurisdiction of the CTA is not limited to cases
which involve decisions of the Commissioner of Internal Revenue
on matters relating to assessments or refunds. The second part
of the provision covers other cases that arise out of the NIRC
or related laws administered by the Bureau of Internal Revenue.
The wording of the provision is clear and simple. It gives the
CTA the jurisdiction to determine if the warrant of distraint and
levy issued by the BIR is valid and to rule if the Waiver of Statute
of Limitations was validly effected. (Philippines Journalist, Inc.,
v. CIR, supra)
Distraint of Personal Property and/or L e v y on Real Property
Upon the issuance of any ruling, order or decision by the

CTA favorable to the national government, the CTA shall issue
an order authorizing the Bureau of Internal Revenue, through
the Commissioner to seize and distraint any goods, chattels, or
effects, and the personal property, including stocks and other
securities, debts, credits, bank accounts, and interests in and
rights to personal property and/or levy the real property of such
persons in sufficient quantity to satisfy the tax or charge together
with any increment thereto incident to delinquency. This remedy
shall not be exclusive and shall not preclude the Court from
availing of other means under the Rules of Court. (Sec. 13, RA
9282)
6. Appeal to the Supreme Court

If the CTA En Banc renders unfavorable decision or denied
the appeal to en banc, the taxpayer adversely affected by the
Chapter 5 211
TAX REMEDIES
decision may file with the Supreme Court a petition for certiorari
under Rule 45.
Jurisprudence has consistently shown that th[e] Court
accords the findings of fact by the CTA with the highest respect.
In Sea-Land Service Inc. v. Court of Appeals, th[e] Court recognizes
that the Court of Tax Appeals, which by the very nature of its
function is dedicated exclusively to the consideration of tax
problems, has necessarily developed an expertise on the subject,
and its conclusions will not be overturned unless there has been
an abuse or improvident exercise of authority. Such findings
can only be disturbed on appeal if they are not supported by
substantial evidence or there is a showing of gross error or
abuse on the part of the Tax Court. In the absence of any clear
and convincing proof to the contrary, th[e] Court must presume
that the CTA rendered a decision which is valid in every respect.
(Barcelon Roxas Securities, Inc. v. CIR, supra)
Section 11. Sec. 18 of the same Act is hereby amended as

follows:
"Sec. 19. Review by Certiorari. — A party adversely
affected by a decision or ruling of the CTA En Banc may
file with the Supreme Court a verified petition for review
on certiorari pursuant to Rule 45 of the 1997 Rules of Civil
Procedure."
Rule 45, Section 2 provides that:
"Time for filing; extension. — The petition shall be filed
within fifteen (15) days from notice of the judgment or final
order or resolution appealed from, or of the denial of the
petitioner's motion for new trial or reconsideration filed
in due time after notice of the judgment. On motion duly
filed and served, with full payment of the docket and other
lawful fees and the deposit for costs before the expiration
of the reglementary period, the Supreme Court may for
justifiable reasons grant an extension of thirty (30) days
only within which to file the petition."
The appeal or review contemplated under Rule 45 is
discretionary and will be granted only when important reasons
212 TAX 2 REVEALED
could justify the petition. The review is not a matter of right, but
of sound judicial discretion, and will be granted only when there
are special and important reasons thereof.
The following, while neither controlling nor fully measuring
the court's discretion, indicate the character of the reasons which
will be considered:
1. When the court a quo has decided a question of
substance, not theretofore determined by the Supreme
Court;
2. Decided it in a way probably not in accord with
law or with the applicable decisions of the Supreme Court;
3. When the court a quo has so far departed from the
accepted and usual course of judicial proceedings, or so far
sanctioned such departure by a lower court, as to call for an
exercise of the power of supervision. (Sec. 6, Rule 45, Rules of
Court)
The petition shall raise only questions of law which must
be distinctly set forth. (Sec. 1, Rule 45, Rules of Court). The rule is
that before the Supreme Court, only legal issues may be raised
in the petition for review on certiorari (appeal by certiorari). The
Supreme Court is not a trier of facts, and is not to review or
calibrate the evidence on record. Moreover, the findings of facts
of the trial court, as affirmed on appeal by the Court of Appeals,
are conclusive on the Court (Boston Bank of the Philippines v.
Manolo, G.R. No. 158149, February 9, 2006; Muaje - Tuazon v.
Wenphil Corporation, G.R. No. 162447, December 27, 2006). It
has to be emphasized that is not the duty of the Supreme Court to
review, evaluate, and weigh the probative value of the evidence
adduced before the lower courts (Frondarina v. Malazarte, G.R.
No. 148423, December 6,2006).
The task of a court in a certiorari proceeding is to determine

whether the lower court committed grave abuse of discretion
(Marcopper Mining v. Solidbank Corporation, G.R. No. 134049,
June 17, 2004). It is a remedy narrow in scope. It is not a general
utility tool in the legal workshop. Its function is to raise only
questions of jurisdiction and no other. It cannot be used for any
Chapter 5 213
TAX REMEDIES
other purpose (Landbank of the Phils, v. CA, 409 SCRA 450).

Do not file certiorari if your purpose is to raise a factual issue of
to ask for a re-evaluation of the facts and the evidence (PILTEL v.
NTC, 410 SCRA 82) (Civil Procedure, 2009 Edition, Willard Riano)
Certiorari is not available to correct errors of procedure or
mistakes in the judge's findings and conclusions of law and
fact. It is only in the presence of extraordinary circumstances
evincing a patent disregard of justice and fair play where resort
to a petition for certiorari is proper. A party must not be allowed
to delay litigation by the sheer expediency of filing a petition for
certiorari under Rule 65 of the Revised Rules of Court based on
scant allegations of grave abuse.
A writ of certiorari is not intended to correct every

controversial interlocutory ruling: it is resorted to only to correct
a grave abuse of discretion or a whimsical exercise of judgment
equivalent to lack of jurisdiction. Its function is limited to
keeping an inferior court within its jurisdiction and to relieve
persons from arbitrary acts - acts which courts or judges have no
power or authority in law to perform. It is not designed to correct
erroneous findings and conclusions made by the courts. (Judy
Anne L. Santos v. People of the Philippines and BIR, G.R. No.
173176, supra)
While an appeal may be predicated on errors of fact or errors

of law, a special civil action for certiorari is grounded on grave
abuse of discretion or lack of or excess of jurisdiction on the part
of the decider. For a special civil action for certiorari to succeed, it
is not enough that the questioned act of the respondent is wrong.
As the Court clarified in Sempio v. Court of Appeals:
A tribunal, board or officer acts without jurisdiction if
it/he does not have the legal power to determine the case.
There is excess of jurisdiction where, being clothed with the
power to determine the case, the tribunal, board or officer
oversteps its /his authority as determined by law. And there
is grave abuse of discretion where the tribunal, board or
officer acts in a capricious, whimsical, arbitrary or despotic
manner in the exercise of his judgment as to be said to be
214 TAX 2 REVEALED
equivalent to lack of jurisdiction. Certiorari is often resorted

to in order to correct errors of jurisdiction. Where the error
is one of law or of fact, which is a mistake of judgment,
appeal is the remedy. (Southern Cross Cement Corporation
v. Philippine Cement Manufacturers Corporation, 434
SCRA 65 [2004])
Satisfaction of J u d g m e n t R e c o v e r e d Against any Internal

Revenue Officer
When an action is brought against any Internal Revenue
Officer to recover damages by reason of any act done in the
performance of official duty, and the Commissioner is notified
of such action in time to make defense against the same through
the Solicitor General, any judgment, damages or costs recovered
in such action shall be satisfied by the Commissioner, upon
approval of the Secretary of Finance, or if the same be paid by
the person used shall be repaid or reimbursed to him.
No such judgment, damages, or costs shall be paid or
reimbursed in behalf of a person who has acted negligently or in
bad faith, or with willful oppression. (Sec. 227)
Action to Contest Forfeiture of Chattel
In case of the seizure of personal property under claim

of forfeiture, the owner desiring to contest the validity of the
forfeiture may:
1. At any time before sale or destruction of the property,
bring an action against the person seizing the property
or having possession thereof to recover the same; and
2. Upon giving proper bond, may enjoin the sale; or after
the sale and within six (6) months, he may bring an
action to recover the net proceeds realized at the sale.
(Sec. 231)
Reports of Violation of L a w s
When an Internal Revenue Officer discovers evidence

of a violation of th[e] Code or of any law, rule or regulations
Chapter 5 215
TAX REMEDIES
administered by the Bureau of Internal Revenue of such character

as to warrant the institution of criminal proceedings, he shall
immediately report the facts to the Commissioner through his
immediate superior, giving the name and address of the offender
and the names of the witnesses if possible: Provided, That in urgent
cases, the Revenue Regional Director or Revenue District Officer,
as the case may be, may send the report to the corresponding
prosecuting officer in the latter case, a copy of his report shall be
sent to the Commissioner. (Sec. 18, NIRC)
Chapter 6
LOCAL TAXATION
Constitutional Basis
Article X, Sec. 5 provides that:

"Each local government unit shall have the power
to create its own sources of revenues and to levy
taxes, fees and 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."
The power to tax is primarily vested in the Congress;

however, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid delegation
as before, but pursuant to direct authority conferred by Sec. 5,
Article X of the Constitution. Under the latter, the exercise of the
power may be subject to such guidelines and limitations as the
Congress may provide which, however, must be consistent with
the basic policy of local autonomy. (Mactan Cebu International
Airport Authority v. Marcos, 261 SCRA 667 [1996])
Power to Create S o u r c e s of R e v e n u e
Each local government unit shall exercise its power to create

its own sources of revenue and to levy taxes, fees, and charges
subject to the provisions herein, consistent with the basic policy
of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local government units. (Sec. 129 LGC)
216
Chapter 6 217
LOCAL TAXATION
P o w e r To L e v y O t h e r Taxes, Fees or C h a r g e s
Local government units may exercise the power to levy

taxes, fees or charges on any base or subject not otherwise
specifically enumerated herein or taxed under the provisions
of the National Internal Revenue Code, as amended, 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 taxes, fees or charges shall not be enacted without
any prior public hearing conducted for the purpose. (Sec. 186
LGC)
F u n d a m e n t a l Principles
A. Taxation shall be uniform in each local government

unit;
B. Taxes, fees, charges and other impositions shall:
1. Be equitable and based as far as practicable on the
taxpayer's ability to pay;
2. Be levied and collected only for public purposes;
3. Not be unjust, excessive, oppressive, or confisca-
tory;
4. Not be contrary to law, public policy, national
economic policy, or in restraint of trade;
C. The collection of local taxes, fees, charges and other
impositions shall in no case be let to any private person;
D. The revenue collected pursuant to the provisions of
th[e] Code shall inure solely to the benefit of, and be subject to
disposition by, the local government unit levying the tax, fee,
charge or other imposition unless otherwise specifically provided
herein; and,
E. Each local government unit shall, as far as practicable,
evolve a progressive system of taxation.
218 TAX 2 REVEALED
Local Taxing Authority

The power to impose a tax, fee, or charge or to generate
revenue under th[e] Code shall be exercised by the sanggunian
of the local government unit concerned through an appropriate
ordinance. (Sec. 132, LGC)
In Reyes v. CA (G.R. No. 118233 [1999]), Sec. 187 of RA 7160,
cited by respondent Secretary, provides as follows:
Sec. 187. Procedure for Approval and Effectivity

of Tax Ordinances and Revenue Measures; Mandatory
Public Hearings. — The procedure for approval of
local tax ordinances and revenue measures shall be in
accordance with the provisions of this Code: Provided,
That public hearings shall be conducted for the purpose
prior to the enactment thereof: Provided further, That
any question on the constitutionality or legality of
tax ordinances or revenue measures may be raised
on appeal within thirty (30) days from the effectivity
thereof to the Secretary of Justice who shall render a
decision within sixty (60) days from the date of receipt
of the appeal: Provided, however, That such appeal [does]
not have the effect of suspending the effectivity of the
ordinance and the accrual and payment of the tax, fee,
or charge levied therein: Provided, finally, That within
thirty (30) days after receipt of the decision or the lapse
of the sixty-day period without the Secretary of Justice
acting upon the appeal, the aggrieved party may file
appropriate proceedings with a court of competent
jurisdiction.
Clearly, the law requires that the dissatisfied taxpayer who

questions the validity or legality of a tax ordinance must hie his
appeal to the Secretary of Justice, within 30 days from effectivity
thereof. In case the Secretary decides the appeals, a period also of
30 days is allowed for an aggrieved party to go to court. But if the
Secretary does not act thereon, after the lapse of 60 days, a party
could already proceed to seek relief in court. These three separate
periods are clearly given for compliance as a prerequisite before
Chapter 6 219
LOCAL TAXATION
seeking redress in a competent court. Such statutory periods

are set to prevent delays as well as enhance the orderly and
speedy discharge of judicial functions. For this reason, the courts
construct these provisions of statutes as mandatory.
A municipal tax ordinance empowers a local government
unit to impose taxes. The power to tax is the most effective
instrument to raise needed revenues to finance and support the
myriad activities of local government units for the delivery of
basic services essential to the promotion of the general welfare
and enhancement of peace, progress, and prosperity of the
people. Consequently, any delay in implementing tax measures
would be to the detriment of the public. It is for this reason that
protests over tax ordinances are required to be done within
certain time frames. In the instant case, it is [the Court's] view
that the failure of petitioners to appeal to the Secretary of Justice
within 30 days as required by Sec. 187 of RA 7160 is fatal to their
cause.
In Figurres v. Court of Appeals (G.R. No. 119172, March 25,

1999), where the municipality failed to conduct public hearings
prior to enacting the revisions on the schedule of fair market
values and assessment level of classes of real estate properties,
the Court said:
Petitioner is right in contending that public hearings
are required to be conducted prior to the enactment of an
ordinance imposing real property taxes. RA 7160, Sec. 186,
provides that an ordinance levying taxes, fees, or charges
"shall not be enacted without any prior public hearing
conducted for the purpose."
However, it is noteworthy that [a]part from her bare
assertions, petitioner Figuerres has not presented any evidence
to show that no public hearings were conducted prior not the
enactment of the ordinances in question. On the other hand, the
Municipality of Mandaluyong claims the public hearings were
indeed conducted before the subject ordinances were adopted,
although it likewise failed to submit any evidence to establish
this allegation. However, in accordance with the presumption
of validity in favor of an ordinance, their constitutionality or
220 TAX 2 REVEALED
legality should be upheld in the absence of evidences showing

that procedure prescribed by law was not observed in their
enactment.
Furthermore, the lack of a public hearing is a negative
allegation essential to petitioner's cause of action in the present
case. Hence, as petitioner is the party asserting it, she has the
burden of proof. Since petitioner failed to rebut the presumption
of validity in favor of the subject ordinances and to discharge the
burden of proving that no public hearings were conducted prior
to the enactment thereof, [the Court is] constrained to uphold
their constitutionality or legality.
C o m m o n Limitations on the Taxing P o w e r s of Local G o v e r n -

ment Units
Unless otherwise provided herein, the exercise of the taxing

powers of provinces, cities, municipalities, and barangays shall
not extend to the levy of the following:
a. Income tax, except when levied on banks and
other financial institutions;
b. Documentary stamp tax;
c. Taxes on estates, inheritance, gifts, legacies and
other acquisitions mortis causa, except as otherwise provided
herein;
d. Customs duties, registration fees of vessel and
wharfage on wharves, tonnage dues, and all other kinds of
customs fees, charges and dues except wharfage on wharves
constructed and maintained by the local government unit
concerned;
e. Taxes, fees and charges and other impositions
upon goods carried into or out of, or passing through, the
territorial jurisdictions 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;
f. Taxes, fees or charges on agricultural and aquatic
products when sold by marginal farmers or fishermen;
Chapter 6 221
LOCAL TAXATION
g. Taxes on business enterprises certified to by the

Board of Investments as pioneer or non-pioneer for a period
of six (6) and four (4) years, respectively from the date of
registration;
h. Excise taxes on articles enumerated under the
National Internal Revenue Code, as amended, and taxes,
fees or charges on petroleum products;
i. Percentage or value-added tax (VAT) on sales,
barters or exchanges or similar transactions on goods or
services except as otherwise provided herein;
j. Taxes on the 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 provided in this Code;
k. Taxes on premiums paid by way of reinsurance or
retrocession;
1. Taxes, fees or charges for the registration of motor
vehicles and for the issuance of all kinds of licenses or
permits for the driving thereof, except tricycles;
m. Taxes, fees, or other charges on Philippine prod-
ucts actually exported, except as otherwise provided herein;
n. Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and cooperatives duly
registered under RA 6810 and RA 6938 otherwise known as
the "Cooperatives Code of the Philippines"; and
o. Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and local
government units. (Sec. 133, LGC)
In Palma Development Corporation v. Municipality
of Malangas, Zamboanga Del Sur (413 SCRA 573 [2003]), it
was held that by express language of Sees. 153 and 155 of RA
7160, local government units, through their Sanggunian, may
prescribe the terms and conditions for the imposition of toll fees
or charges for the use of any public road, pier or wharf funded
TAX 2 REVEALED
222
and constructed by them. A service fee imposed on vehicles using

municipal roads leading to the wharf is thus valid. However,
Sec. 133(e) of RA 7160 prohibits the imposition, in the guise of
wharfage, of fees — as well as all other taxes or charges in any
form whatsoever — on goods or merchandise. It is therefore
irrelevant if the fees imposed are actually for police surveillance
on the goods, because any other form of imposition on goods
passing through the territorial jurisdiction of the municipality is
clearly prohibited by Sec. 133(e).
Under Sec. 131 (y) of RA 7160, wharfage is defined as "a
fee assessed against the cargo of a vessel engaged in foreign or
domestic trade based on quantity, weight, or measure received
and/or discharged by vessel." It is apparent that a wharfage
does not lose its basic character by being labeled as a service fee
"for police surveillance on all goods."
In Lieu of All Taxes Clause
In Quezon City v. ABS-CBN Broadcasting Corporation

(G.R. No. 166408 [20081), the issue covers Sec. 8 of RA 7966
imposes on ABS-CBN a franchise tax equivalent to three (3)
percent of all gross receipts of the radio/television business
transacted under the franchise and the franchise tax shall be in lieu
of all taxes on the franchise or earnings thereof. [Emphasis supplied]
The "in lieu of all taxes" provision in the franchise of ABS-
CBN does not expressly provide what kind of taxes ABS-CBN
is exempted from. It is not clear whether the exemption would
include both local, whether municipal, city or provincial, and
national tax. What is clear is that ABS-CBN shall be liable to pay
three (3) percent franchise tax and income taxes under Title II of
the NIRC. But whether the "in lieu of all taxes" provision would
include exemption from local tax is not unequivocal.
The "in lieu of all taxes" provision in its franchise does not
exempt ABS-CBN from payment of local franchise tax.
The power of the local government of Quezon City to
impose franchise tax is based on Sec. 151 in relation to Sec. 137 of
the LGC, to wit:
Chapter 6
223
LOCAL TAXATION
Section 137. Franchise Tax. Notwithstanding any

exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a
franchise, at the rate not exceeding fifty percent (50%)
of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt,
or realized within its territorial jurisdiction, x x x .
x x x.
Section 151. Scope of Taxing Powers. Except as

otherwise provided in this Code, the city may levy the
taxes, fees and charges which the province or municipality
may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and
component cities shall accrue to them and distributed
in accordance with the provisions of th[e] Code.
The rates of taxes that the city may levy may

exceed the maximum rates allowed for the province
or municipality by not more than fifty percent (50%)
except the rates of professional and amusement taxes.
(Emphasis supplied)
Taxes are what civilized people pay for civilized society.

They are the lifeblood of the nation. Thus, statutes granting tax
exemptions are construed stricissimi juris against the taxpayer
and liberally in favor of the taxing authority. A claim of tax
exemption must be clearly shown and based on language in law
too plain to be mistaken. Otherwise stated, taxation is the rule,
exemption is the exception. The burden of proof rests upon the
party claiming the exemption to prove that it is in fact covered by
the exemption so claimed.
The basis for the rule on strict construction to statutory
provisions granting tax exemptions or deductions is to minimize
differential treatment and foster impartiality, fairness and equality
of treatment among taxpayers. He who claims an exemption
from his share of common burden must justify his claim that the
legislature intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are they
presumed. They must be expressed in the clearest and most
224 TAX 2 REVEALED
unambiguous language and not left to mere implications. It has

been held that exemptions are never presumed, the burden is on
the claimant to establish clearly his right to exemption and cannot
be made out of inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule and
exemption the exception, the intention to make an exemption
ought to be expressed in clear and unambiguous terms.
Transfer Taxes (Tax on Transfer of Real Property Ownership)
1. Province — The province may impose a tax on the

sale, donation, barter, or on any other mode of transferring
ownership or title of real property at the rate of not more than
fifty percent (50%) of one percent (1%) of the total consideration
involved in the acquisition of the property or of the fair market
value in case the monetary consideration involved in the transfer
is not substantial, whichever is higher. The sale, transfer or other
disposition of real property pursuant to RA 6657 shall be exempt
from this tax. (Sec. 135 LGU)
2. City — Except as otherwise provided in this Code, the
city, may levy the taxes, fees, and charges which the province
or municipality may impose: Provided, however, That the taxes,
fees and charges levied and collected by highly urbanized
and independent component cities shall accrue to them and
distributed in accordance with the provisions of th[e] Code. The
rates of taxes that the city may levy may exceed the maximum
rates allowed for the province or municipality by not more
than fifty percent (50%) except the rates of professional and
amusement taxes. (Sec. 151, LGC)
Note that for the municipalities, it cannot impose transfer

taxes on real property because Sec. 142 (LGC) provides that it
can only levy taxes, fees, and charges not otherwise levied by
provinces.
Common Revenue-Raising Powers
1. Service Fees and Charges

Local government units may impose and collect such
reasonable fees and charges for services rendered. (Sec. 153, LGC)
Chapter 6 225
LOCAL TAXATION
2. Public Utility Charges

Local government units may fix the rates for the operation
of public utilities owned, operated and maintained by them
within their jurisdiction. (Sec. 154, LGC)
3. Toll Fees or Charges
The sanggunian concerned may prescribe the terms and
conditions and fix the rates for the imposition of toll fees or charges
for the use of any public road, pier or wharf, waterway, bridge,
ferry or telecommunication system funded and constructed by
the local government unit concerned: Provided, That no such
toll fees or charges shall be collected from officers and enlisted
men of the Armed Forces of the Philippines and members of
the Philippine National Police on mission, post office personnel
delivering mail, physically-handicapped, and disabled citizens
who are sixty-five (65) years or older. When public safety and
welfare so requires, the sanggunian concerned may discontinue
the collection of the tolls, and thereafter the said facility shall be
free and open for public use. (Sec. 155, LGC)
C o m m u n i t y Tax
Cities or municipalities may levy a community tax. (Sec.

156, LGC)
Persons Liable
1. Individuals
Every inhabitant of the Philippines eighteen (18) years of
age or over who has been:
a. Regularly employed on a wage or salary basis for at
least thirty (30) consecutive working days during any
calendar year; or
b. Engaged in business or occupation;
c. Owns real property with an aggregate assessed value
of one thousand pesos (P1,000.00) or more; or
d. Required by law to file an income tax return.
TAX 2 REVEALED
226
The foregoing are required to pay an annual community

tax of five pesos (P5.00) and an annual additional tax of one
peso (PI.00) for every one thousand pesos (P1,000.00) of income
regardless of whether from business, exercise of profession or
from property which in no case shall exceed five thousand pesos
(P5,000.00). In the case of husband and wife, the additional tax
herein imposed shall be based upon the total property owned by
them and the total gross receipts or earnings derived by them.
(Sec. 157, LGC)
2. Juridical Persons
Every corporation no matter how created or organized:
1. Domestic Corporation
2. Resident foreign, engaged in or doing business in the
Philippines
These two (2) corporations are required to pay an annual
community tax of five hundred pesos (P500.00) and an annual
additional tax, which, in no case, shall exceed ten thousand pesos
(P10,000.00) in accordance with the following schedule:
1. For every five thousand pesos (P5,000.00) worth of real
property in the Philippines owned by it during the preceding
year based on the valuation used for the payment of the real
property tax under existing laws, found in the assessment rolls of
the city or municipality where the real property is situated - two
pesos (P2.00); and
2. For every five thousand pesos (P5,000.00) of gross re-
ceipts or earnings derived by it from its business in the Philippines
during the preceding year - two pesos (P2.00). The dividends re-
ceived by a corporation from another corporation however shall,
for the purpose of the additional tax, be considered as part of the
gross receipts or earnings of said corporation. (Sec. 158, LGC)
T h e following are e x e m p t f r o m t h e c o m m u n i t y tax:
1. Diplomatic and consular representatives; and

2. Transient visitors when their stay in the Philippines
does not exceed three (3) months. (Sec. 159, LGC)
Chapter 6
227
LOCAL TAXATION
Place of P a y m e n t
The community tax shall be paid in:

1. The place of residence of the individual; or
2. In the place where the principal office of the juridical
entity is located. (Sec. 160, LGC)
T i m e for P a y m e n t ; Penalties for D e l i n q u e n c y
a. The community tax shall accrue on the first (1st) day

of January of each year which shall be paid not later than the
last day of February of each year. If a person reaches the age of
eighteen (18) years or otherwise loses the benefit of exemption on
or before the last day of June, he shall be liable for the community
tax on the day he reaches such age or upon the day the exemption
ends. However, if a person reaches the age of eighteen (18) years
or loses the benefit of exemption on or before the last day of
March, he shall have twenty (20) days to pay the community tax
without becoming delinquent. Persons who come to reside in the
Philippines or reach the age of eighteen (18) years on or after the
first (1st) day of July of any year, or who cease to belong to an
exempt class on or after the same date, shall not be subject to the
community tax for that year.
b. Corporations established and organized on or before
the last day of June shall be liable for the community tax for that
year. But corporations established and organized on or before the
last day of March shall have twenty (20) days within which to pay
the community tax without becoming delinquent. Corporations
established and organized on or after the first day of July shall
not be subject to the community tax for that year. If the tax is not
paid within the time prescribed above, there shall be added to
the unpaid amount an interest of twenty-four percent (24%) per
annum from the due date until it is paid. (Sec. 161, LGC)
C o m m u n i t y Tax Certificate
A community tax certificate shall be issued to every
person or corporation upon payment of the community tax. A
community tax certificate may also be issued to any person or
228 TAX 2 REVEALED
corporation not subject to the community tax upon payment of

one peso (P1.00). (Sec. 162, LGC)
Professional Tax
a. The province may levy an annual professional tax on
each person engaged in the exercise or practice of his profession
requiring government examination at such amount and reason-
able classification as the sangguniang panlalawigan may deter-
mine but shall in no case exceed three hundred pesos (P300.00).
b. Every person legally authorized to practice his
profession shall pay the professional tax to:
1. The province where he practices his profession; or
2. Where he maintains his principal office in case he
practices his profession in several places.
Provided, however, That 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.
c. Any individual or corporation employing a person
subject to professional tax shall require payment by that person
of the tax on his profession before employment and annually
thereafter.
d. The professional tax shall be payable annually, on
or before the thirty-first (31st) day of January. Any person first
beginning to practice a profession after the month of January
must, however, pay the full tax before engaging therein. A line of
profession does not become exempt even if conducted with some
other profession for which the tax has been paid. Professionals
exclusively employed in the government shall be exempt from
the payment of this tax.
e. Any person subject to the professional tax shall write
in deeds, receipts, prescriptions, reports, books of account, plans
and designs, surveys and maps, as the case may be, the number
of the official receipt issued to him. (Sec. 139, LGC)
Chapter 6 229
LOCAL TAXATION
Tax O r d i n a n c e
P r o c e d u r e for A p p r o v a l a n d Effectivity of Tax Ordinances

a n d R e v e n u e M e a s u r e s ; M a n d a t o r y Public Hearing
The procedure for approval of local tax ordinances and

revenue measures shall be in accordance with the provisions the
Code.
1. Public hearings shall be conducted for the purpose
prior to the enactment thereof.
2. Any question on the constitutionality or legality of
tax ordinances or revenue measures may be raised
on appeal within thirty (30) days from the effectivity
thereof to the Secretary of Justice who shall render a
decision within sixty (60) days from the date of receipt
of the appeal.
3. Such appeal shall not have the effect of suspending
the effectivity of the ordinance and the accrual and
payment of the tax, fee, or charge levied therein.
4. Within thirty (30) days after receipt of the decision or
the lapse of the sixty-day period without the Secretary
of Justice acting upon the appeal, the aggrieved party
may file appropriate proceedings with a court of
competent jurisdiction. (Sec. 187, LGC)
Publication of Tax o r d i n a n c e s a n d R e v e n u e Measures

Within ten (10) days after their approval, certified true
copies of all provincial, city, and municipal tax ordinances
or revenue measures shall be published in full for three (3)
consecutive days in a newspaper of local circulation: Provided,
however, That in provinces, cities and municipalities where there
are no newspapers of local circulation, the same may be posted
in at least two (2) conspicuous and publicly accessible places.
(Sec. 188, LGC) (Emphasis supplied)
Attempt to Enforce Void or Suspended Tax ordinances and

revenue measures
The enforcement of any tax ordinance or revenue measure
after due notice of the disapproval or suspension thereof shall be
TAX 2 REVEALED
230
sufficient ground for administrative disciplinary action against

the local officials and employees responsible therefor. (Sec. 190,
LGC)
Authority to Grant Tax Exemption Privileges

Local government units may, through ordinances duly
approved, grant tax exemptions, incentives or reliefs under such
terms and conditions as they may deem necessary. (Sec. 192, LGC)
REAL PROPERTY TAXATION
Real property tax is a direct tax on the ownership of lands

and buildings or other improvements thereon, not specially
exempted, and is payable regardless of whether the property
is used or not, although the value may vary in accordance with
such factor. The tax is usually single or indivisible, although the
land and building or improvements erected thereon are assessed
separately, except when the land and building or improvements
belong to separate owners. (Villanueva, et al. v. City of Iloilo,
135 Phil. 572, 582-583 [1968])
Imposition of Real Property Tax
The power to levy this tax is vested in local government

units (LGUs).
Power to Levy Real Property Tax
A province or city or a municipality within the Metropolitan

Manila Area may levy an annual ad valorem tax on real property
such as land, building, machinery, and other improvement not
hereinafter specifically exempted. (Sec. 232, LGC)
\ significant innovation in the LGC is the withdrawal,
subject to some exceptions, of all tax exemption privileges of all
natural or juridical persons, including government-owned and
controlled corporations (GOCCs), thus:
Under Book TT. Title I. Chapter V-Miscellaneous Provisions
Section 193. Withdrawal of Tax Exemption Privileges. — Unless
otherwise provided in this Code, tax exemptions or incentives
Chapter 6 231
LOCAL TAXATION
granted to, or presently enjoyed by all persons, whether

natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code. (Manila International Airport
Authority v. City of Pasay, G.R. No. 163072 [2009])
E x e m p t i o n s f r o m Real Property Tax

(Refer to Volume I for a detailed discussion)
The following are exempted from payment of the real
property tax:
(a) Real property owned by the Republic of the Philip-
pines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise to a taxable person;
(b) Charitable institutions, churches, parsonages
or convents appurtenant thereto, mosques, non-profit
or religious cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for
religious, charitable or educational purposes;
(c) All machineries and equipment that are actually,
directly and exclusively used by local water districts and
government owned or controlled corporations engaged in
the supply and distribution of water and/or generation and
transmission of electric power;
(d) All real property owned by duly registered
cooperatives as provided for under RA 6938; and
(e) Machinery and equipment used for pollution
control and environment protection. (Sec. 234, LGC)
In this case, MIAA is not a government-owned or controlled
corporation but a government instrumentality which is exempt
from any kind of tax from the local governments. Indeed, the
exercise of the taxing power of local government units is subject
to the limitations enumerated in Sec. 133 of the Local Government
232 TAX 2 REVEALED
Code. Under Sec. 133(o) of the Local Government Code, local

government units have no power to tax instrumentalities of the
National Government like the MIAA. Hence, MIAA is not liable
to pay real property tax for the NAIA Pasay properties.
Furthermore, the airport lands and buildings of MIAA are
properties of public dominion intended for public use, and as
such are exempt from real property tax under Sec. 234(a) of the
Local Government Code. However, under the same provision,
if MIAA leases its real property to a taxable person, the specific
property leased becomes subject to real property tax. In this case,
only those portions of the NAIA Pasay properties which are
leased to taxable persons like private parties are subject to real
property tax by the City of Pasay.
The airport lands and buildings of MIAA are properties
devoted to public use and thus are properties of public dominion.
Properties of public dominion are owned by the State or the Republic.
Article 420 of the Civil Code provides: x x x .
MIAA is not a government-owned or controlled corpo-
ration under Sec. 2(13) of the Introductory Provisions of the
Administrative Code because it is not organized as a stock or
non-stock corporation. Neither is MIAA a government-owned
or controlled corporation under Sec. 16, Article XII of the 1987
Constitution because MIAA is not required to meet the test of
economic viability. MIAA is a government instrumentality
vested with corporate powers and performing essential public
services pursuant to Sec. 2(10) of the Introductory Provisions
of the Administrative Code. As a government instrumentality,
MIAA is not subject to any kind of tax by local governments
under Sec. 133(o) of the Local Government Code. The exception
to the exemption in Sec. 234(a) does not apply to MIAA because
MIAA is not a taxable entity under the Local Government Code.
Such exception applies only if the beneficial use of real property
owned by the Republic is given to a taxable entity.
Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads,
canals, rivers, torrents, ports and bridges constructed by
Chapter 6
233
LOCAL TAXATION
the State, banks, shores, roadsteads, and others of similar

character;
(2) Those which belong to the State, without being

for public use, and are intended for some public service or
for the development of the national wealth.
The term "ports x x x constructed by the State" includes airports
and seaports. The airport lands and buildings of MIAA are
intended for public use, and at the very least intended for public
service. Whether intended for public use or public service, the
airport lands and buildings are properties of public dominion. As
properties of public dominion, the airport lands and buildings
are owned by the Republic and thus exempt from real estate tax
under Sec. 234(a) of the Local Government Code. (Emphasis in
the original)
Parenthetically, while the basis of a real property tax
assessment is actual use, the tax itself is directed to the ownership
of the lands and buildings or other improvements thereon.
Public policy considerations dictate that property of the State
and of its municipal subdivisions devoted to governmental uses
and purposes is generally exempt from taxation although no
express provision in the law is made therefor. In the instant case,
the legislature specifically provided that real property owned by
the Republic of the Philippines or any of its political subdivisions
is exempt from real property tax, except, of course, when the
beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person. The principal basis of the
exemption is likewise ownership. (Citing separate opinion of
Justice A. Nachura)
Kinds of Real Property Tax
1. Real estate tax

2. Additional levy on education fund
3. Additional levy on idle funds
4. Additional levy on public works
234 TAX 2 REVEALED
Power to Levy Real Property Tax

Manila Area may levy an annual ad valorem tax on real property
such as land, building, machinery, and other improvement not
hereinafter specifically exempted. (Sec. 232, LGC)
Empowered by the LGC are only:
A. Province
B. City C.F.M.V. = 1,000
x A.L. = 20%, assesment level
C. Municipality within MM A.V. = 200
X rate = 2%
1. Real estate tax real property rate = 4

Manila Area shall fix a uniform rate of basic real property tax
applicable to their respective localities as follows:
a. In the case of a province, at the rate not exceeding one
percent (1%) of the assessed value of real property; and
b. In the case of a city or a municipality within the
Metropolitan Manila Area, at the rate not exceeding
two percent (2%) of the assessed value of real property.
(Sec. 233, LGC)
2. Additional Levy on Real Property for the Special Education
Fund
A province or city, or a municipality within the Metropolitan
Manila Area, may levy and collect an annual tax of one percent
(1%) on the assessed value of real property which shall be in
addition to the basic real property tax. The proceeds thereof shall
exclusively accrue to the Special Education Fund (SEF). (Sec. 235,
LGC)
3. Additional Ad Valorem Tax on Idle Lands
A province or city, or a municipality within the Metropolitan
Manila Area, may levy an annual tax on idle lands at the rate not
exceeding five percent (5%) of the assessed value of the property
which shall be in addition to the basic real property tax. (Sec. 236,
LGC)
Chapter 6
235
LOCAL TAXATION
For purposes of real property taxation, idle lands shall

include the following:
a. Agricultural lands, more than one (1) hectare in
area, suitable for cultivation, dairying, inland fishery, and
other agricultural uses, one-half (1/2) of which remain
uncultivated or unimproved by the owner of the property
or person having legal interest therein. Agricultural lands
planted to permanent or perennial crops with at least fifty
(50) trees to a hectare shall not be considered idle lands.
Lands actually used for grazing purposes shall likewise not
be considered idle lands.
b. Lands, other than agricultural, located in a city
or municipality, more than one thousand (1,000) square
meters in area one-half (1 / 2) of which remain unutilized or
unimproved by the owner of the property or person having
legal interest therein.
Regardless of land area, this Section shall likewise apply
to residential lots in subdivisions duly approved by proper
authorities, the ownership of which has been transferred to
individual owners, who shall be liable for the additional tax.
Provided, however, That individual lots of such subdivisions, the
ownership of which has not been transferred to the buyer shall
be considered as part of the subdivision, and shall be subject to
the additional tax payable by subdivision owner or operator.
(Sec. 237, LGC)
Idle L a n d s E x e m p t f r o m Tax
Manila Area may exempt idle lands from the additional levy by
reason of force majeure, civil disturbance, natural calamity or any
cause or circumstance which physically or legally prevents the
owner of the property or person having legal interest therein
from improving, utilizing or cultivating the same. (Sec. 238, LGC)
i. Special Levy by Local Government Units on Public Works

A province, city or municipality may impose a special levy on
the lands comprised within its territorial jurisdiction [especially
236 TAX 2 REVEALED
benefited by public works projects or improvements funded by

the local government unit concerned: Provided, however, That the
special levy shall not exceed sixty percent (60%) of the actual
cost of such projects and improvements, including the costs
of acquiring land and such other real property in connection
therewith: Provided, further, That the special levy shall not apply
to lands exempt from basic real property tax and the remainder
of the land portions of which have been donated to the local
government unit concerned for the construction of such projects
or improvements. (Sec. 240, LGC)
Publication of Proposed O r d i n a n c e I m p o s i n g a Special Levy
Before the enactment of an ordinance imposing a special

levy, the sanggunian concerned shall conduct a public hearing
thereon; [and] notify in writing the owners of the real property
to be affected or the persons having legal interest therein as to
the date and place thereof and afford the latter the opportunity
to express their positions or objections relative to the proposed
ordinance. (Sec. 242, LGC)
TAXPAYER'S REMEDIES
Periods of A s s e s s m e n t a n d Collection (Sec. 194)
a. Local taxes, fees, or charges shall be assessed within

five (5) years from the date they become due. No action for the
collection of such taxes, fees, or charges, whether administrative
or judicial, shall be instituted after the expiration of such period.
b. In case of fraud or intent to evade the payment of taxes,
fees, or charges, the same may be assessed within ten (10) years
from discovery of the fraud or intent to evade payment.
c. Local taxes, fees, or charges may be collected within he
(5) years from the date of assessment by administrative or judicial
action. No such action shall be instituted after the expiration of
said period.
Chapter 6
237
LOCAL TAXATION
S u s p e n s i o n of Statute of Limitation
The running of the periods of prescription provided in the

preceding paragraphs shall be suspended for the time during
which:
1. The treasurer is legally prevented from making the
assessment of collection;
2. The taxpayer requests for a reinvestigation and
executes a waiver in writing before the expiration of
the period within which to assess or collect; and
3. The taxpayer is out of the country or otherwise cannot
be located.
Simplified:
Assessment Collection
Ordinary 5 years 5 years
Fraudulent 10 years 5 years
Notice of A s s e s s m e n t
As held in Manila Electric Company v. Barlis (375 SCRA

571 [2002]), a notice of assessment, as provided for in the Real
Property Tax Code, should effectively inform the taxpayer of the
value of a specific property, or proportion thereof subject to tax,
including the discovery, listing, classification, and appraisal of
properties
Protest of A s s e s s m e n t
When the local treasurer or his duly authorized representa-
tive finds that correct taxes, fees, or charges have not been paid,
he shall:
1. Issue a notice of assessment stating the nature of the tax,
fee or charge, the amount of deficiency, the surcharges,
interests and penalties.
238 TAX 2 REVEALED
2. Within sixty (60) days from the receipt of the notice

of assessment, the taxpayer may file a written protest
with the local treasurer contesting the assessment;
otherwise, the assessment shall become final and
executory. [Note: It must be a payment under protest.]
3. The local treasurer shall decide the protest within sixty
(60) days from the time of its filing. If the local treasurer
finds the protest to be wholly or partly meritorious, he
shall issue a notice canceling wholly or partially the
assessment. However, if the local treasurer finds the
assessment to be wholly or partly correct, he shall deny
the protest wholly or partly with notice to the taxpayer.
4. The taxpayer shall have thirty (30) days from the receipt
of the denial of the protest or from the lapse of the
sixty (60) day period prescribed herein within which
to appeal with the court of competent jurisdiction
otherwise the assessment becomes conclusive and
unappealable. (Sec. 195, LGC)
Payment Under Protest
1. No protest shall be entertained unless the taxpayer

first pays the tax. There shall be annotated on the tax receipts the
words "paid under protest." The protest in writing must be filed
within thirty (30) days from payment of the tax to the provincial,
city treasurer or municipal treasurer, in the case of a municipality
within Metropolitan Manila Area, who shall decide the protest
within sixty (60) days from receipt.
2. The tax or a portion thereof paid under protest shall be

held in trust by the treasurer concerned.
3. In the event that the protest is finally decided in favor
of the taxpayer, the amount or portion of the tax protested shall
be refunded to the protestant, or applied as tax credit against his
existing or future tax liability.
4. In the event that the protest is denied or upon the
lapse of the sixty day period prescribed in subparagraph 1, the
Chapter 6 239
LOCAL TAXATION
taxpayer may avail of the remedies as provided for in Chapter 3

Title II, Book II of the LGC. (Sec. 252, LGC)
R e m e d y W h e n P a y m e n t U n d e r Protest is Denied (Appeal to

LBAA & CBAA)
In case of denial of the protest or lapse of the 60-day period

within which the local treasurer should decide the protest, any
owner or person having legal interest in the property who is
not satisfied with the action of the provincial, city or municipal
assessor in the assessment of his property may, within sixty (60)
days from the date of receipt of the written notice of assessment,
appeal to the Board of Assessment appeals of the province or
city by filing a petition under oath in the form prescribed for the
purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal. (Sec.
236, LGC)
The Local Board of Assessment Appeals shall decide the
appeal within one hundred twenty (120) days from the date of
receipt of such appeal. The Board, after hearing, shall render its
decision based on substantial evidence or such relevant evidence
on record as a reasonable mind might accept as adequate to
support the conclusion.
The owner of the property or the person having legal interest
therein or the assessor who is not satisfied with the decision of the
Board, may, within thirty (30) days after receipt of the decision of
said Board, appeal to the Central Board of Assessment appeals,
as herein provided. The decision of the Central Board shall be
final and executory.
In case of denial by the CBAA, an appeal to the CTA can
be filed within fifteen (15) days from receipt of notice of denial,
and finally, in case of denial by the CTA, the taxpayer may file an
appeal to the Supreme Court within the same number of days.
In expanding the jurisdiction of the CTA under RA 9282, it
is provided that:
"5. Decisions of the Central Board of Assessment
Appeals in the exercise of its appellate jurisdiction over
240 TAX 2 REVEALED
cases involving the assessment and taxation of real property

originally decided by the provincial or city board of assess-
ment appeals;
Effect of Appeal on the Payment of Real Property Tax

Appeal on assessments of real property made under the
provisions of this Code shall, in no case, suspend the collection
of the corresponding realty taxes on the property involved as
assessed by the provincial or city assessor, without prejudice to
subsequent adjustment depending upon the final outcome of the
appeal. (Sec. 231, LGC)
Simplified:
Notice of Assessment
J 60 days
Protest (to LBAA)

| 30 days
Appeal (to CBAA]

^ 15 days
Appeal (to CTA]

^ 15 days
Supreme Court
As held in National Power Corporation v. Province of

Quezon and Municipality of Pagbilao (G.R. No. 171586 [2010]),
by providing that real property not declared and proved as
tax-exempt shall be included in the assessment roll, (Sec. 206.
Proof of Exemption of Real Property from Taxation) implies that the
local assessor has the authority to assess the property for realty
taxes, and any subsequent claim for exemption shall be allowed
only when sufficient proof has been adduced supporting the
claim. Since Napocor was simply questioning the correctness
Chapter 6
241
LOCAL TAXATION
of the assessment, it should have first complied with Sec. 252

particularly the requirement of payment under protest. Napocor's
failure to prove that this requirement has been complied with
thus renders its administrative protest under Sec. 226 of the LGC
without any effect. No protest shall be entertained unless thp
taxpayer first pays the tax. (Emphasis supplied)
In this case, it was an ill-advised move for Napocor to
directly file an appeal with the LBAA under Sec. 226 without
first paying the tax as required under Sec. 252. Sees. 252 and 226
provide successive administrative remedies to a taxpayer who
questions the correctness of an assessment. Sec. 226, in declaring
that "any owner or person having legal interest in the property
who is not satisfied with the action of the provincial, city, or
municipal assessor in the assessment of his property may x x x
appeal to the Board of Assessment Appeals x x x," should be read
in conjunction with Sec. 252 (d), which states that "in the event
that the protest is denied x x x , the taxpayer may avail of the
remedies as provided for in Chapter 3, Title II, Book II of the LGC
[Chapter 3 refers to Assessment Appeals, which includes Sees.
226 to 231]. The "action" referred to in Sec. 226 (in relation to a
protest of real property tax assessment) thus refers to the local
assessor's act of denying the protest filed pursuant to Sec. 252.
Without the action of the local assessor, the appellate authority of
the LBAA cannot be invoked. Napocor's action before the LBAA
was thus prematurely filed.
Taxpayer's Failure to Question the A s s e s s m e n t in the LBAA
In Fels Energy, Inc. v. Province of Batangas (516 SCRA

187 [2007]), it was held that if the taxpayer fails to appeal in due
course, the right of the local government to collect the taxes due
with respect to the taxpayer's property becomes absolute upon
the expiration of the period to appeal. It also bears stressing that
the taxpayer's failure to question the assessment in the LBAA
renders the assessment of the local assessor final, executory and
demandable, thus, precluding the taxpayer from questioning the
correctness of the assessment, or from invoking any defense that
would reopen the question of its liability on the merits.
242 TAX 2 REVEALED
In fine, the LBAA acted correctly when it dismissed the

petitioners' appeal for having been filed out of time; the CBAA
and the appellate court were likewise correct in affirming the
dismissal. Elementary is the rule that the perfection of an appeal
within the period therefor is both mandatory and jurisdictional,
and failure in this regard renders the decision final and executory.
Claim for Refund of Tax Credit
No case or proceeding shall be maintained in any court for

the recovery of any tax, fee, or charge erroneously or illegally
collected until a written claim for refund or credit has been
filed with the local treasurer. No case or proceeding shall be
entertained in any court after the expiration of two (2) years from
the date of the payment of such tax, fee, or charge, or from the
date the taxpayer is entitled to a refund or credit. (Sec. 196, LGC)
Effect of A p p e a l on t h e P a y m e n t of Real Property Tax
Appeal on assessments of real property made under the

provisions of this Code shall, in no case, suspend the collection
of the corresponding realty taxes on the property involved as
assessed by the provincial or city assessor, without prejudice to
subsequent adjustment depending upon the final outcome of the
appeal. (Sec. 231, LGC)
Date of Accrual of Real Property Tax
The real property tax for any year shall accrue on the first
day of January and from that date it shall constitute a lien on the
property which shall be superior to any other lien, mortgage, or
encumbrance of any kind whatsoever, and shall be extinguished
only upon the payment of the delinquent tax. (Sec. 246,1 GO
Remedies for the Collection of Real Property Tax.
The local government unit concerned may avail of the

remedies by:
1. Administrative action thru levy on real property or

2. By judicial action. (Sec. 256, LGC)
Chapter 6 243
LOCAL TAXATION
Local G o v e r n m e n t s Lien
The basic real property tax and any other tax levied under
this Title constitutes a lien on the property subject to tax, superior
to all liens, charges or encumbrances in favor of any person,
irrespective of the owner or possessor thereof, enforceable by
administrative or judicial action, and may only be extinguished
upon payment of the tax and the related interests and expenses.
(Sec. 257, LGC)
Further Distraint or L e v y
Levy may be repeated if necessary until the full amount

due, including all expenses, is collected. (Sec. 265, LGC)
Periods within w h i c h to Collect Real Property Taxes
The basic real property tax and any other tax levied under
this Title shall be collected within five (5) years from the date
they become due. No action for the collection of the tax, whether
administrative or judicial, shall be instituted after the expiration
of such period. In case of fraud or intent to evade payment of the
tax, such action may be instituted for the collection of the same
within ten (10) years from the discovery of such fraud or intent
to evade payment. The period of prescription within which to
collect shall be suspended for the time during which:
1. The local treasurer is legally prevented from collecting
the tax;
2. The owner of the property or the person having
legal interest therein requests for reinvestigation and
executes a waiver in writing before the expiration of
the period within which to collect; and
3. The owner of the property or the person having legal
interest therein is out of the country or otherwise
cannot be located. (Sec. 270, LGC)
Auction Sale an Action In Personam

The auction sale of real property for the collection of
delinquent taxes is in personam, not in rem. Although sufficient
244 TAX 2 REVEALED
in proceedings in rem like land registration, mere notice by

publication will not satisfy the requirements of proceedings
in personam. "[Publication of the notice of delinquency [will]
not suffice, considering that the procedure in tax sales is in
personam." It is still incumbent upon the city treasurer to send
the notice directly to the taxpayer - the registered owner of the
property - in order to protect the latter's interests. Although
preceded by proper advertisement and publication, an auction
sale is void absent an actual notice to a delinquent taxpayer. (Tan
v. Bantequi, 473 SCRA 663 [2005])
Injunction Against Collection of Taxes
Sec. 11 of RA 9282, which amended RA 1125 (The Law

Creating the Court of Tax Appeals) provides:
Sec. 11. Who may Appeal; Mode of Appeal; Effect

of Appeal; —
xxxx
No appeal taken to the Court of Appeals from
the Collector of Internal Revenue x x x shall suspend
the payment, levy, distraint, and /or sale of any
property for the satisfaction of his tax liability as
provided by existing law: Provided, however. That
when in the opinion of the Court the collection
by the aforementioned government agencies may
jeopardize the interest of the Government and/or the
taxpayer the Court at any stage of the processing may
suspend the collection and require the taxpayer either
to deposit the amount claimed or to file a surety bond
for not more than double the amount with the Court.
(Emphasis supplied)
G r o u n d s for Issuance of a Writ of Preliminary Injunction.
Section 3, Rule 58, of the Rules of Court, provides:
SEC. 3. Grounds for issuance of preliminary injunction. —

A preliminary injunction may be granted by the court when
it is established:
Chapter 6
245
LOCAL TAXATION
(a) That the applicant is entitled to the relief

demanded, and the whole or part of such relief consists
in restraining the commission or continuance of the acts
complained of, or in the performance of an act or acts, either
for a limited period or perpetually;
(b) That the commission, continuance or non-
performance of the act or acts complained of during the
litigation would probably work injustice to the applicant; or
(c) That a party, court, or agency or a person is doing,
threatening, or attempting to do, or is procuring or suffering
to be done, some act or acts probably in violation of the
rights of the applicant respecting the subject of the action or
proceeding, and tending to render the judgment ineffectual.
Requisites
The requisites for the issuance of a writ of preliminary

injunction are:
1. The existence of a clear and unmistakable right that
must be protected; and
2. An urgent and paramount necessity for the writ to
prevent serious damage.
In Talento v. Escalada, Jr., and Petron Corporation (556
SCRA 491 [2008]), the urgency and paramount necessity for the
issuance of a writ of injunction becomes relevant in the instant
case considering that what is being enjoined is the sale by public
auction of the properties of Petron amounting to at least PI .7
billion and which properties are vital to its business operations.
If at all, the repercussions and far-reaching implications of the
sale of these properties on the operations of Petron merit the
issuance of a writ of preliminary injunction in its favor.
In addition to the fact that the issues raised by the
respondent would have a direct impact on the validity of the
assessment made by the petitioner, [the Court] also note[s] that
respondent has posted a surety bond equivalent to the amount
of the assessment due. The Rules of Procedure of the LBAA,
particularly Sec. 7, Rule V thereof, provides:
246 TAX 2 REVEALED
Section 7. Effect of Appeal on Collection of Taxes. — An

appeal shall not suspend the collection of the corresponding
realty taxes on the real property subject of the appeal as
assessed by the Provincial, City or Municipal Assessor,
without prejudice to the subsequent adjustment depending
upon the outcome of the appeal. An appeal may be
entertained but the hearing thereof shall be deferred until
the corresponding taxes due on the real property subject
of the appeal shall have been paid under protest or the
petitioner shall have given a surety bond, subject to the
following conditions:
1. The amount of the bond must not be less than
the total realty taxes and penalties due as assessed by the
assessor nor more than double said amount;
2. The bond must be accompanied by a certification
from the Insurance Commissioner:
a. That the surety is duly authorized to issue
such bond;
b. That the surety bond is approved by and
registered with said Commission; and
c. That the amount covered by the surety bond
is within the writing capacity of the surety company;
and
3. The amount of the bond in excess of the surety
company's writing capacity, if any, must be covered by
Reinsurance Binder, in which case, a certification to this
effect must likewise accompany the surety bond.
Chapter 7
TARIFF AND CUSTOM DUTIES
THE BUREAU OF CUSTOMS
Chief Officials of B u r e a u of C u s t o m s
The Bureau of Customs shall have one chief and one assistant
chief, to be known respectively as the Commissioner (hereinafter
known as the "Commissioner") and Assistant Commissioner
of Customs, who shall each receive an annual compensation
in accordance with the rates prescribed by existing laws. The
Assistant Commissioner of Customs shall be appointed by the
proper department head. (Sec. 601, TCC)
Functions of t h e B u r e a u
The general duties, powers and jurisdiction of the bureau

shall include:
a. The assessment and collection of the lawful
revenues from imported articles and all other dues, fees,
charges, fines and penalties accruing under the tariff and
customs laws;
b. The prevention and suppression of smuggling
and other frauds upon the customs;
c. The supervision and control over the entrance
and clearance of vessels and aircraft engaged in foreign
commerce;
d. The general supervision, control and regulation
of vessels engaged in the carrying of passengers and freight
or in towage in coastwise trade and in the bays and rivers of
the Philippines;
247
248 TAX 2 REVEALED
e. The prohibition and suppression of unnecessary

noises, such as explosion of gasoline engines, the excessive
blowing of whistles or sirens, and other needless and
disturbing sounds made by water craft in the ports of the
Philippines or in parts of rivers included in such ports;
f. The exclusion, if the conditions of traffic should
at any time so require, of vessels of more than one hundred
and fifty tons from entering, berthing or mooring in the
Pasig River;
g. The admeasurement, registration, documenting
and licensing of vessels built or owned in the Philippines,
the recording of sales, transfers and encumbrances of such
vessels, and the performance of all the duties pertaining to
marine registry;
h. The inspection of Philippine vessels, and supervi-
sion over the safety and sanitation of such vessels;
i. The enforcement of the lawful quarantine regula-
tions for vessels entering Philippine ports;
j. The enforcement of the tariff and customs laws
and all other laws, rules and regulations relating to the tariff
and customs administration;
k. The licensing of marine officers who have
qualified in the examination required by law to be carried on
Philippine vessels, the determination of the qualifications of
pilots, the regulation of this service, and the fixing of the
fees which they may charge; and
1. The supervision and control over the handling of
foreign mails arriving in the Philippines, for the purpose of
the collection of the lawful duty on dutiable articles thus
imported and the prevention of smuggling through the
medium of such mails. (Sec. 602, TCC)
Delegation of Tariff P o w e r s to the President

Section 28 of the Constitution provides:
"(2) The Congress may, by law, authorize the President
to fix within specified limits, and subject to such limitations
Chapter 7 249
and restrictions as it may impose, tariff rates, import and

export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national
development program of the Government."
In Southern Cross Cement Corporation v. Cement Manu-

facturers Association of the Philippines (465 SCRA 537 [2005]),
the Court acknowledges the basic postulates ingrained in the
provision, and, hence, governing in this case. They are:
1. It is Congress which authorizes the President
to impose tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts. Thus, the
authority cannot come from the Finance Department, the
National Economic Development Authority, or the World
Trade Organization, no matter how insistent or persistent
these bodies may be.
2. The authorization granted to the President must
be embodied in a law. Hence, the justification cannot be
supplied simply by inherent executive powers. It cannot
arise from administrative or executive orders promulgated
by the executive branch or from the wisdom or whim of the
President.
3. The authorization to the President can be
exercised only within the specified limits set in the law
and is further subject to limitations and restrictions which
Congress may impose. Consequently, if Congress specifies
that the tariff rates should not exceed a given amount, the
President cannot impose a tariff rate that exceeds such
amount. If Congress stipulates that no duties may be
imposed on the importation of corn, the President cannot
impose duties on corn, no matter how actively the local corn
producers lobby the President. Even the most picayune of
limits or restrictions imposed by Congress must be observed
by the President.
There is one fundamental principle that animates these
constitutional postulates. These impositions under Sec. 28(2),
Art. VI fall within the realm of the power of taxation, a power
TAX 2 REVEALED
250
which is within the sole province of the legislature under the

Constitution.
Without Sec. 28(2), Article VI, the executive branch has
no authority to impose tariffs and other similar tax levies
involving the importation of foreign goods. Assuming that Sec.
28(2) Article VI did not exist, the enactment of the Republic Act
No. 8800, the Safeguard Measures Act (SMA) by Congress would
be voided on the ground that it would constitute an undue
delegation of the legislative power to tax. The constitutional
provision shields such delegation from constitutional infirmity,
and should be recognized as an exceptional grant of legislative
power to the President, rather than the affirmation of an inherent
executive power.
Territorial Jurisdiction
For due and effective exercise of the powers conferred by

law and to the extent requisite therefor, said bureau shall have:
1. The right of supervision and police authority over all
seas within the jurisdiction of the Philippines;
2. Over all coasts, ports, airports, harbors, bays, rivers;
and
3. Inland waters navigable from the sea.
When a vessel becomes subject to seizure by reason of an act
done in Philippine waters in violation of the tariff and customs
laws, a pursuit of such vessel begun within the jurisdictional
waters may continue beyond the maritime zone, and the vessel
may be seized on the high sea. Imported articles which may be
subject to seizure for violation of the tariff and customs laws may
be pursued in their transportation in the Philippines by land,
water or air and such jurisdiction exerted over it at any place
therein as may be necessary for the due enforcement of the law.
(Sec. 603, TCC)
Jurisdiction over P r e m i s e s U s e d for C u s t o m s P u r p o s e s
The Bureau of Customs shall, for customs purposes, have

exclusive control, direction and management of:
Chapter 7
251
1. Custom-houses,
2. Warehouses,
3. Offices,
4. Wharves, and
5. Other premises in the respective ports of entry, in all
cases without prejudice to the general police powers
of the city or municipality wherein such premises are
situated. (Sec. 604, TCC)
P o w e r of t h e President to S u b j e c t P r e m i s e s to Jurisdiction
of Bureau of Customs
When any public wharf, landing place, street or land, not

previously under the jurisdiction of the Bureau of Customs, in
any port of entry, is necessary or desirable for any proper customs
purpose, the President of the Philippines may, by executive
order, declare such premises to be under the jurisdiction of the
Bureau of Customs, and thereafter the authority of such Bureau
in respect thereto shall be fully effective. (Sec. 606, TCC)
Unlawful Importation or S m u g g l i n g
Unlawful importation means:

1. Any person who shall fraudulently import or bring
into the Philippines, or
2. Assist in so doing, any article, contrary to law, or
3. Shall receive, conceal, buy, sell, or in any manner
facilitate the transportation, concealment, or
4. Sale of such article after importation, knowing the
same to have been imported contrary to law, shall be
guilty of smuggling. (Sec. 3601, TCC)
When, upon trial for a violation of this section, the defendant
is shown to have had possession of the article in question,
possession shall be deemed sufficient evidence to authorize
conviction, unless the defendant shall explain the possession
to the satisfaction of the court. Provided, however, That payment
TAX 2 REVEALED
252
of the tax due after apprehension shall not constitute a valid

defense in any prosecution under this section." (As amended by
RA 4712 effective June 18, 1966) (Ramos v. Pamaran, G.R. No.
L-38271 [1974])
In Jardeleza v. People (G.R. No. 165265 [2006]), the accused
did, bring or import into the Philippines in a fraudulent and
illegal manner a total of TWENTY POINT ONE (20.1) kilograms
of assorted gold jewelry with an estimated value of P7,562,231.50
by hiding said jewelry inside a hanger bag and, thereafter, by not
declaring it in the Customs Declaration form and, likewise, by
verbally denying that she is carrying said items by answering
NO when asked by Bureau of Customs if she has anything to
declare prior to the actual inspection of her luggage.
What made the act punishable under Sec. 3601 of the TCC
was her failure to declare the items in the Customs Declaration
Form as required under Sec. 2505 of the TCC, thus, making
petitioner's act contrary to law. In other words, the phrase
"contrary to law" refers to the petitioner's act, and not to dutiable
goods brought into the country.
"SEC. 2505. Failure to Declare Baggage. - Whenev-

er any dutiable article is found in the baggage of any
person arriving within the Philippines which is not
included in the baggage declaration, such article shall
be seized and the person in whose baggage it is found
may obtain release of such article, if not imported
contrary to any law, upon payment of treble and ap-
praised value of such article plus all duties, taxes and
other charges due thereon unless it shall be established
to the satisfaction of the Collector that the failure to
mention or declare said dutiable article was without
fraud."
A person arriving in the Philippines with baggages

containing dutiable articles is bound to declare the same in all
respects. In order to meet the convenience of the travelers, a simple
and more expeditious method of customs clearance is provided
for baggages occupying the passage therein for goods imported
in the regular manner. Official entry forms and forms of baggage
Chapter 7 253
declaration are supplied to the passengers to be filled [out] before

the customs officer. The traveler has the burden of carrying
forward items that have to be declared before examination of the
cargo has begun. Adequate reporting of dutiable merchandise
being brought into the country is absolutely necessary to the
enforcement of customs laws, and failure to comply with those
requisites is as condemnable as failure to pay customs fees.
R e w a r d to P e r s o n s Instrumental in the Discovery and

Seizure of S m u g g l e d G o o d s
To encourage the public and law-enforcement personnel

to extend full cooperation and do their utmost in stamping out
smuggling, a cash reward [equivalent] to twenty per centum of
the fair market value of the smuggled and confiscated goods
shall be given to the officers and men and informers who are
instrumental in the discovery and seizure of such goods in
accordance with the rules and regulations to be issued by the
Secretary of Finance. (Sec. 3513, TCC)
Collector of C u s t o m s at Port of Entry
At each principal port of entry, there shall be a Collector of

Customs (hereinafter known as the "Collector") who shall be:
1. Responsible to the Commissioner, and who shall be
the official head of the customs service in his port and
district.
2. The Collector shall have jurisdiction over all matters
arising from the enforcement of tariff and customs
laws within his collection district.
Provided, however, That the Commissioner shall have the
authority to review any such action upon appeal as provided in
Sec. 2313 of this Code. No appointment to any position under
the Collector shall be made without the recommendation of the
Collector concerned. (Sec. 703, TCC)
Authority of Collector to Remit Duties

A Collector shall have discretionary authority to remit the
assessment and collection of customs duties, taxes and other
254 TAX 2 REVEALED
charges when the aggregate amount of such duties, taxes and

other charges is less than ten pesos, and he may dispense with
the seizure of articles of less than ten pesos in value except in
cases of prohibited importations or the habitual or intentional
violation of the tariff and customs laws. (Sec. 709, TCC)
Jurisdiction of Collector Over Importation of Articles
The Collector:
1. Shall cause all articles entering the jurisdiction of his
district and destined for importation through his port
to be entered at the customhouse;
2. Shall cause all such articles to be appraised and
classified;
3. Shall assess and collect the duties, taxes and other
charges thereon; and
4. Shall hold possession of all imported articles upon
which duties, taxes, and other charges have not been
paid or secured to be paid, disposing of the same
according to law. (Sec. 1206, TCC)
Jurisdiction of Collector O v e r Articles of Prohibited Impor-

tation
Where articles are of prohibited importation or subject to

importation only upon conditions prescribed by law, it shall
be the duty of the Collector to exercise such jurisdiction in
respect thereto as will prevent importation or otherwise secure
compliance with all legal requirements. (Sec. 1207, TCC)
IMPORTATION IN GENERAL
Articles to be I m p o r t e d only t h r o u g h C u s t o m h o u s e
All articles imported into the Philippines, whether subject

to duty or not, shall be entered through a custom house at a port
of entry. (Sec. 1201, TCC)
Chapter 7 255
W h e n Importation B e g i n s a n d D e e m e d Terminated
1. Importation begins when the carrying vessel or aircraft

enters the jurisdiction of the Philippines with intention to unlade
therein.
2. Importation is deemed terminated upon payment
of the duties, taxes and other charges due upon the articles, or
secured to be paid, at a port of entry and the legal permit for
withdrawal shall have been granted, or in case said articles are
free of duties, taxes and other charges, until they have legally left
the jurisdiction of the customs. (Sec. 1202, TCC)
O w n e r o f I m p o r t e d Articles
All articles imported into the Philippines shall:

1. Be held to be the property of the person to whom the
same are consigned; and
2. The holder of a bill of lading duly indorsed by the
consignee therein named, or,
3. If consigned to order, by the consignor, shall be deemed
the consignee thereof.
4. The underwriters of abandoned articles and the salvors
of articles saved from a wreck at sea, along a coast or
in any area of the Philippine may be regarded as the
consignees. (Sec. 1203, TCC)
Liability of Importer for Duties

Unless relieved by laws or regulations, the liability for duties,
taxes, fees and other charges attaching on importation constitutes
a personal debt due from the importer to the government which
can be discharged only by payment in full of all duties, taxes, fees
and other charges legally accruing. It also constitutes a lien upon
the articles imported which may be enforced while such articles
are in custody or subject to the control of the government. (Sec.
1204, TCC)
Import duties constitute a personal debt of the importer that
must be paid in full - the importer's liability constitutes a lien on
256 TAX 2 REVEALED
the article, and if the Bureau of Customs release the goods, its
lien over the imported goods are extinguished. (Pilipinas Shell
Petroleum Corporation v. Republic, 547 SCRA 701 [2009])
Importations by the G o v e r n m e n t
Except as otherwise specifically provided, all importations
by the government for its own use or that of its subordinate
branches on instrumentalities, or corporations, agencies or
instrumentalities owned or controlled by the government, shall
be subject to the duties, taxes, fees and other charges provided
for in this Code: Provided, however, That upon certification of the
head of the department or political subdivision concerned, with
the approval of the Auditor General, that the imported article
is actually being used by the government or any of its political
subdivision concerned, the amount of duty, tax, fee or charge
shall be refunded to the government or the political subdivision
which paid it. (Sec. 1205, TCC)
Imported Articles to be R e c e i v e d in G e n e r a l O r d e r Stores
Unless otherwise directed by the Collector, all articles

except bulk cargo shall be received in general order stores. (Sec.
1208, TCC)
Persons A u t h o r i z e d to M a k e Import Entry
Imported articles must be entered in the custom house at

the port of entry within fifteen days from the date of discharge of
the last package from the vessel either:
a. By the importer, being holder of the bill of lading,
b. By any other holder of the bill of lading in due course,
c. By a customs broker acting under authority from a
holder of the bill, or
d. By a person duly empowered to act as agent or attorney-
in-fact for such holder: Provided, That the Collector
may grant an extension of not more than fifteen days.
(Sec. 1301, TCC)
Chapter 7
257
In Chevron Philippines, Inc. v. Commissioner of Bureau

of Custom (G.R. No. 178759 [20081), the petitioner's failure to file
the required entries within a non-extendible period of thirty days
from the date of discharge of the last package from the carrying
vessel constituted implied abandonment of its oil importations.
This means that from the precise moment that the non-extendible
thirty-day period lapsed, the abandoned shipments were deemed
(that is, they became) the property of the government. Therefore,
when petitioner withdrew the oil shipments for consumption,
it appropriated for itself the properties which already belonged
to the government. Accordingly, it became liable for the total
dutiable value of the shipments of imported crude oil.
The term "entry" in customs law has a triple meaning. It
means
1. The documents filed at the customs house;
2. The submission and acceptance of the documents; and
3. The procedure of passing goods through the customs
house. (Supra)
Import Entries
All imported articles, except importations admitted free

of duty under Subsection "k," Sec. 105 of this Code, shall be
subject to a formal or informal entry. Articles of a commercial
nature intended for sale, barter or hire, the dutiable value of
which is Two thousand pesos (P2,000.00) or less, land personal
and household effects or articles, not in commercial quantity,
imported in passenger's baggage, mail or otherwise, for personal
use, shall be cleared on an informal entry whenever duty, tax or
other charges are collectible.
The Commissioner may, upon instruction of the Secretary
of Finance, for the protection of domestic industry or of the
revenue, require a formal entry, regardless of value, whatever be
the purpose and nature of the importation.
A formal entry may be for immediate consumption, or under
irrevocable domestic letter of credit, bank guarantee or bond for:
a. Placing the article in customs bonded warehouse;
258 TAX 2 REVEALED
b. Constructive warehousing and immediate transpor-

tation to other port of the Philippines upon proper
examination and appraisal; or
c. Constructive warehousing and immediate exportation.
Import entries under irrevocable domestic letter of credit,
bank guarantee or bond shall be subject to the provisions of Title
V, Book II of this Code.
All importations entered under formal entry shall be covered
by a letter of credit or any other verifiable document evidencing
payment. (Sec. 1302, TCC as amended)
Examination of Imported Articles
The imported articles shall in any case be subject to the

regular physical examination when:
1. the government surveyor's seal on the container has
been tampered with or broken, or the container shows
signs of having been opened or having its identity
changed;
2. the container is leaking or damaged;
3. the number, weight and nature of packages indicated
in the customs entry declaration and supporting
documents differ from that in the manifest;
4. the shipment is covered by alert /hold orders issued
pursuant to existing orders;
5. the importer disagrees with the findings as contained
in the government surveyor's report; or
6. the articles are imported through air freight where the
Commissioner or Collector has knowledge that there
is a variance between the declared and true quantity,
measurement, weight, and tariff classification. (Sec.
1401, TCC)
Duties of C u s t o m s Officer Tasked to E x a m i n e , Classify, a n d

Appraise Imported Articles
The customs officer tasked to examine, classify, and appraise

imported articles:
Chapter 7 259
1. Shall determine whether the packages designated for

examination and their contents are in accordance with
the declaration in the entry, invoice and other pertinent
documents;
2. Shall make return in such a manner as to indicate
whether the articles have been truly and correctly
declared in the entry as regard their quantity,
measurement, weight, and tariff classification and not
imported contrary to law; and
3. He shall submit samples to the laboratory for analysis
when feasible to do so and when such analysis is
necessary for the proper classification, appraisal, and /
or admission into the Philippines of imported articles.
Likewise, the customs officer shall determine the unit of
quantity in which they are usually bought and sold, and appraise
the imported articles in accordance with Sec. 201 of this Code.
Failure on the part of the customs officer to comply with his
duties shall subject him to the penalties prescribed under Sec.
3604 of this Code. (Sec. 1403, TCC; PD 1464 as amended)
Imported Articles Subject to Duty
All articles, when imported from any foreign country into

the Philippines, shall be subject to duty upon each importation,
even though previously exported from the Philippines, except as
otherwise specifically provided for in this Code or in other laws.
(Sec. 101, TCC)
Prohibited Importations
The importation into the Philippines of the following articles
is prohibited:
a. Dynamite, gunpowder, ammunitions and other explo-
sives, firearms and weapons of war, and parts thereof,
except when authorized by law.
b. Written or printed articles in any form containing any
matter advocating or inciting treason, or rebellion,
TAX 2 REVEALED
260
or insurrection, sedition or subversion against the

Government of the Philippines, or forcible resistance to
any law of the Philippines, or containing any threat to
take the life of, or inflict bodily harm upon any person
in the Philippines.
c. Written or printed articles, negatives or cinemato-
graphic film, photographs, engravings, lithographs,
objects, paintings, drawings or other representation of
an obscene or immoral character.
d. Articles, instruments, drugs and substances designed,
intended or adapted for producing unlawful abortion,
or any printed matter which advertises or describes or
gives directly or indirectly information where, how, or
by whom unlawful abortion is produced.
e. Roulette wheels, gambling outfits, loaded dice, marked
cards, machines, apparatus or mechanical devices
used in gambling or the distribution of money, cigars,
cigarettes or other articles when such distribution is
dependent on chance, including jackpot and pinball
machines or similar contrivances, or parts thereof.
f. Lottery and sweepstakes tickets except those authorized
by the Philippine Government, advertisements thereof,
and lists of drawings therein.
g. Any article manufactured in whole or in part of gold,
silver or other precious metals or alloys thereof, the
stamps brands or marks or which do not indicate the
actual fineness of quality of said metals or alloys.
h. Any adulterated or misbranded articles of food or any
adulterated or misbranded drug in violation of the
provisions of the "Food and Drugs Act."
i. Marijuana, opium, pipes, coca leaves, heroin or any
other narcotics or synthetic drugs which are or may
hereafter be declared habit forming by the President
of the Philippines, or any compound, manufactured
salt, derivative, or preparation thereof, except when
Chapter 7
261
imported by the Government of the Philippines or

any person duly authorized by the Dangerous Drugs
Board, for medicinal purposes only.
j. Opium pipes and parts thereof, of whatever material.
k. All other articles and parts thereof, the importation
of which prohibited by law or rules and regulations
issued by competent authority. (As amended by PD 34;
Sec. 101, TCC)
Conditionally-Free Importations
The following articles shall be exempt from the payment of

import duties upon compliance with the formalities prescribed
in, or with, the regulations which shall be promulgated by the
Commissioner of Customs with the approval of the Secretary of
Finance; Provided, That any article sold, bartered, hired or used
for purposes other than that they were intended for without
prior payment of the duty, tax or other charges which would
have been due and payable at the time of entry if the article had
been entered without the benefit of this section, shall be subject
to forfeiture and the importation shall constitute a fraudulent
practice against customs revenue punishable under Sec. 3602, as
amended of this Code: Provided, further, That a sale pursuant to a
judicial order or in liquidation of the estate of a deceased person
shall be subject to the preceding proviso, without prejudice to
the payment of duties, taxes and other charges: Provided, finally,
That the President may upon recommendation of the Secretary
of Finance, suspend, disallow or completely withdraw, in whole
or in part, any of the conditionally-free importation under this
section:
a. Aquatic products (e.g., fishes, crustaceans, mollusks,
marine animals, seaweeds, fish oil, roe) caught or
gathered by fishing vessels of Philippine registry:
Provided, That they are imported in such vessels or in
crafts attached thereto: And provided, further, That they
have not been landed in any foreign territory or, if so
landed, they have been landed solely for transshipment
without having been advanced in condition;
TAX 2 REVEALED
Equipment for use in the salvage of vessels or aircrafts,

not available locally, upon identification and the giving
of a bond in an amount equal to one and one-half times
b the ascertained duties, taxes and other charges thereon,
conditioned for the exportation thereof or payment
of the corresponding duties, taxes and other charges
within six (6) months from the date of acceptance
of the import entry: Provided, That the Collector of
Customs may extend the time for exportation or
payment of duties, taxes and other charges for a term
not exceeding six (6) months from the expiration of the
original period;
Cost of repairs, excluding the value of the article used,
made in foreign countries upon vessels or aircraft
documented, registered or licensed in the Philippines,
upon proof satisfactory to the Collector of Customs (1)
that adequate facilities for such repairs are not afforded
in the Philippines, or (2) that such vessels or aircrafts,
c while in the regular course of her voyage or flight was
compelled by stress of weather or other casualty to
put into a foreign port to make such repairs in order
to secure the safety, seaworthiness or airworthiness of
the vessel or aircraft to enable her to reach her port of
destination;
Articles brought into the Philippines for repair,

processing or reconditioning to be re-exported upon
completion of the repair, processing or reconditioning:
Provided, That the Collector of Customs shall require
d the giving of a bond in an amount equal to one and
one-half times the ascertained duties, taxes and other
charges thereon, conditioned for the exportation
thereof or payment of the corresponding duties, taxes
and other charges within six (6) months from the date
of acceptance of the import entry;
Medals, badges, cups and other small articles bestowed
e as trophies or prizes, or those received or accepted as
honorary distinction;
Chapter 7 263
f. Personal and household effects belonging to

residents of the Philippines returning from abroad
including jewelry, precious stones and other articles
of luxury which were formally declared and listed
before departure and identified under oath before
the Collector of Customs when exported from the
Philippines by such returning residents upon their
departure therefrom and during their stay abroad;
personal and household effects including wearing
apparel, articles of personal adornment (except
luxury items), toilet articles, portable appliances and
instruments and similar personal effects, excluding
vehicles, watercrafts, aircrafts, and animals purchased
in foreign countries by residents of the Philippines
which were necessary, appropriate and normally used
for the comfort and convenience in their journey and
during their stay abroad upon proof satisfactory to the
Collector of Customs that same have been in their use
abroad for more than six (6) months and accompanying
them on their return, or arriving within a reasonable
time which, barring unforeseen circumstances, in
no case shall exceed ninety (90) days before or after
the owners' return: Provided, That the personal and
household effects shall neither be in commercial
quantities nor intended for barter, sale or hire and that
the total dutiable value of which shall not exceed two
thousand pesos (P2,000.00): Provided further, That the
returning residents have not previously received the
benefit under this section within one year from and
after the last exemption granted: Provided furthermore,
That a fifty (50) per cent ad valorem duty across the
board shall be levied and collected on the personal and
household effects (except luxury items) in excess of
two thousand pesos (P2,000.00): And provided, finally,
That the personal and household effects (except luxury
items) of a returning resident who has not stayed
abroad for six (6) months shall be subject to fifty (50)
per cent ad valorem duty across the board, the total
264 TAX 2 REVEALED
dutiable value of which does not exceed two thousand

pesos (P2,000.00); any excess shall be subject to the
corresponding duty provided in this Code;
g. Wearing apparel, articles of personal adornment, toilet
articles, portable tools and instruments, theatrical
costumes and similar effects accompanying travelers,
or tourists or arriving within a reasonable time before
and after their arrival in the Philippines, which are
necessary and appropriate for the wear and use of
such persons according to the nature of the journey,
their comfort and convenience: Provided, That this
exemption shall not apply to articles intended for other
persons or for barter, sale or hire: Provided, further, That
the Collector of Customs may, in his discretion, require
either a written commitment or a bond in an amount
equal to one and one-half times the ascertained duties,
taxes and other charges conditioned for the exportation
thereof or payment of the corresponding duties, taxes
and other charges within three (3) months from the
date of acceptance of the import entry: And provided
finally, That the Collector of Customs may extend the
time for exportation or payment of duties, taxes and
other charges for a term not exceeding three (3) months
from the expiration of the original period;
g-1. Personal and household effects and vehicles belonging
to foreign consultants and experts hired by, and/or
rendering service to, the government, and their staff
or personnel and families, accompanying them or
arriving within a reasonable time before or after their
arrival in the Philippines, in quantities and of the
kind necessary and suitable to the profession, rank
or position of the person importing them, for their
own use and not for barter, sale or hire provided that,
the Collector of Customs may in his discretion require
either a written commitment or a bond in an amount
equal to one and one-half times the ascertained duties,
taxes and other charges upon the articles classified
under this subsection; conditioned for the exportation
Chapter 7 265
thereof or payment of the corresponding duties,

taxes and other charges within six (6) months after
the expiration of their term or contract; And provided,
finally, That the Collector of Customs may extend the
time for exportation or payment of duties, taxes and
other charges for term not exceeding six (6) months
from the expiration of the original period;
Professional instruments and implements, tools of
trade, occupation or employment, wearing apparel,
domestic animals, and personal and household effects
belonging to persons coming to settle in the Philippines
or Filipinos and/or their families and descendants who
are now residents or citizens of other countries, such
parties hereinafter referred to as Overseas Filipinos, in
quantities and of the class suitable to the profession,
rank or position of the persons importing them, for
their own use and not for barter or sale, accompanying
such persons, or arriving within a reasonable time,
in the discretion of the Collector of Customs, before
or after the arrival of their owners, which shall not
be later than February 28, 1979 upon the production
of evidence satisfactory to the Collector of Customs
that such persons are actually coming to settle in the
Philippines, that change of residence was bona fide
and that the privilege of free entry was never granted
to them before or that such person qualifies under the
provisions of Letters of Instructions 105, 163 and 210,
and that the articles are brought from their former place
of abode, shall be exempt from the payment of customs
duties and taxes: Provided, That vehicles, vessels,
aircrafts, machineries and other similar articles for use
in manufacture, shall not be classified hereunder;
Articles used exclusively for public entertainment,
and for display in public expositions, or for exhibition
or competition for prizes, and devices for projecting
pictures and parts and appurtenances thereof, upon
identification, examination, and appraisal and the
TAX 2 REVEALED
giving of a bond in an amount equal to one and one-

half times the ascertained duties, taxes and other
charges thereon, conditioned for exportation thereof
or payment of the corresponding duties, taxes and
other charges within six (6) months from the date
of acceptance of the import entry; Provided, That
the Collector of Customs may extend the time for
exportation or payment of duties, taxes and other
charges for a term not exceeding six (6) months from
the expiration of the original period; and technical and
scientific films when imported by technical, cultural
and scientific institutions, and not to be exhibited for
profit: Provided, further, That if any of the said films
is exhibited for profit, the proceeds therefrom shall
be subject to confiscation, in addition to the penalty
provided under Sec. 3610 as amended, of this Code;
Articles brought by foreign film producers directly

and exclusively used for making or recording motion
picture films on location in the Philippines, upon
their identification, examination and appraisal, and
the giving of a bond in an amount equal to one and
one-half times the ascertained duties, taxes and other
charges thereon, conditioned for exportation thereof or
payment of the corresponding duties, taxes and other
charges within six (6) months from the date of acceptance
of the import entry, unless extended by the Collector
of Customs for another six (6) months; photographic
and cinematographic films, undeveloped, exposed
outside the Philippines by resident Filipino citizens
or by producing companies of Philippine registry
where the principal actors and artists employed for
the production are Filipinos, upon affidavit by the
importer and identification that such exposed films
are the same films previously exported from the
Philippines. As used in this paragraph, the terms
"actors" and "artists" include the persons operating
the photographic cameras or other photographic and
sound recording apparatus by which the film is made;
Chapter 7
267
k. Importations for the official use of foreign embassies,

legations, and other agencies of foreign governments:
Provided, That those foreign countries accord like
privileges to corresponding agencies of the Philippines;
Articles imported for the personal or family use
of the members and attaches of foreign embassies,
legations, consular officers and other representatives
of foreign governments: Provided, That such privilege
shall be accorded under special agreements between
the Philippines and the countries which they represent:
And Provided, further, That the privilege may be
granted only upon specific instructions of the Secretary
of Finance in each instance which will be issued only
upon request of the Department of Foreign Affairs;
1. Imported articles donated to, or for the account of,
any duly registered relief organization, not operated
for profit, for free distribution among the needy, upon
certification by the Department of Social Services and
Development or the Department of Education, Culture
and Sports, as the case may be;
m. Containers, holders and other similar receptacles of
any material including kraft paper bags for locally
manufactured cement for export, including corrugated
boxes for bananas, mangoes, pineapples and other
fresh fruits for export, except other containers made of
paper, paperboard and textile fabrics, which are of such
character as to be readily identifiable and/or reusable
for shipment or transportation of goods shall be
delivered to the importer thereof upon identification,
examination and appraisal and the giving of a bond
in an amount equal to one and one-half times the
ascertained duties, taxes and other charges within six
(6) months from the date of acceptance of the import
entry;
n. Supplies which are necessary for the reasonable
requirements of the vessel or aircraft in her voyage
or flight outside the Philippines, including articles
TAX 2 REVEALED
transferred from a bonded warehouse in any collection

district to any vessel or aircraft engaged in foreign
trade, for use or consumption of the passengers or
its crew on board such vessel or aircrafts as sea or air
stores; or articles purchased abroad for sale on board a
vessel or aircraft as saloon stores or air store supplies:
Provided, That any surplus or excess of such vessel or
aircraft supplies arriving from foreign ports or airports
shall be dutiable;
Articles and salvage from vessels recovered after a
period of two (2) years from the date of filing the
marine protest or the time when the vessel was
wrecked or abandoned, or parts of a foreign vessel
or her equipment, wrecked, abandoned in Philippine
waters or elsewhere: Provided, That articles and salvage
recovered within the said period oftwo (2) years shall
be dutiable;
Coffins or urns containing human remains, bones
or ashes, used personal and household effects (not
merchandise) of the deceased person, except vehicles,
the value of which does not exceed ten thousand pesos
(P10,000.00), upon identification as such;
Samples of the kind, in such quantity and of such
dimension or construction as to render them unsalable
or of no appreciable commercial value; models not
adapted for practical use; and samples of medicines,
properly marked "sample-sale punishable by law,"
for the purpose of introducing a new article in the
Philippine market and imported only once in a
quantity sufficient for such purpose by a person duly
registered and identified to be engaged in that trade:
Provided, That importations under this subsection shall
be previously authorized by the Secretary of Finance:
Provided, however, That importation of sample medicine
shall be previously authorized by the Secretary of
Health that such samples are new medicines not
available in the Philippines: Provided, finally, That
Chapter 7 269
samples not previously authorized and /or properly

marked in accordance with this section shall be levied
the corresponding tariff duty.
Commercial samples, except those that are not
readily and easily identifiable [e.g., precious and semi-
precious stones, cut or uncut, and jewelry set with
precious stones), the value of any single importation of
which does not exceed ten thousand pesos (P10,000.00)
upon the giving of a bond in an amount equal to twice
the ascertained duties, taxes and other charges thereon,
conditioned for the exportation of said samples within
six (6) months from the date of the acceptance of the
import entry or in default thereof, the payment of the
corresponding duties, taxes and other charges. If the
value of any single consignment of such commercial
samples exceeds ten thousand pesos (P10,000.00), the
importer thereof may select any portion of same not
exceeding in value of ten thousand pesos (P10,000.00)
for entry under the provision of this subsection, and
the excess of the consignment may be entered in bond,
or for consumption, as the importer may elect;
r. Animals (except race horses), and plants for scientific,
experimental, propagation, botanical, breeding,
zoological and national defense purposes: Provided,
That no live trees, shoots, plants, moss, and bulbs,
tubers and seeds for propagation purposes may be
imported under this section, except by order of the
Government or other duly authorized institutions:
Provided, further, That the free entry of animals for
breeding purposes shall be restricted to animals of
recognized breed, duly registered in the book of
record established for that breed, certified as such by
the Bureau of Animal Industry: Provided, furthermore,
That certificate of such record, and pedigree of such
animal duly authenticated by the proper custodian of
such book of record, shall be produced and submitted
to the Collector of Customs, together with affidavit of
the owner or importer, that such animal is the animal
TAX 2 REVEALED
described in said certificate of record and pedigree:

And provided, finally, That the animals and plants are
certified by the National Economic and Development
Authority as necessary for economic development;
Economic, technical, vocational, scientific, philosophi-
cal, historical, and cultural books and/or publica-
tions: Provided, That those which may have already
been imported but pending release by the Bureau of
Customs at the effectivity of this Decree may still en-
joy the privilege herein provided upon certification
by the Department of Education, Culture and Sports
that such imported books and/or publications are for
economic, technical, vocational, scientific, philosophi-
cal, historical or cultural purposes or that the same are
educational, scientific or cultural materials covered by
the International Agreement on Importation of Educa-
tional Scientific and Cultural Materials signed by the
President of the Philippines on August 2,1952, or other
agreements binding upon the Philippines.
Educational, scientific and cultural materials
covered by international agreements or commitments
binding upon the Philippine Government so certified
by the Department of Education, Culture and Sports.
Bibles, missals, prayer books, Koran, Ahadith and
other religious books of similar nature and extracts
therefrom, hymnal and hymns for religious uses;
Philippine articles previously exported from the Phil-
ippines and returned without having been advanced in
value or improved in condition by any process of man-
ufacture or other means, and upon which no drawback
or bounty has been allowed, including instruments
and implements, tools of trade, machinery and equip-
ment, used abroad by Filipino citizens in the pursuit
of their business, occupation or profession; and for-
eign articles previously imported when returned after
having been exported and loaned for use temporarily
Chapter 7
271
abroad solely for exhibition, testing and experimenta-

tion, for scientific or educational purposes; and foreign
containers previously imported which have been used
in packing exported Philippine articles and returned
empty if imported by or for the account of the person
or institution who exported them from the Philippines
and not for sale, barter or hire subject to identification:
Provided, That any Philippine article falling under this
subsection upon which drawback or bounty has been
allowed shall, upon re-importation thereof, be subject
to a duty under this subsection equal to the amount of
such drawback or bounty;
u. Aircraft, equipment and machinery, spare parts
commissary and catering supplies, aviation gas, fuel
and oil, whether crude or refined, and such other
articles or supplies imported by and for the use of
scheduled airlines operating under Congressional
franchise: Provided, That such articles or supplies are
not locally available in reasonable quantity, quality
and price and are necessary or incidental for the proper
operation of the scheduled airline importing the same;
v. Machineries, equipment, tools for production, plants
to convert mineral ores into saleable form, spare parts,
supplies, materials, accessories, explosives, chemicals,
and transportation and communication facilities
imported by and for the use of new mines and old mines
which resume operations, when certified to as such by
the Secretary of Agriculture and Natural Resources
upon the recommendation of the Director of Mines,
for a period ending five (5) years from the first date
of actual commercial production of saleable mineral
products: Provided, That such articles are not locally
available in reasonable quantity, quality and price and
are necessary or incidental in the proper operation of
the mine; and aircrafts imported by agro-industrial
companies to be used by them in their agriculture
and industrial operations or activities, spare parts and
accessories thereof;
TAX 2 REVEALED
Spare parts of vessels or aircraft of foreign registry

engaged in foreign trade when brought into the
Philippine exclusively as replacements or for the
emergency repair thereof, upon proof satisfactory to
the Collector of Customs that such spare parts shall
be utilized to secure the safety, seaworthiness or
airworthiness of the vessel or aircraft, to enable it to
continue its voyage or flight;
Articles of easy identification exported from the
Philippines for repair and subsequently reimported
upon proof satisfactory to the Collector of Customs
that such articles are not capable of being repaired
locally: Provided, That the cost of the repairs made to
any such article shall pay a rate of duty of thirty per
cent ad valorem;
Trailer chassis when imported by shipping companies
for their exclusive use in handling containerized
cargo, upon posting a bond in an amount equal to one
and one-half times the ascertained duties, taxes and
other charges due thereon to cover a period of one
year from the date of acceptance of the entry, which
period for meritorious reasons may be extended by the
Commissioner of Customs from year to year, subject to
the following conditions:
1. That they shall be properly identified and

registered with the Land Transportation Com-
mission;
2. That they shall be subject to customs supervision
fee to be fixed by the Collector of Customs and
subject to the approval of the Commissioner of
Customs;
3. That they shall be deposited in the Customs zone
when not in use; and
4. That upon the expiration of the period prescribed
above, duties and taxes shall be paid, unless
otherwise re-exported.
Chapter 7 273
The provisions of Sec. 105 of PD 34, dated October 27,

1972, to the contrary notwithstanding any officer or employee
of the Department of Foreign Affairs, including any attache,
civil or military, or member of his staff assigned to a Philippine
diplomatic mission abroad by his Department or any similar
officer or employee assigned to a Philippine consular office
abroad, or any personnel of the Reparations Mission in Tokyo
or AFP military personnel detailed with SEATO or any AFP
military personnel accorded assimilated diplomatic rank on
duty abroad who is returning from a regular assignment abroad,
for reassignment to his Home office, or who dies, resigns, or is
retired from the service, after the approval of this Decree, shall be
exempt from the payment of all duties and taxes on his personal
and household effects, including one motor car which must have
been ordered or purchased prior to the receipt by the mission or
consulate of his order of recall, and which must be registered in
his name: Provided, however, That this exemption shall apply only
to the value of the motor car and to aggregate assessed value of
said personal and household effects the latter not to exceed thirty
per centum (30%) of the total amount received by such officer or
employee in salary and allowances during his latest assignment
abroad but not to exceed four years; And provided, finally, That the
officer or employee concerned must have served abroad for not
less than two years.
The provisions of general and special laws, including those
granting franchises, to the contrary notwithstanding, there shall
be no exemptions whatsoever from the payment of customs
duties except those provided for in this Code; those granted to
government agencies, instrumentalities or government-owned
or controlled corporations with existing contracts, commitments,
agreements, or obligations (requiring such exemption) with
foreign countries; international institutions, associations or
organizations entitled to exemption pursuant to agreements or
special laws; and those that may be granted by the President
upon prior recommendation of the National Economic and
Development Authority in the interest of national economic
development. (Sec. 105, TCC)
274 TAX 2 REVEALED
Drawbacks
a. On Fuel Used for Propulsion of Vessels
On all fuel imported into the Philippines which is afterwards
used for the propulsion of vessels of Philippine registry engaged
in trade with foreign countries, or in the coastwise trade, a refund
shall be allowed equal to the duty imposed by law upon such
fuel, less one per cent thereof, which shall be paid under such
rules and regulations as may be prescribed by the Commissioner
of Customs with the approval of the department head.
b. On Articles Made from Imported Materials or Similar
Domestic Materials and Wastes Thereof
Upon the exportation of articles manufactured or produced
in the Philippines, including the packing, covering, putting up,
marking or labeling thereof, either in whole or in part of imported
materials, or from similar domestic materials of equal quantity
and productive manufacturing quality and value, such question
to be determined by the Collector of Customs, there shall be
allowed a drawback equal in amount to the duties paid on the
imported materials so used, or where similar domestic materials
are used, to the duties paid on the equivalent imported similar
materials, less one per cent thereof:
1. That the exportation shall be made within three years

after the importation of the foreign material used or
constituting the basis for drawback.
2. That when the articles exported or coverings
thereof are in part of materials grown or produced
in the Philippines not entitled to drawback under
this section, the imported materials, or the similar
domestic materials of equal quantity and productive
manufacturing quality and value entitled to drawback,
shall so appear in the completed articles or packages
that the quantity or measure thereof may be ascertained.
3. That the imported materials, or the similar domestic
materials entitled to drawback under this section for
which drawback is claimed, shall be identified; that
the quantity of such materials used and the amount of
Chapter 7 275
duty paid thereon or, if the domestic materials, paid

upon its equivalent, shall be ascertained; and that
the fact of their exportation shall be established; and
the refund if made shall be paid to the manufacturer,
producer, or exporter, or to the duly authorized agent
of any of them, under and in accordance with such
rules and regulations as the Commissioner of Customs
shall prescribe with the approval of the department
head. (Sec. 106, TCC)
REPUBLIC ACT NO. 9135

April 27, 2001
An act amending certain provisions of PD 1464, otherwise

known as the "Tariff and Customs Code of the Philippines," as
amended, and for other purposes
I. Ordinary/Regular Duties
Basis of Dutiable Value
A. Method One. Transaction Value

The dutiable value of an imported article subject to an ad
valorem rate of duty shall be the transaction value, which shall
be the price actually paid or payable for the goods when sold for
export to the Philippines, adjusted by adding:
1. The following to the extent that they are incurred by
the buyer but are not included in the price actually
paid or payable for the imported goods:
a. Commissions and brokerage fees (except buying
commissions);
b. Cost of containers;
c. The cost of packing, whether for labour or
materials;
d. The value, apportioned as appropriate, of the
following goods and services: materials, compo-
nents, parts and similar items incorporated in the
276 TAX 2 REVEALED
imported goods; tools; dies; moulds and similar

items used in the production of imported goods;
materials consumed in the production of the im-
ported goods; and engineering, development,
artwork, design work and plans and sketches un-
dertaken elsewhere than in the Philippines and
necessary for the production of imported goods,
where such goods and services are supplied di-
rectly or indirectly by the buyer free of charge or
at a reduced cost for use in connection with the
production and sale for export of the imported
goods;
e. The amount of royalties and license fees related to
the goods being valued that the buyer must pay,
either directly or indirectly, as a condition of sale
of the goods to the buyer;
2. The value of any part of the proceeds of any subsequent
resale, disposal or use of the imported goods that
accrues directly or indirectly to the seller;
3. The cost of transport of the imported goods from
the port of exportation to the port of entry in the
Philippines;
4. Loading, unloading and handling charges associated
with the transport of the imported goods from the
country of exportation to the port of entry in the
Philippines; and
5. The cost of insurance.
All additions to the price actually paid or payable
shall be made only on the basis of objective and
quantifiable data.
No additions shall be made to the price actually
paid or payable in determining the customs value
except as provided in this Section: Provided, That
Method One shall not be used in determining the
dutiable value of imported goods if:
Chapter 7 277
There are restrictions as to the disposition or use

of the goods by the buyer other than restrictions
which:
i. are imposed or required by law or by Philip-
pine authorities;
ii. limit the geographical area in which the
goods may be resold; or
iii. do not substantially affect the value of the
goods.
The sale or price is subject to some condition
or consideration for which a value cannot be
determined with respect to the goods being
valued;
Part of the proceeds of any subsequent resale,
disposal or use of the goods by the buyer will
accrue directly or indirectly to the seller, unless an
appropriate adjustment can be made in accord-
ance with the provisions hereof; or
The buyer and the seller are related to one another,
and such relationship influenced the price of the
goods. Such persons shall be deemed related if:
i. they are officers or directors of one another's
businesses;
ii. they are legally recognized partners in busi-
ness;
iii. there exists an employer-employee relation-
ship between them;
iv. any person directly or indirectly owns, con-
trols or holds five percent (5%) or more of the
outstanding voting stock or shares of both
seller and buyer;
v. one of them directly or indirectly controls
the other;
TAX 2 REVEALED
278
vi. both of them are directly or indirectly con-

trolled by a third person;
vii. together they directly or indirectly control a
third person; or
viii. they are members of the same family, includ-
ing those related by affinity or consanguinity
up to the fourth civil degree.
Persons who are associated in business with one another in
that one is the sole agent, sole distributor or sole concessionaire,
however described, of the other shall be deemed to be related
for the purposes of this Act if they fall within any of the eight (8)
cases above. if transaction value cannot be
determined, in sequence...
B. Method Two. Transaction Value of Identical Goods
Where the dutiable value cannot be determined under
method one, the dutiable value shall be the transaction value of
identical goods sold for export to the Philippines and exported
at or about the same time as the goods being valued. "Identical
goods" shall mean goods which are the same in all respects,
including physical characteristics, quality and reputation. Minor
differences in appearances shall not preclude goods otherwise
conforming to the definition from being regarded as identical.
C. Method Three. Transaction Value of Similar Goods

Where the dutiable value cannot be determined under the
preceding method, the dutiable value shall be the transaction
value of similar goods sold for export to the Philippines and
exported at or about the same time as the goods being valued.
"Similar goods" shall mean goods which, although not alike
in all respects, have like characteristics and like component
materials which enable them to perform the same functions and
to be commercially interchangeable. The quality of the goods,
their reputation and the existence of a trademark shall be among
the factors to be considered in determining whether [the] goods
are similar.
If the dutiable value still cannot be determined through

the successive application of the two immediately preceding
Chapter 7 279
methods, the dutiable value shall be determined under method

four or, when the dutiable value still cannot be determined under
that method, under method five, except that, at the request of the
importer, the order of application of methods four and five shall be
reversed: Provided, however, That if the Commissioner of Customs
deems that he will experience real difficulties in determining the
dutiable value using method five, the Commissioner of Customs
may refuse such a request in which event the dutiable value shall
be determined under method four, if it can be so determined.
D. Method Four. Deductive Value

The dutiable value of the imported goods under this
method shall be the deductive value which shall be based on the
unit price at which the imported goods or identical or similar
imported goods are sold in the Philippines, in the same condition
as when imported, in the greatest aggregate quantity, at or about
the time of the importation of the goods being valued, to [the]
persons not related to the persons from whom they buy such
goods, subject to deductions for the following:
1. Either the commissions usually paid or agreed to be
paid or the additions usually made for profit and
general expenses in connection with sales in such
country of imported goods of the same class or kind;
2. The usual costs of transport and insurance and
associated costs incurred within the Philippines; and
3. Where appropriate, the costs and charges referred to in
Subsection (A) (3), (4) and (5); and
4. The customs duties and other national taxes payable in
the Philippines by reason of the importation or sale of
the goods.
If neither the imported goods nor identical nor similar
imported goods are sold at or about the time of importation of
the goods being valued in the Philippines in the conditions as
imported, the customs value shall, subject to the conditions set
forth in the preceding paragraph hereof, be based on the unit
price at which the imported goods or identical or similar imported
280 TAX 2 REVEALED
goods sold in the Philippines in the condition as imported at the

earliest date after the importation of the goods being valued but
before the expiration of ninety (90) days after such importation.
If neither the imported goods nor identical nor similar
imported goods are sold in the Philippines in the condition as
imported, then, if the importer so requests, the dutiable value
shall be based on the unit price at which the imported goods,
after further processing, are sold in the greatest aggregate
quantity to persons in the Philippines who are not related to the
persons from whom they buy such goods, subject to allowance
for the value added by such processing and deductions provided
under Subsections (D)(1), (2), (3) and (4) hereof.
E. Method Five. Computed Value

The dutiable value under this method shall be the computed
value which shall be the sum of:
1. The cost or the value of materials and fabrication or
other processing employed in producing the imported
goods;
2. The amount for profit and general expenses equal to
that usually reflected in the sale of goods of the same
class or kind as the goods being valued which are made
by producers in the country of exportation for export
to the Philippines;
3. The freight, insurance fees and other transportation
expenses for the importation of the goods;
4. Any assist, if its value is not included underparagraph
(1) hereof; and
5. The cost of containers and packing, if their values are
not included under paragraph (1) hereof.
The Bureau of Customs shall not require or compel any
person not residing in the Philippines to produce for examination,
or to allow access to, any account or other record for the purpose of
determining a computed value. However, information supplied
by the producer of the goods for the purposes of determining
Chapter 7 281
the customs value may be verified in another country with the

agreement of the producer and provided they will give sufficient
advance notice to the government of the country in question and
the latter does not object to the investigation.
F. Method Six. Fallback Value.

If the dutiable value cannot be determined under the
preceding methods described above, it shall be determined by
using other reasonable means and on the basis of data available
in the Philippines. GATT
If the importer so requests, the importer shall be informed
in writing of the dutiable value determined under Method Six
and the method used to determine such value.
No dutiable value shall be determined under Method Six
on the basis of:
1. The selling price in the Philippines of goods produced
in the Philippines;
2. A system that provides for the acceptance for customs
purposes of the higher of two alternative values;
3. The price of goods in the domestic market of the
country of exportation;
4. The cost of production, other than computed values,
that have been determined for identical or similar
goods in accordance with Method Five hereof;
5. The price of goods for export to a country other than
the Philippines;
6. Minimum customs values; or
7. Arbitrary or fictitious values.
If in the course of determining the dutiable value of imported
goods, it becomes necessary to delay the final determination of
such dutiable value, the importer shall nevertheless be able to
secure the release of the imported goods upon the filing of a
sufficient guarantee in the form of a surety bond, a deposit, cash
or some other appropriate instrument in an amount equivalent to
282 TAX 2 REVEALED
the imposable duties and taxes on the imported goods in question

conditioned upon the payment of customs duties and taxes for
which the imported goods may be liable: Provided, however, That
goods, the importation of which is prohibited by law shall not be
released under any circumstance whatsoever.
Nothing in this Section shall be construed as restricting
or calling into question the right of the Collector of Customs
to satisfy himself as to the truth or accuracy of any statement,
document or declaration presented for customs valuation
purposes. When a declaration has been presented and where the
customs administration has reason to doubt the truth or accuracy
of the particulars or of documents produced in support of this
declaration, the customs administration may ask the importer
to provide further explanation, including documents or other
evidence, that the declared value represents the total amount
actually paid or payable for the imported goods, adjusted in
accordance with the provisions of Subsection (A) hereof.
If, after receiving further information, or in the absence of a
response, the customs administration still has reasonable doubts
about the truth or accuracy of the declared value, it may, without
prejudice to an importer's right to appeal pursuant to Article 11 of
the World Trade Organization Agreement on customs valuation,
be deemed that the customs value of the imported goods cannot
be determined under Method One. Before taking a final decision,
the Collector of Customs shall communicate to the importer,
in writing if requested, his grounds for doubting the truth or
accuracy of the particulars or documents produced and give
the importer a reasonable opportunity to respond. When a final
decision is made, the customs administration shall communicate
to the importer in writing its decision and the grounds therefor.
(Sec. 201, TCC)
II. Special Duties
D u m p i n g Duty
Whenever the Secretary of Finance (hereinafter called

the "Secretary") has reason to believe, from invoices or other
documents or newspapers, magazines or information made
Chapter 7
283
available by any government agency or interested party, that a

specific kind or class of foreign article is being imported into, or
sold or is likely to be sold in the Philippines at a price less than
its fair value, the importation and sale of which might injure,
or retard the establishment of, or is likely to injure, an industry
producing like goods in the Philippines, he shall so advise the
Tariff Commission (hereinafter called the "Commission"), and
shall instruct the Collector of Customs to require an anti-dumping
bond of twice the dutiable value of the imported article coming
from the specific country. (Sec. 301 [a], TCC)
Countervailing Duty
Whenever any article is directly or indirectly granted any

bounty, subsidy or subvention upon its production, manufacture
or exportation in the country of origin and / or exportation, and
the importation of which has been determined by the Secretary,
after investigation and report of the Commission, as likely
to injure an established industry, or prevent or considerably
retard the establishment of an industry in the Philippines, there
shall be levied a countervailing duty equal to the ascertained
or estimated amount of such bounty, countervailing duty
equal to the ascertained or estimated amount of such bounty,
subsidy or subvention: Provided, That the injury criterion to a
domestic industry shall be applied only in case of imports from
countries which adhere to the GATT Code on Subsidies and
Countervailing Duties; Provided further, That the exemption of
any exported article from duty or tax imposed on like articles
when destined for consumption in the country of origin and/
or exportation or the refunding of such duty or tax, shall not be
deemed to constitute a grant of a bounty, subsidy or subvention
within the meaning of this subsection: Provided, furthermore, That
should an article be allowed drawback by the country of origin
and /or exportation, only the ascertained or estimated excess of
the amount of the drawback over the total amount of the duties
and /or internal taxes, if any, shall constitute a bounty, subsidy
or subvention: Provided, finally, That petitions for imposition
of countervailing duty shall be filed with the Secretary of
Finance. Upon finding of a prima facie case of bounty, subsidy
284 TAX 2 REVEALED
or subvention enjoyed by the imported article and injury to, or

likelihood of injury to a domestic industry, the Secretary shall
refer the case to the Tariff Commission for investigation and
shall instruct the Commissioner of Customs to require the filing
of countervailing bonds for importations entered during the
pendency of countervailing proceedings. (Sec. 302[a], TCC)
Marking Duty
Marking of Imported Articles a n d Containers
a. Marking of Articles
Except as hereinafter provided, every article of foreign origin
(or its container, as provided in subsection "b" hereof) imported
into the Philippines shall be marked in any official language of
the Philippines and in a conspicuous place as legibly, indelibly
and permanently as the nature of the article (or container) will
permit in such manner as to indicate to an ultimate purchaser
in the Philippines the name of the country of origin of the
article. The Commissioner of Customs shall, with the approval
of the department head, issue rules and regulations to —
1. Determine the character of words and phrases or
abbreviation thereof which shall be acceptable as
indicating the country of origin and prescribe any
reasonable method of marking, whether by printing,
stenciling, stamping, branding, labelling or by any
other reasonable method, and a conspicuous place on
the article or container where the marking shall appear.
2. Require the addition of any other words or symbols
which may be appropriate to prevent deception or
mistake as to the origin of the article or as to the origin
of any other article with which such imported article
is usually combined subsequent to importation but
before delivery to an ultimate purchaser; and
3. Authorize the exception of any article from the
requirements of marking if —
a. such article is incapable of being marked;
Chapter 7 285
b. such article cannot be marked prior to shipment

to the Philippines without injury;
c. such article cannot be marked prior to shipment to
the Philippines, except at an expense economically
prohibitive of its importation;
d. the marking of a container of such article will
reasonably indicate the origin of such article;
e. such article is a crude substance;
f. such article is imported for use by the importer
and not intended for sale in its imported or any
other form;
g. such article is to be processed in the Philippines by
the importer or for his account otherwise than for
the purpose of concealing the origin of such article
and in such manner that any mark contemplated
by this section would necessarily be obliterated,
destroyed or permanently concealed;
h. an ultimate purchaser, by reason of the character
of such article or by reason of the circumstances
of its importation must necessarily know the
country of origin of such article even though it is
not marked to indicate its origin;
i. such article was produced more than twenty years
prior to its importation into the Philippines; or
j. such article cannot be marked after importation
except at an expense which is economically
prohibitive, and the failure to mark the article
before importation was not due to any purpose of
the importer, producer, seller or shipper to avoid
compliance with this section.
b. Marking of Containers
Whenever an article is excepted under subdivision (3) of
subsection "a" of this section from the requirements of marking,
the immediate container, if any, of such article, or such other
286 TAX 2 REVEALED
container or containers of such article as may be prescribed by the

Commissioner of Customs with the approval of the department
head, shall be marked in such manner as to indicate to an ultimate
purchaser in the Philippines the name of the country of origin of
such article in any official language of the Philippines, subject to
all provisions of this section, including the same exceptions as
are applicable to articles under subdivision (3) of subsection "a."
(Sec. 303, TCC)
c. Marking Duty for Failure to Mark

If at the time of importation any article (or its container, as
provided in subsection "b" hereof) is not marked in accordance
with the requirements of this section, there shall be levied,
collected and paid upon such article a marking duty of 5 per cent
ad valorem, which shall be deemed to have accrued at the time
of importation, except when such article is exported or destroyed
under customs supervision and prior to the final liquidation of
the corresponding entry.
d. Delivery Withheld Until Marked

No imported article held in customs custody for inspection,
examination or appraisement shall be delivered until such
article and/or its containers, whether released or not from
customs custody, shall have been marked in accordance with
the requirements of this section and until the amount of duty
estimated to be payable under subsection " c " of this section shall
have been deposited. Nothing in this section shall be construed
as excepting any article or its container from the particular
requirements of marking provided for in any provision of law.
e. The failure or refusal of the owner or importer to mark the
articles as herein required within a period of thirty days
after due notice shall constitute as an act of abandonment
of said articles and their disposition shall be governed by
the provisions of this Code relative to abandonment of
imported articles. (Sec. 303, TCC)
Chapter 7
287
retaliatory Discriminatory Duties
Discrimination by Foreign C o u n t r i e s
a. The President, when he finds that the public interest

will be served thereby, shall by proclamation specify and declare
new or additional duties in an amount not exceeding one
hundred (100) per cent ad valorem upon articles wholly or in part
the growth or product of, or imported in a vessel of, any foreign
country whenever he shall find as a fact that such country:
1. Imposes, directly or indirectly, upon the disposition
or transportation in transit through or re-exportation from
such country of any article wholly or in part the growth
or product of the Philippines, any unreasonable charge,
exaction, regulation or limitation which is not equally
enforced upon the like articles of every foreign country;
2. Discriminates in fact against the commerce of the
Philippines, directly or indirectly, by law or administrative
regulation or practice, by or in respect to any customs, ton-
nage, or port duty, fee, charge, exaction, classification, regu-
lation, condition, restriction or prohibition, in such manner
as to place the commerce of the Philippines at a disadvan-
tage compared with the commerce of any foreign country.
b. If at any time the President shall find it to be a fact
that any foreign country has not only discriminated against
the commerce of the Philippines, as aforesaid, but has, after
the issuance of a proclamation as authorized in subsection "a"
of this section, maintained or increased its said discrimination
against the commerce of the Philippines, the President is hereby
authorized, if he deems it consistent with the interests of the
Philippines, to issue a further proclamation directing that such
product of said country or such article imported in its vessels,
as he shall deem consistent with the public interests, shall be
excluded from importation into the Philippines.
c. Any proclamation issued by the President under this
section shall, if he deems it consistent with the interest of the
Philippines, extend to the whole of any foreign country or may
288 TAX 2 REVEALED
be confined to any subdivision or subdivisions thereof; and the

President shall, whenever he deems the public interests require,
suspend, revoke, supplement or amend any such proclamation.
d. All articles imported contrary to the provisions of this
section shall be forfeited to the Government of the Philippines
and shall be liable to be seized, prosecuted and condemned in
like manner and under the same regulations, restrictions and
provisions as may from time to time be established for the
recovery, collection, distribution and remission or forfeiture to
the government by the tariff and customs laws. Whenever the
provision of this section shall be applicable to importations into
the Philippines of articles wholly or in part the growth or product
of any foreign country, they shall be applicable thereto, whether
such articles are imported directly or indirectly.
e. It shall be the duty of the Commission to ascertain and
at all times to be informed whether any of the discrimination
against the commerce of the Philippines enumerated in
subsections "a" and "b" of this section are practiced by any
country; and if and when such discriminatory acts are disclosed,
it shall be the duty of the Commission to bring the matter to the
attention of the President, together with recommendations.
f. The Secretary of finance shall make such rules and
regulations as are necessary for the execution of such proclamation
as the President may issue in accordance with the provisions of
this section. (Sec. 304, TCC)
Flexible Clause
a. In the interest of national economy, general welfare

and/or national security, and subject to the limitations herein
prescribed, the President, upon recommendation of the National
Economic and Development Authority (hereinafter referred to as
NEDA), is hereby empowered: (1) to increase, reduce or remove
existing protective 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 one hundred (100) per cent ad valorem; (2) to establish import
Chapter 7 289
quota or to ban imports of any commodity, as may be necessary;

and (3) to impose an additional duty on all imports not exceeding
ten (10%) per cent ad valorem whenever necessary; Provided,
That upon periodic investigations by the Tariff Commission
and recommendation of the NED A, the President may cause a
gradual reduction of protection levels granted in Sec. 104 of this
Code, including those subsequently granted pursuant to this
section.
b. Before any recommendation is submitted to the Presi-
dent by the NEDA pursuant to the provisions of this section,
except in the imposition of an additional duty not exceeding
ten (10) per cent ad valorem, the Commission shall conduct
an investigation in the course of which they shall hold public
hearings wherein interested parties shall be afforded reasonable
opportunity to be present, produce evidence and to be heard. The
Commission shall also hear the views and recommendations of
any government office, agency or instrumentality concerned. The
Commission shall submit their findings and recommendations to
NEDA within thirty (30) days after the termination of the public
hearings.
c. The power of the President to increase or decrease rates
of import duty within the limits fixed in subsection "a" shall
include the authority to modify the form of duty. In modifying the
form of duty, the corresponding ad valorem or specific equivalents
of the duty with respect to imports from the principal competing
foreign country for the most recent representative period shall be
used as bases.
d. The Commissioner of Customs shall regularly furnish
the Commission a copy of all customs import entries as filed in
the Bureau of Customs. The Commission or its duly authorized
representatives shall have access to, and the right to copy
all liquidated customs import entries and other documents
appended thereto as finally filed in the Commission on Audit.
e. The NEDA shall promulgate rules and regulations
necessary to carry out the provisions of this section.
f. Any Order issued by the President pursuant to the
provisions of this section shall take effect thirty (30) days after
290 TAX 2 REVEALED
promulgation, except in the imposition of additional duty not

exceeding ten (10) per cent ad valorem which shall take effect at
the discretion of the President. (Sec. 401, TCC)
Export Products Subject to Duty a n d Rates

There shall be levied, assessed and collected an export
duty on the gross F.O.B. value at the time of shipment based
on the prevailing rate of exchange, of the following products
in accordance with the schedule specified in the column Export
Duty.
In addition to the export duties, herein referred to as basic
rate, there shall be levied, assessed and collected a premium
duty on the difference between the current price as established
by the Bureau of Customs and the base price of the products
in accordance with the schedule specified under the column
Premium Duty; Provided, That should the current price of any
export product be below the established base price, then only
the basic rate shall be applied: Provided, further, That, initially, the
base price upon which the premium duty shall be levied eighty
per centum (80%) of the F.O.B. value of exports established by
the Bureau of Customs for February 1974. The NEDA shall, from
time to time, review and establish such base prices taking into
account, among others, the cost conditions in various industries.
(Sec. 514, TCC)
Rate of E x c h a n g e
For the assessment and collection of import duty upon

imported articles and for other purposes, the value and prices
thereof quoted in foreign currency shall be converted into the
currency of the Philippines at the current rate of exchange or
value specified or published, from time to time, by the Central
Bank of the Philippines. (Sec. 203, TCC)
Effective Date of Rates of Import Duty
Imported articles shall be subject to the rate or rates of

import duty existing at the time of entry, or withdrawal from
warehouse, in the Philippines for consumption.
Chapter 7
291
On and after the day when this Code shall go into effect, all
articles previously imported, for which no entry has been made,
and all articles previously entered without payment of duty
and under bond for warehousing, transportation, or any other
purpose, for which no permit of delivery to the importer or his
agent has been issued, shall be subject to the rates of any duty
imposed by this Code and to any other duty, upon the entry, or
withdrawal thereof from warehouse, for consumption.
On article abandoned or forfeited to, or seized by, the
government, and then sold at public auction, the rates of duty
and the tariff in force on the date of the auction shall apply:
Provided, That duty based on the weight, volume and quantity of
articles shall be levied and collected on the weight, volume and
quantity at the time of their entry into the warehouse or the date
of abandonment, forfeiture and / o r seizure. (Sec. 204, TCC)
Entry, or W i t h d r a w a l f r o m W a r e h o u s e , for C o n s u m p t i o n
Imported articles shall be deemed "entered" in the Philip-

pines for consumption when the specified entry form is properly
filed and accepted, together with any related documents
required by the provisions of this Code and/or regulations to be
filed with such form at the time of entry, at the port or station by
the customs official designated to receive such entry papers and
any duties, taxes, fees and/or other lawful charges required to be
paid at the time of making such entry have been paid or secured
to be paid with the customs official designated to receive such
monies, provided that the article has previously arrived within
the limits of the port of entry.
Imported articles shall be deemed "withdrawn" from ware-
house in the Philippines for consumption when the specified
form is properly filed and accepted, together with any related
documents required by any provisions of this Code and/or
regulations to be filed with such form at the time of withdrawal,
by the customs official designated to receive the withdrawal entry
and any duties, taxes, fees and /or other lawful charges required
to be paid at the time of withdrawal have been deposited with
the customs official designated to receive such payment. (Sec.
205, TCC)
292 TAX 2 REVEALED
ADMINISTRATIVE AND JUDICIAL PROCEEDINGS
PARTI
Search, Seizure and Arrest
Exercise of Power of Seizure a n d Arrest
It shall be within the power of a customs official or person

authorized, and it shall be his duty to:
1. Make seizure of any vessel, aircraft, cargo, articles,
animal or other movable property when the same
is subject to forfeiture or liable for any fine imposed
under customs and tariff laws, and
2. To arrest any person subject to arrest for violation of
any customs and tariff laws, such power to be exercised
in conformity with the law and the provisions of this
Code. (Sec. 2205, TCC)
Special Surveillance for Protection of C u s t o m s R e v e n u e

and Prevention of S m u g g l i n g
In order to prevent smuggling and to secure the collection

of the legal duties, taxes and other charges, the customs service
shall exercise surveillance over the coast, beginning when a vessel
or aircraft enters the Philippine territory and concluding when
the article imported therein has been legally passed through the
custom house. (Sec. 2202, TCC)
Right of Police Officer to Enter Inclosure
For the more effective discharge of his official duties, any

person exercising the powers conferred by the Code, may at any
time enter, pass through, or search any land or inclosure or any
warehouse, store or other building, not being a dwelling house.
(Sec. 2208, TCC)
A warehouse, store or other building or inclosure used for

the keeping of storage of articles does not become a dwelling
house, within the meaning, hereof merely by reason of the fact
Chapter 7 293
that a person employed as watchman lives in the place, nor will

the fact that his family stays there with him alter the case.
S e a r c h of Dwelling H o u s e
A dwelling house may be entered and searched only upon

warrant issued by a judge or justice of the peace, upon sworn
application showing probable case and particularly describing
the place to be searched and person or thing to be seized. (Sec.
2209, TCC)
Right to S e a r c h Vessels or Aircrafts a n d Persons or Articles

Conveyed Therein
It shall be lawful for any official or person exercising police

authority under the provisions of this Code to go aboard any
vessel or aircraft within the limits of any collection district, and
to inspect, search and examine said vessel or aircraft and any
trunk, package, box or envelope on board, and to search any
person on board the said vessel or aircraft and to this end to hail
and stop such vessel or aircraft if under way, to use all necessary
force to compel compliance; and if it shall appear that any breach
or violation of the customs and tariff laws of the Philippines
has been committed, whereby or in consequence of which such
vessels or aircrafts, or the article, or any part thereof, on board
of or imported by such vessel or aircraft, is liable to forfeiture, to
make seizure of the same or any part thereof.
The power of search hereinabove given shall extend to
the removal of any false bottom, partition, bulkhead or other
obstruction, so far as may be necessary to enable the officer to
discover whether any dutiable or forfeitable articles may be
concealed therein.
No proceeding herein shall give rise to any claim for the
damage thereby caused to article or vessel or aircraft. (Sec. 2210,
TCC)
Right to Search Vehicles, Beasts and Persons
It shall also be lawful for a person exercising authority
as aforesaid to open and examine any box, trunk, envelope or
TAX 2 REVEALED
294
other container, wherever found where he has reasonable cause

to suspect the presence therein of dutiable or prohibited article
or articles introduced into the Philippines contrary to law, and
likewise to stop, search and examine any vehicle, beast or person
reasonably suspected of holding or conveying such article as
aforesaid. (Sec. 2211, TCC)
Search of Persons Arriving f r o m Foreign Countries
All persons coming into the Philippines from foreign

countries shall be liable to detention and search by the customs
authorities under such regulations as may be prescribed relative
thereto.
Female inspectors may be employed for the examination
and search of persons of their own sex. (Sec. 2212, TCC)
PART 2
Administrative Proceedings
Warrant for Detention of Property — B o n d
Upon making any seizure, the Collector shall issue a warrant

for the detention of the property; and if the owner or importer
desires to secure the release of the property for legitimate use, the
Collector may surrender it upon the filing of a sufficient bond, in
an amount to be fixed by him, conditioned for the payment of the
appraised value of the article and / o r any fine, expenses and costs
which may be adjudged in the case: Provided, That articles the
importation of which is prohibited by law, shall not be released
under bond. (Sec. 2301, TCC)
Notification to O w n e r or Importer
The Collector shall give the owner or importer of the

property or his agent a written notice of the seizure and shall give
him an opportunity to be heard in reference to the delinquency
which was the occasion of such seizure.
For the purpose of giving such notice and of all other
proceedings in the matter of such seizure, the importer, consignee
Chapter 7 295
or person holding the bill of lading shall be deemed to be the

"owner" of the article included in the bill.
For the same purpose, "agent" shall be deemed to include
not only any agent in fact of the owner of the seized property but
also any person having responsible possession of the property
at the time of the seizure, if the owner or his agent in fact is
unknown or cannot be reached. (Sec. 2303, TCC)
In Juan Diosamito, et al. v. Benjamin Balanque, et al. (G.R.
No. L-30734 [1969]), it was held that Sec. 2303 of the Tariff and
Customs Code requires the Collector of Customs to give to the
owner of the property sought to be forfeited, a written notice of
the seizure and to give him the opportunity to be heard in his
defense. This provision clearly indicates the intention of the law
to confina in the Bureau of Customs the determination of all the
questions affecting the disposal of property proceeded against in
a seizure and forfeiture case. The judicial recourse of the property
owner is not in the Court of First Instance but in the Court of Tax
Appeals, and only after exhausting administrative remedies in
the Bureau of Customs.
Notification t o U n k n o w n O w n e r
Notice to an unknown owner shall be effected by posting

a notice for fifteen days in the public corridor of the custom
house of the district in which the seizure was made, and, in the
discretion of the Commissioner, by publication in a newspaper
or by such other means as he shall consider desirable. (Sec. 2304,
TCC)
Proceedings in Case of Property Belonging to Unknown

Parties
If, within fifteen days after the notification prescribed in Sec.
2304 of this Code, no owner or agent can be found or appears
before the Collector, the latter shall declare the property forfeited
to the government to be sold at auction in accordance with law.
(Sec. 2306, TCC)
296 TAX 2 REVEALED
Settlement of Case by Payment of Fine or Redemption of

Forfeited Property
If, in any seizure case, the owner or agent shall, while the
case is yet before the Collector of the district of seizure, pay to
such Collector the fine imposed by him or, in case of forfeiture,
shall pay the appraised value of the property, or, if after appeal of
the case, he shall pay to the Commissioner the amount of the fine
as finally determined by him, or, in case of forfeiture, shall pay the
appraised value of the property, such property shall be forthwith
surrendered, and all liability which may or might attach to the
property by virtue of the offense which was the occasion of the
seizure and all liability which might have been incurred under
any bond given by the owner or agent in respect to such property
shall thereupon be deemed to be discharged.
Redemption of forfeited property shall not be allowed in
any case where the importation is absolutely prohibited or where
the surrender of the property to the person offering to redeem
the same would be contrary to law. (Sec. 2307, TCC)
Protest and P a y m e n t u p o n Protest in Civil Matters
When a ruling or decision of the Collector is made whereby

liability for duties, fees, or other money charge is determined,
except the fixing of fines in seizure cases, the party adversely
affected may protest such ruling or decision by presenting to the
Collector at the time when payment of the amount claimed to be
due the Government is made, or within thirty days thereafter,
a written protest setting forth his objections to the ruling or
decision in question, together with the reasons therefor. No
protest shall be considered unless payment of the amount due
after final liquidation has first been made. (Sec. 2308, TCC)
Protest Exclusive R e m e d y in Protestable C a s e
In all cases subject to protest, the interested party who

desires to have the action of the Collector reviewed, shall make
a protest, otherwise, the action of the Collector shall be final
and conclusive against him, except as to matters correctible for
Chapter 7 297
manifest error in the manner prescribed in Section 1707 hereof.

(Sec. 2309, TCC)
F o r m a n d S c o p e o f Protest
Every protest shall be filed in accordance with the prescribed

rules and regulations promulgated under this Section and shall
point out the particular decision or ruling of the Collector to
which exception is taken or objection made, and shall indicate
with reasonable precision the particular ground or grounds
upon which the protesting party based his claim for relief. (Sec.
2310, TCC)
The scope of a protest shall be limited to the subject matter
of a single adjustment or other independent transaction; but any
number of issue may be raised in a protest with reference to the
particular item or items constituting the subject matter of the
protest.
"Single adjustment," as hereinabove used, refers to the entire
content of one liquidation, including all duties, fees, surcharges
or fines incident thereto.
S a m p l e s to be Furnished by Protesting Parties
If the nature of the articles permit, importers filing protests

involving questions of fact must, upon demand, supply the
Collector with samples of the articles which are the subject matter
of the protests. Such samples shall be verified by the custom
official who made the classification against which the protest are
filed. (Sec. 2311, TCC)
Decision or Action by Collector in Protest a n d Seizure Cases

When a protest in proper form is presented in a case where
protest i[s] required, the Collector shall reexamine the matter
thus presented, and if the protest is sustained, in whole or in
part, he shall enter the appropriate order, the entry reliquidated
if necessary. (Sec. 2312, TCC)
In seizure cases, the Collector, after a hearing, shall in
writing make a declaration of forfeiture or fix the amount of the
fine or take such other action as may be proper.
298 TAX 2 REVEALED
Review by Commissioner
The person aggrieved by the decision or action of the
Collector in any matter presented upon protest or by his action
in any case of seizure may, within fifteen days after notification
in writing by the Collector of his action or decision, give written
notice to the Collector of his desire to have the matter reviewed
by the Commissioner. Thereupon the Collector shall forthwith
transmit all the records of the proceedings to the Commissioner,
who shall approve, modify or reverse the action or decision of
the Collector and take such steps and make such orders as may
be necessary to give effect to his decision. (Sec. 2313, TCC)
Notice of Decision of C o m m i s s i o n e r
Notice of the decision of the Commissioner shall be given to

the party by whom the case was brought before him for review,
and in seizure cases, such notice shall be effected by personal
service if practicable. (Sec. 2314, TCC)
JUDICIAL PROCEEDINGS
Supervision a n d Control over Judicial P r o c e e d i n g s
In the absence of special provision, judicial action and

proceedings instituted on behalf of the Government pursuant to
the provisions of this Code shall be subject to the supervision
and control of the Commissioner. (Sec. 2401, TCC)
Review by the Court of Tax A p p e a l s
The party aggrieved by a ruling of the Commissioner in any

matter brought before him upon protest or by his action or ruling
in any case of seizure may appeal to the Court of Tax Appeals,
in the manner and within the period prescribed by law and
regulations.
Unless an appeal is made to the Court of Tax Appeals in

the manner and within the period prescribed by laws and
regulations, the action or ruling of the Commissioner shall be
final and conclusive. (Sec. 2402, TCC)
Chapter 7
299
RA 9282, Sec. 7. Section 7 of the same Act is hereby amended

to read as follows:
"Sec. 7. Jurisdiction. — The CTA shall exercise:

"a. Exclusive appellate jurisdiction to review by
appeal, as herein provided:
"4. Decisions of the Commissioner of Customs

in cases involving liability for customs duties, fees or
other money charges, seizure, detention or release of
property affected, fines, forfeitures or other penalties
in relation thereto, or other matters arising under
the Customs Law or other laws administered by the
Bureau of Customs;
"6. Decisions of the Secretary of Finance on

customs cases elevated to him automatically for review
from decisions of the Commissioner of Customs which
are adverse to the Government under Section 2315 of
the Tariff and Customs Code-
Under RA 9282, any party adversely affected by a decision,
ruling or inaction of the Commissioner of Customs, or the
Regional Trial Courts may file an appeal with the CTA within
thirty (30) days after the receipt of such decision or ruling.
Appeal shall be made by filing a petition for review under
a procedure analogous to that provided for under Rule 42 of the
1997 Rules of Civil Procedure with the CTA within thirty (30)
days from the receipt of the decision or ruling or in the case of
inaction as herein provided, from the expiration of the period
fixed by law to act thereon. A Division of the CTA shall hear the
appeal.
All other cases involving rulings, orders or decisions filed
with the CTA shall be raffled to its Divisions. A party adversely
affected by a ruling, order or decision of a Division of the CTA
may file a motion for reconsideration of new trial before the
same Division of the CTA within fifteen (15) days from notice
thereof: Provide, however, That in criminal cases, the general
300 TAX 2 REVEALED
rule applicable in regular Courts on matters of prosecution and

appeal shall likewise apply.
No appeal taken to the CTA from the decision of the
Commissioner of Internal Revenue or the Commissioner of
Customs or the Regional Trial Court, provincial, city or municipal
treasurer or the Secretary of Finance, the Secretary of Trade and
Industry and Secretary of Agriculture, as the case may be, shall
suspend the payment, levy, distraint, and/or sale of any property
of the taxpayer for the satisfaction of his tax liability as provided
by existing law: Provided, however, That when in the opinion
of the Court the collection by the aforementioned government
agencies may jeopardize the interest of the Government and / or
the taxpayer the Court any stage of the proceeding may suspend
the said collection and require the taxpayer either to deposit the
amount claimed or to file a surety bond for not more than double
the amount with the Court.
In criminal and collection cases, the Government may
directly file the said cases with the CTA covering amounts within
its exclusive and original jurisdiction.
In Pilipinas Shell Petroleum Corporation v. Republic
(547 SCRA 701 [2009]), the decision of the respondent involving
customs duties specifically refer to his decisions on administrative
tax protest cases, as stated in Section 2402 of the Tariff and Customs
Code of the Philippines (TCCP).
A tax protest case, under the TCCP, involves a protest
of the liquidation of import entries. A liquidation is the final
computation and ascertainment by the collector of the duties on
imported merchandise, based on official reports as to the quantity,
character, and value thereof, and the collector's own finding as to
the applicable rate of duty; it is akin to an assessment of internal
revenue taxes under the National Internal Revenue Code where
the tax liability of the taxpayer is definitely determined. (Supra)
Forfeiture P r o c e e d i n g s
The requisites for the forfeiture of goods under Sec. 2530(f),

in relation to (1) (3-5), of the Tariff and Customs Code are:
Chapter 7 301
a. The wrongful making by the owner, importer,

exporter or consignee of any declaration or affidavit, or the
wrongful making or delivery by the same person of any
invoice, letter or paper — all touching on the importation or
exportation of merchandise;
b. The falsity of such declaration, affidavit, invoice,
letter or paper; and
c. An intention on the part of the importer / consignee
to evade the payment of the duties due. (Republic v. CTA,
366 SCRA 489 [2001])
Fraud must be proved to justify forfeiture. It must be actual,
amounting to intentional wrong-doing with the clear purpose of
avoiding the tax. Forfeiture is not favored in law nor in equity.
Mere negligence is not equivalent to the fraud contemplated by
law. (Supra)
PENAL P R O V I S I O N S
Unlawful Importation
Any person who shall:

1. Fraudulently import or bring into the Philippines, or
assist in so doing, any article, contrary to law, or
2. Receive, conceal, buy, sell, or in any manner facilitate
the transportation, concealment, or sale of such article
after importation, knowing the same to have been
imported contrary to law. (Sec. 3601, TCC)
When, upon trial for a violation of this section, the defendant
is shown to have or to have had possession of the article in
question, such possession shall be deemed sufficient evidence
to authorize conviction, unless the defendant shall explain the
possession to the satisfaction of the court.
Various Fraudulent Practices Against Customs Revenue

Any person who makes or attempts to make any entry of
imported or exported article by means of:
302 TAX 2 REVEALED
1. Any false or fraudulent invoice, declaration, affidavit,

letter, paper, or
2. By means of any false statement, written or verbal, or
3. By means of any false or fraudulent practice whatsoever,
or
4. Shall be guilty of any willful act or omission by means
of whereof the Government might be deprived of the
lawful duties, taxes and other charges, or any portion
thereof, accruing from the article or any portion thereof,
embraced or referred to in such invoice, declaration,
affidavit, letter, paper, or statement, or affected by such
act or omission. (Sec. 3602, TCC)
Failure to Report Fraud
Any master, pilot in command or other officer, owner

or agent of any vessel or aircraft trading with or within the
Philippines and any employee of the Bureau of Customs, who,
having cognizance of any fraud upon the customs revenue, shall
fail to report all information relative thereto to the Collector, as
by law required. (Sec. 3603, TCC)
C o n c e a l m e n t or Destruction of E v i d e n c e of F r a u d
Any person who:

1. Willfully conceals or destroys, any invoice, book or
paper relating to any article liable to duty, after an
inspection thereof has been demanded by the Collector
of any Collection district, or
2. At any time conceals or destroys any such invoice, book
or paper for the purpose of suppressing any evidence
of fraud therein contained. (Sec. 3605, TCC)
Breaking of Seal on Car or C o n v e y a n c e by L a n d , Sea or Air
Any person who shall willfully break or destroy any seal

placed by a customs official upon any car, or other conveyance
by land, sea or air, or any compartment thereof. (Sec. 3606, TCC)
Chapter 7 303
Alteration of M a r k s on A n y P a c k a g e of W a r e h o u s e d Articles
Any person who alters, defaces or obliterates any distinctive

mark placed by a customs official on any package of warehoused
articles shall be liable to fine of not more than one thousand
pesos. (Sec. 3607, TCC)
Fraudulent O p e n i n g o r Entering o f W a r e h o u s e
Any importer or owner of warehoused articles, or person in

his employ, who by contrivance:
1. Fraudulently opens the warehouse, or
2. Gains access to the articles, except in the presence of the
proper official of the customs acting in the execution of
his duty. (Sec. 3608, TCC)
Fraudulent R e m o v a l o r C o n c e a l m e n t o f W a r e h o u s e d Articles
Any person who shall:

1. Fraudulently remove warehoused articles from any
public or private warehouse or
2. Shall fraudulently conceal such articles in any such
warehouse, or
3. Shall aid or abet any such removal or concealment.
(Sec. 3609, TCC)
Violation of Tariff a n d C u s t o m s L a w s a n d Regulations in

General
Any person who violates a provision of this Code or
regulations pursuant thereto, for which delinquency no specific
penalty is provided, shall be punished by a fine of not more than
four hundred pesos or by imprisonment for not more than six
months, or both. (Sec. 3610, TCC)
Chapter 8
P O W E R S O F T H E BIR A N D T H E CIR
The taxpayer must be apprised of the authority and powers

of the Commissioner. Outside of these powers, any assessment or
investigation made can be considered as erroneous, capricious or
an arbitrary assessment. The legality and constitutionality can be
assailed by the taxpayer. An erroneous, capricious or an arbitrary
assessment is a valid cause of action against the government and
its officials.
Powers of the C o m m i s s i o n e r of Internal R e v e n u e
1. Power of the Commissioner to Interpret Tax Laws and to

Decide Tax Cases (Sec. 4, NIRC)
The power to interpret the provisions of this Code and other
tax laws shall be under the exclusive and original jurisdiction of
the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed
in relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.
In Agencia Exquisite of Bohol, Inc. v. CIR (G.R. No.
150141 [2009]), it was held that adding to the invalidity of RMC
No. 43-91 and RMO No. 15-91 is the absence of publication.
While the rule-making authority of the CIR is not doubted, like
any other government agency, the CIR may not disregard legal
requirements or applicable principles in the exercise of quasi-
legislative powers.
304
Chapter 8 305
POWERS OF THE BIR AND THE CIR
XXX
RMO No. 15-91 and RMC No. 43-91 cannot be

viewed simply as implementing rules or corrective
measures revoking in the process the previous rulings
of past Commissioners. Specifically, they would have
been amendatory provisions applicable to pawnshops,
xxx. The due observance of the requirements of notice,
hearing, and publication should not have been ignored.
xxx
2. Power of the Commissioner to Obtain Information, and to

Summon, Examine, and Take Testimony of Persons (Sec. 5,
NIRC)
In ascertaining the correctness of any return, or in making a
return when none has been made, or in determining the liability
of any person for any internal revenue tax, or in collecting any
such liability, or in evaluating tax compliance, the Commissioner
is authorized:
A. To examine any book, paper, record, or other data
which may be relevant or material to such inquiry;
B. To obtain on a regular basis from any person oth-
er than the person whose internal revenue tax liability is
subject to audit or investigation, or from any office or officer
of the national and local governments, government agen-
cies and instrumentalities, including the Bangko Sentral ng
Pilipinas and government-owned or -controlled corpora-
tions, any information such as, but not limited to, costs and
volume of production, receipts or sales and gross incomes
of taxpayers, and the names, addresses, and financial state-
ments of corporations, mutual fund companies, insurance
companies, regional operating headquarters of multination-
al companies, joint accounts, associations, joint ventures of
consortia and registered partnerships, and their members;
C. To summon the person liable for tax or required
to file a return, or any officer or employee of such person, or
any person having possession, custody, or care of the books
306 TAX 2 REVEALED
of accounts and other accounting records containing entries

relating to the business of the person liable for tax, or any
other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in
the summons and to produce such books, papers, records,
or other data, and to give testimony;
D. To take such testimony of the person concerned,
under oath, as may be relevant or material to such inquiry;
and
E. To cause revenue officers and employees to make
a canvass from time to time of any revenue district or region
and inquire after and concerning all persons therein who
may be liable to pay any internal revenue tax, and all persons
owning or having the care, management or possession of
any object with respect to which a tax is imposed.
The provisions of the foregoing paragraphs notwithstanding,
nothing in this Section shall be construed as granting the
Commissioner the authority to inquire into bank deposits other
than as provided for in Sec. 6(F) of this Code.
3. Power of the Commissioner to Make Assessments and

Prescribe additional Requirements for Tax Administration
and Enforcement. (Sec. 6, NIRC)
A. Examination of Returns and Determination of Tax Due. -
After a return has been filed as required under the provisions
of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer
and the assessment of the correct amount of tax: Provided, however;
That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer.
Any return, statement of declaration filed in any office
authorized to receive the same shall not be withdrawn: Provided,
That within three (3) years from the date of such filing, the same
may be modified, changed, or amended: Provided, further, That
no notice for audit or investigation of such return, statement or
declaration has in the meantime been actually served upon the
taxpayer.
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307
B. Failure to Submit Required Returns, Statements, Reports

and other Documents. - When a report required by law as a basis
for the assessment of any national internal revenue tax shall
not be forthcoming within the time fixed by laws or rules and
regulations or when there is reason to believe that any such
report is false, incomplete or erroneous, the Commissioner shall
assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other
document at the time prescribed by law, or willfully or
otherwise files a false or fraudulent return or other document,
the Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through
testimony or otherwise, which shall be prima facie correct and
sufficient for all legal purposes.
C. Authority to Conduct Inventory-taking, surveillance and to
Prescribe Presumptive Gross Sales and Receipts. - The Commissioner
may, at any time during the taxable year, order inventory-taking
of goods of any taxpayer as a basis for determining his internal
revenue tax liabilities, or may place the business operations of any
person, natural or juridical, under observation or surveillance
if there is reason to believe that such person is not declaring
his correct income, sales or receipts for internal revenue tax
purposes. The findings may be used as the basis for assessing the
taxes for the other months or quarters of the same or different
taxable years and such assessment shall be deemed prima facie
correct.
When it is found that a person has failed to issue receipts and
invoices in violation of the requirements of Sections 113 and 237
of this Code, or when there is reason to believe that the books of
accounts or other records do not correctly reflect the declarations
made or to be made in a return required to be filed under the
provisions of this Code, the Commissioner, after taking into
account the sales, receipts, income or other taxable base of other
persons engaged in similar businesses under similar situations
or circumstances or after considering other relevant information
may prescribe a minimum amount of such gross receipts, sales
and taxable base, and such amount so prescribed shall be prima
308 TAX 2 REVEALED
facie correct for purposes of determining the internal revenue tax

liabilities of such person.
D. Authority to Terminate Taxable Period. - When it shall
come to the knowledge of the Commissioner that a taxpayer
is retiring from business subject to tax, or is intending to leave
the Philippines or to remove his property therefrom or to hide
or conceal his property, or is performing any act tending to
obstruct the proceedings for the collection of the tax for the past
or current quarter or year or to render the same totally or partly
ineffective unless such proceedings are begun immediately, the
Commissioner shall declare the tax period of such taxpayer
terminated at any time and shall send the taxpayer a notice of
such decision, together with a request for the immediate payment
of the tax for the period so declared terminated and the tax for
the preceding year or quarter, or such portion thereof as may be
unpaid, and said taxes shall be due and payable immediately
and shall be subject to all the penalties hereafter prescribed,
unless paid within the time fixed in the demand made by the
Commissioner.
E. Authority of the Commissioner to Prescribe Real Property
Values. — The Commissioner is hereby authorized to divide
the Philippines into different zones or areas and shall, upon
consultation with competent appraisers both from the private and
public sectors, determine the fair market value of real properties
located in each zone or area. For purposes of computing any
internal revenue tax, the value of the property shall be, whichever
is the higher of:
1. The fair market value as determined by the

Commissioner, or
2. The fair market value as shown in the schedule of
values of the Provincial and City Assessors.
F. Authority of the Commissioner to inquire into Bank Deposit
Accounts. — Notwithstanding any contrary provision of Republic
Act No. 1405 and other general or special laws, the Commissioner
is hereby authorized to inquire into the bank deposits of:
Chapter 8
309
1. A decedent to determine his gross estate; and

2. Any taxpayer who has filed an application for
compromise of his tax liability under Sec. 204(A)(2) of this
Code by reason of financial incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the
payment of his tax liabilities on his claim that his financial
position demonstrates a clear inability to pay the tax assessed,
his application shall not be considered unless and until he waives
in writing his privilege under RA 1405 or under other general or
special laws, and such waiver shall constitute the authority of the
Commissioner to inquire into the bank deposits of the taxpayer.
G. Authority to Accredit and Register Tax Agents. - The Com-
missioner shall accredit and register, based on their professional
competence, integrity and moral fitness, individuals and general
professional partnerships and their representatives who prepare
and file tax returns, statements, reports, protests, and other pa-
pers with or who appear before, the Bureau for taxpayers. Within
one hundred twenty (120) days from January 1, 1998, the Com-
missioner shall create national and regional accreditation boards,
the members of which shall serve for three (3) years, and shall
designate from among the senior officials of the Bureau, one (1)
chairman and two (2) members for each board, subject to such
rules and regulations as the Secretary of Finance shall promul-
gate upon the recommendation of the Commissioner.
Individuals and general professional partnerships and

their representatives who are denied accreditation by the Com-
missioner and / or the national and regional accreditation boards
may appeal such denial to the Secretary of Finance, who shall
rule on the appeal within sixty (60) days from the receipt of such
appeal. Failure of the Secretary of Finance to rule on the Appeal
within the prescribed period shall be deemed as approval of the
application for accreditation of the appellant.
H. Authority of the Commissioner to Prescribe Additional
Procedural or Documentary Requirements. — The Commissioner
may prescribe the manner of compliance with any documentary
or procedural requirement in connection with the submission
310 TAX 2 REVEALED
or preparation of financial statements accompanying the tax

returns.
4. Authority of the Commissioner to Delegate Power (Sec. 7,

NIRC)
The Commissioner may delegate the powers vested in
him under the pertinent provisions of this Code to any or such
subordinate officials with the rank equivalent to a division chief
or higher, subject to such limitations and restrictions as may be
imposed under rules and regulations to be promulgated by the
Secretary of finance, upon recommendation of the Commissioner:
Provided, however, That the following powers of the Commissioner
shall not be delegated:
a. The power to recommend the promulgation of
rules and regulations by the Secretary of Finance;
b. The power to issue rulings of first impression or to
reverse, revoke or modify any existing ruling of the Bureau;
c. The power to compromise or abate, under Sec.
204(A) and (B) of this Code, any tax liability: Provided, however,
That assessments issued by the regional offices involving
basic deficiency taxes of Five hundred thousand pesos
(P500,000) or less, and minor criminal violations, as may
be determined by rules and regulations to be promulgated
by the Secretary of finance, upon recommendation of the
Commissioner, discovered by regional and district officials,
may be compromised by a regional evaluation board which
shall be composed of the Regional Director as Chairman,
the Assistant Regional Director, the heads of the Legal,
Assessment and Collection Divisions and the Revenue
District Officer having jurisdiction over the taxpayer, as
members; and
d. The power to assign or reassign internal revenue

officers to establishments where articles subject to excise tax
are produced or kept.
The general rule is that the Commissioner of Internal
Revenue may delegate any power vested upon him by law to
Chapter 8 311
Division Chiefs or to officials of higher rank. He cannot, however,

delegate the four powers granted to him under the National
Internal Revenue Code (NIRC) enumerated in Section 7.
It is clear from the above provision that the act of issuance
of the demand letter by the Chief of the Accounts Receivable and
Billing Division does not fall under any of the exceptions that
have been mentioned as non-delegable.
Section 6 of the Code further provides:
SEC. 6. Power of the Commissioner to Make Assess-

ments' and Prescribe Additional Requirements for Tax
Administration and Enforcement.
(A) Examination of Returns and Determination of Tax
Due. — After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination
of any taxpayer and the assessment of the correct amount
of tax; Provided, however, That failure to file a return shall
not prevent the Commissioner from authorizing the
examination of any taxpayer.
The tax or any deficiency tax so assessed shall be paid
upon notice and demand from the Commissioner or from
his duly authorized representative— (Emphasis supplied)
Thus, the authority to make tax assessments may be
delegated to subordinate officers. Said assessment has the same
force and effect as that issued by the Commissioner himself, if not
reviewed or revised by the latter such as in this case. (Oceanic
Wireless Network, Inc. v. CIR, 477 SCRA 205 [2005])
5. Duty of the Commissioner to Ensure the Provision and

Distribution of forms, Receipts, Certificates, and Appli-
ances, and the Acknowledgment of Payment of Taxes (Sec.
8, NIRC)
A. Provision and Distribution to Proper Officials. — It
shall be the duty of the Commissioner, among other things,
to prescribe, provide, and distribute to the proper officials the
312 TAX 2 REVEALED
requisite licenses internal revenue stamps labels all other forms,

certificates, bonds, records, invoices, books, receipts, instruments,
appliances and apparatus used in administering the laws falling
within the jurisdiction of the Bureau. For this purpose, internal
revenue stamps, strip stamps and labels shall be caused by the
Commissioner to be printed with adequate security features.
Internal revenue stamps, whether of a bar code or fusion
design, shall be firmly and conspicuously affixed on each pack
of cigars and cigarettes subject to excise tax in the manner and
form as prescribed by the Commissioner, upon approval of the
Secretary of Finance.
B. Receipts for Payment Made. — It shall be the duty of
the Commissioner or his duly authorized representative or an
authorized agent bank to whom any payment of any tax is made
under the provision of this Code to acknowledge the payment of
such tax, expressing the amount paid and the particular account
for which such payment was made in a form and manner
prescribed therefor by the Commissioner.
6. Assignment of Internal Revenue Officers and Other

Employees to Other Duties (Sec. 17, NIRC)
The Commissioner may, subject to the provisions of
Sec. 16 and the laws on civil service, as well as the rules and
regulations to be prescribed by the Secretary of Finance upon
the recommendation of the Commissioner, assign or reassign
internal revenue officers and employees of the Bureau of Internal
Revenue, without change in their official rank and salary, to
other or special duties connected with the enforcement or
administration of the revenue laws as the exigencies of the service
may require: Provided, That internal revenue officers assigned to
perform assessment or collection function shall not remain in the
same assignment for more than three (3) years; Provided, further,
That assignment of internal revenue officers and employees of
the Bureau to special duties shall not exceed one (1) year.
7. Power to Apply Accounting Period (Sec. 43, NIRC)

The taxable income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year,
Chapter 8 313
as the case may be) in accordance with the method of accounting

regularly employed in keeping the books of such taxpayer, but
if no such method of accounting has been so employed, or if
the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as
in the opinion of the Commissioner clearly reflects the income.
If the taxpayer's annual accounting period is other than a fiscal
year, as defined in Section 22(Q), or if the taxpayer has no annual
accounting period, or does not keep books, or if the taxpayer is
an individual, the taxable income shall be computed on the basis
of the calendar year. (Emphasis supplied)
8. Allocation of Income and Deductions (Sec. 50, NIRC)

In the case of two or more organizations, trades or businesses
(whether or not incorporated and whether or not organized in
the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to distribute,
apportion or allocate gross income or deductions between or
among such organization, trade or business, if he determined
that such distribution, apportionment or allocation is necessary
in order to prevent evasion of taxes or clearly to reflect the income
of any such organization, trade or business.
9. Power of the Commissioner to Suspend the Business

Operations of a Taxpayer (Sec. 115, NIRC)
The Commissioner or his authorized representative is
hereby empowered to suspend the business operations and
temporarily close the business establishment of any person for
any of the following violations:
a. In the case of a VAT-registered person.
i. Failure to issue receipts or invoices;
ii. Failure to file a value-added tax return as required
under Section 114; or
iii. Understatement of taxable sales or receipts by
thirty percent (30%) or more of his correct taxable
sales or receipts for the taxable quarter.
314 TAX 2 REVEALED
b. Failure of any person to register as required under Sec.

236.
The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only
upon compliance with whatever requirements prescribed by the
Commissioner in the closure order.
RMO 3-2009 provides for the "Oplan Kandado" of the BIR.
The closure of a business establishment shall last for a period of
not less than five (5) days, and shall be in force until the violation
is rectified.
10. The Power to File Civil and Criminal Actions

Civil and criminal actions and proceedings instituted in
behalf of the Government under the authority of this Code or
other law enforced by the Bureau of Internal Revenue shall be
brought in the name of the Government of the Philippines and
shall be conducted by legal officers of the Bureau of Internal
Revenue but no civil or criminal action for the recovery of taxes or
the enforcement of any fine, penalty or forfeiture under this Code
shall be filed in court without the approval of the Commissioner.
(Sec. 220, NIRC)
The remedy for enforcement of statutory penalties of all
sorts shall be by criminal or civil action, as the particular situation
may require, subject to the approval of the Commissioner. (Sec.
221, NIRC)
11. Non-Retroactivity of Rulings (Sec. 246, NIRC)

Any revocation, modification or reversal of any of the rules
and regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
a. Where the taxpayer deliberately misstates or omits
material facts from his return or any document required of
him by the Bureau of Internal Revenue;
Chapter 8 315
b. Where the facts subsequently gathered by the

Bureau of Internal Revenue are materially different from
the facts on which the ruling is based; or
c. Where the taxpayer acted in bad faith.
In a long line of cases, the Supreme Court has affirmed that
the rulings, circular, rules and regulations promulgated by the
Commissioner of Internal Revenue would have no retroactive
application if to so apply them would be prejudicial to the
taxpayers. (CIR v. Benguet Corporation, 463 SCRA 29 [2005])
The determination of whether respondent had suffered
prejudice is a factual issue. It is an established rule that in the
exercise of its power of review, the Supreme Court is not a
trier of facts. Moreover, in the exercise of the Supreme Court's
power of review, the findings of facts of the Court of Appeals are
conclusive and binding on the Supreme Court. An exception to
this rule is when the findings of fact a quo are conflicting. (Supra)
Other Percentage Taxes
Section 116 provides the tax on persons exempt from value-

added tax (VAT), to wit:
"Any person whose sales or receipts are exempt
under Section 109(V) of this Code from the payment
of value-added tax and who is not a VAI-registered
person shall pay a tax equivalent to three percent (3%)
of his gross quarterly sales or receipts: Provided, That
cooperatives shall be exempt from the three percent
(3%) gross receipts tax herein imposed."
Simply put, percentage tax is imposed on persons whose
sales or receipts are:
1. Gross annual sales and /or receipts do not exceed the
amount of Pl,500,000.00
2. Not VAT-registered.
Percentage Tax Distinguished from Income Tax

A percentage tax is a national tax measured by a certain
percentage of the gross selling price or gross value in money
of goods sold, bartered or imported or the gross receipts from

earnings derived by any person engaged in the sale of services.
It is not subject to withholding. On the other hand, an income
tax is a national tax imposed on the net or gross income realized
in a taxable year. It is subject to withholding. (CIR v. Solidbank
Corporation, 416 SCRA 437 [2003])
Imposition
The three percent (3%) percentage tax is based on the gross
quarterly sales or receipts.
Simplified:
1. Below P1.5M ceiling and not VAT registered — 3%

percentage tax
2. Exceeds P1.5M ceiling whether VAT or not VAT
registered — 1 2 % VAT
3. Person covered and VAT registered regardless of sales
— 1 2 % VAT
Percentage taxes:
1. Percentage tax on domestic carriers and keepers of
garage (Sec. 117)
2. Percentage tax on international carriers (Sec. 118)
3. Tax on franchises (Sec. 119)
a. Radio and / or television broadcasting companies
b. Gas and water utilities
4. Tax on overseas dispatch, message or conversation
originating from the Philippines (Sec. 120)
5. Tax on banks and non-bank financial intermediaries
performing quasi banking functions (Sec. 121)
6. Tax on other non-bank financial intermediaries (Sec.
122)
7. Tax on life insurance premiums (Sec. 123)
Chapter 8 317
n iWERS OF THE BIR AND THE CIR
8. Tax on agents of foreign insurance companies (Sec. 124)

9. Amusement taxes (Sec. 125)
10. Tax on winnings (Sec. 126)
11. Tax on sale, barter or exchange of shares of stock listed
and traded through the local stock exchange or
through initial public offering (Sec. 127)
P e r c e n t a g e Tax on D o m e s t i c Carriers and Keepers of

G a r a g e s (Sec. 117)
Cars for rent or hire driven by the lessee, transportation

contractors, including persons who transport passengers for
hire, and other domestic carriers by land, air or water, for the
transport of passengers (except owners of bancas and owner of
animal-drawn two wheeled vehicle) and keepers of garages shall
pay a tax equivalent to three percent (3%) of their quarterly gross
receipts.
The gross receipts of common carriers derived from their
incoming and outgoing freight shall not be subjected to the local
taxes imposed under RA 7160, otherwise known as the Local
Government Code of 1991.
In computing the percentage tax provided in this Section,
the following shall be considered the minimum quarterly gross
receipts in each particular case:
Jeepney for hire
1. Manila and other cities P 2,400
2. Provincial 1,200
Public utility bus
Not exceeding 30 passengers 3,600
Exceeding 30 but not exceeding 50 passengers 6,000
Exceeding 50 passengers 7,200
Tim's
1. Manila and other cities P3,600
TAX 2 REVEALED
318
2. Provincial 2,400
Car for hire (with chauffer) 3,000
Car for hire (without chauffer) 1,800
Percentage Tax on International Carriers (Sec. 118, NIRC)
A. International air carriers doing business in the

Philippines shall pay a tax of three percent (3%) of their quarterly
gross receipts.
B. International shipping carriers doing business in the
Philippines shall pay a tax equivalent to three percent (3%) of
their quarterly gross receipts.
Tax on Franchises (Sec. 119, NIRC)

Any provision of general or special law to the contrary
notwithstanding, there shall be levied, assessed and collected in
respect to all franchises on radio and/or television broadcasting
companies whose annual gross receipts of the preceding year
does not exceed Ten million pesos (P10,000,000.00), subject to
Sec. 236 of this Code, a tax of three percent (3%) and on electric,
gas and water utilities, a tax of two percent (2%) on the gross
receipts derived from the business covered by the law granting
the franchise: Provided, however, That radio and television
broadcasting companies referred to in this Section shall have an
option to be registered as a value-added taxpayer and pay the tax
due thereon: Provided, further, That once the option is exercised,
said option shall be irrevocable.
Tax on O v e r s e a s D i s p a t c h , M e s s a g e or C o n v e r s a t i o n
Originating f r o m t h e Philippines (Sec. 120, NIRC)
A. Persons Liable.
There shall be collected upon every overseas dispatch,
message or conversation transmitted from the Philippines by
telephone, telegraph, telewriter exchange, wireless and other
communication equipment service, a tax of ten percent (10%)
on the amount paid for such services. The tax imposed in this
Chapter 8
319
Section shall be payable by the person paying for the services

rendered and shall be paid to the person rendering the services
who is required to collect and pay the tax within twenty (20)
days after the end of each quarter.
8. Exemptions
The tax imposed by this Section shall not apply to:
1. Government
Amounts paid for messages transmitted by the
Government of the Republic of the Philippines or any
of its political subdivisions or instrumentalities;
2. Diplomatic Services
Amounts paid for messages transmitted by any
embassy and consular offices of a foreign government;
3. International Organizations
Amounts paid for messages transmitted by a
public international organization or any of its agencies
based in the Philippines enjoying privileges, exemp-
tions and immunities which the Government of the
Philippines is committed to recognize pursuant to an
international agreement; and
4. News Services
Amounts paid for messages from any newspaper,
press association, radio or television newspaper,
broadcasting agency, or newstickers services, to any
other newspaper, press association, radio or television
newspaper broadcasting agency, or newsticker service
or to a bona fide correspondent, which messages deal
exclusively with the collection of news items for, or
the dissemination of news item through, public press,
radio or television broadcasting or a newsticker service
furnishing a general news service similar to that of the
public press.
TAX 2 REVEALED
320
Tax on Banks and Non-Bank Financial (Sec. 121, NIRC)
Intermediaries
There shall be a collected tax on gross receipts derived
from sources within the Philippines by all banks and non-
bank financial intermediaries in accordance with the following
schedule:
a. On interest, commissions and discounts from
lending activities as well as income from financial leasing,
on the basis of remaining maturities of instruments from
which such receipts are derived:
Maturity period is five years or less 5%
Maturity period is more than five years or less 1%
b. On dividends and equity shares and net
income of subsidiaries 0%
c. On royalties, rentals of property, real or
personal, profits, from exchange and all other
items treated as gross income under
Section 32 of this Code 7%
d. On net trading gains within the taxable
year on foreign currency, debt securities,
derivatives, and other similar financial
statements 7%
Provided, however, That in case the maturity period referred
to in paragraph (a) is shortened thru pre-termination, then the
maturity period shall be reckoned to end as of the date of pre-
termination for purposes of classifying the transaction as short,
medium or long-term and the correct rate of tax shall be applied
accordingly.
Provided, finally, That the generally accepted accounting

principles as may be prescribed by the Bangko Sentral ng
Pilipinas for the bank or non-bank financial intermediary
performing quasi-banking functions shall likewise be the basis
for the calculation of gross receipts.
Chapter 8
321
Nothing in this Code shall preclude the Commissioner from

imposing the same tax herein provided on persons performing
similar banking activities.
Tax on Other N o n - B a n k Financial Intermediaries (Sec. 122

NIRC)
There shall be collected a tax of five percent (5%) on the
gross receipts derived by other non-bank financial intermediaries
doing business in the Philippines, from interest, commissions,
discounts and all other items treated as gross income under
the Code: Provided, That interests, commissions and discounts
from lending activities, as well as income from financial leasing,
shall be taxed on the basis of the remaining maturities of the
instruments from which such receipts are derived, in accordance
with the following schedule:
Maturity period is 5 years or less 5%

Maturity period is more than 5 years 1%
Provided, however, That in case the maturity period is

shortened thru pretermination, then the maturity period shall be
reckoned to end as of the date of pretermination for purposes of
classifying the transaction as short, medium or long-term and
the correct rate of tax shall be applied accordingly.
Provided, finally, That the generally accepted accounting
principles as may be prescribed by the Securities and Exchange
Commission for other non-bank financial intermediaries shall
likewise be the basis for the calculation of gross receipts.
Nothing in the Code shall preclude the Commissioner from
imposing the same tax herein provided on persons performing
similar financing activities.
Tax on Life Insurance P r e m i u m s (Sec. 123, NIRC)

There shall be collected from every person, company or cor-
poration (except purely cooperative companies or associations)
doing life insurance business of any sort in the Philippines a tax
of five percent (5%) of the total premium collected, whether such
322 TAX 2 REVEALED
premiums are paid in money, notes, credits or any substitute for

money; but premiums refunded within six (6) months after pay-
ment on account of rejection of risk or returned for other reason
to a person insured shall not be included in the taxable receipts;
nor shall any tax be paid upon reinsurance by a company that
has already paid the tax; nor upon doing business outside the
Philippines on account of any life insurance of the insured who
is a nonresident, if any tax on such premium is imposed by the
foreign country where the branch is established nor upon premi-
ums collected or received on account of any reinsurance, if the
insured, in case of personal insurance, resides outside the Phil-
ippines, if any tax on such premiums is imposed by the foreign
country where the original insurance has been issued or perfect-
ed; nor upon that portion of the premiums collected or received
by the insurance companies on variable contracts (as defined in
Sec. 232[2] ofPD 612), in excess of the amounts necessary to in-
sure the lives of the variable contract workers.
Cooperative companies or associations are such as are
conducted by the members thereof with the money collected
from among themselves and solely for their own protection and
not for profit.
Tax on A g e n t s of Foreign I n s u r a n c e C o m p a n i e s (Sec. 124,

NIRC)
Every fire, marine or miscellaneous insurance agent
authorized under the Insurance Code to procure policies of
insurance as he may have previously been legally authorized
to transact on risks located in the Philippines for companies not
authorized to transact business in the Philippines shall pay a
tax equal to twice the tax imposed in Sec. 123: Provided, That the
provision of this Section shall not apply to reinsurance: Provided,
however, That the provisions of this Section shall not affect the
right of an owner of property to apply for and obtain for himself
policies in foreign companies in cases where said owner does not
make use of the services of any agent, company or corporation
residing or doing business in the Philippines. In all cases where
owners of property obtain insurance directly with foreign
companies, it shall be the duty of said owners to report to the
Chapter 8 323
Insurance Commissioner and to the Commissioner each case

where insurance has been so effected, and shall pay the tax of
five percent (5%) on premiums paid, in the manner required by
Sec. 123.
A m u s e m e n t Taxes (Sec. 125, NIRC)
There shall be collected from the proprietor, lessee or operator

of cockpits, cabarets, night or day clubs, boxing exhibitions,
professional basketball games, Jai-Alai and racetracks, a tax
equivalent to:
a. Cockpits-18%;
b. Cabarets, night or day clubs - 18%;
c. Boxing exhibitions - 1 0 %
i. Boxing exhibitions wherein World or Oriental
Championships in any division is at stake shall be
exempt from amusement tax:
ii. At least one of the contenders for World or Oriental
Championship is a citizen of the Philippines, and
iii. Said exhibitions are promoted by a citizen/s of
the Philippines or by a corporation or association
at least sixty percent (60%) of the capital of which
is owned by such citizens;
d. Professional basketball games — 15% as envisioned in
PD 871: Provided, however, That the tax herein shall be
in lieu of all other percentage taxes of whatever nature
and description; and
e. Jai-Alai and racetracks — 30% of their gross receipts,
irrespective, of whether or not any amount is charged
for admission.
For the purpose of the amusement tax, the term "gross
receipts" embraces all the receipts of the proprietor, lessee or
operator of the amusement place. Said gross receipts also include
income from television, radio and motion picture rights, if any. A
person or entity or association conducting any activity subject to
324 TAX 2 REVEALED
the tax herein imposed shall be similarly liable for said tax with
respect to such portion of the receipts derived by him or it.
The taxes imposed herein shall be payable at the end of each
quarter and it shall be the duty of the proprietor, lessee or operator
concerned, as well as any party liable, within twenty (20) days
after the end of each quarter, to make a true and complete return
of the amount of the gross receipts derived during the preceding
quarter and pay the tax due thereon.
The foregoing provision should not be confused with the
amusement tax imposed by the local government. In PBA v. CA
(337 SCRA 359 [2000]), it was held that the laws on the matter are
succinct and clear and need no elaborate disquisition. Sec. 13 of
the Local Tax Code provides:
"SECTION 13. Amusement tax on admission. — The

province shall impose a tax on admission to be collected
from the proprietors, lessees, or operators of theaters,
cinematographs, concert halls, circuses and other places of
amusement..."
The foregoing provision of law in point indicates that the

province can only impose a tax on admission from the proprietors,
lessees, or operators of theaters, cinematographs, concert halls,
circuses and other places of amusement. The authority to tax
professional basketball games is not therein included, as the same
is expressly embraced in PD 1959, which amended PD 1456.
From the foregoing, it is clear that the "proprietor, lessee or
operator of . . . professional basketball games" is required to pay
an amusement tax equivalent to fifteen per centum (15%) of their
gross receipts to the Bureau of Internal Revenue, which payment
is a national tax. The said payment of amusement tax is in lieu
of all other percentage taxes of whatever nature and description.
While Sec. 13 of the Local Tax Code mentions "other places
of amusement," professional basketball games are definitely not
within its scope. Under the principle of ejusdem generis, where
general words follow an enumeration of persons or things, by
words of a particular and specific meaning, such general words
Chapter 8
325
are not to be construed in their widest extent, but are to be held

as applying only to persons or things of the same kind or class as
those specifically mentioned. Thus, in determining the meaning
of the phrase "other places of amusement," one must refer to the
prior enumeration of theaters, cinematographs, concert halls and
circuses with artistic expression as their common characteristic.
Professional basketball games do not fall under the same
category as theaters, cinematographs, concert halls and circuses
as the latter basically belong to artistic forms of entertainment
while the former caters to sports and gaming.
In CIR v. S M Prime Holdings, Inc. (G.R. No. 183505 [2010]),
the High Court said that, x x x these reveal the legislative intent
not to impose VAT on persons already covered by the amusement
tax. This holds true even in the case of cinema /theater operators
taxed under the LGC of 1991 precisely because the VAT law was
intended to replace the percentage tax on certain services. The
mere fact that they are taxed by the local government unit and
not by the national government is immaterial. The Local Tax
Code, in transferring the power to tax gross receipts derived by
cinema/theater operators or proprietor from admission tickets
to the local government, did not intend to treat cinema/theater
houses as a separate class. No distinction must, therefore, be
made between the places of amusement taxed by the national
government and those taxed by the local government.
At present, only lessors or distributors of cinematographic

films are subject to VAT. While persons subject to amusement tax
under the NIRC of 1997 are exempt from the coverage of VAT.
Tax on Winnings (Sec. 126, NIRC)

Every person who wins in horse races shall pay a tax
equivalent to ten percent (10%) of his winnings or 'dividends,'
the tax to be based on the actual amount paid to him for every
winning ticket after deducting the cost of the ticket: Provided,
That in the case of winnings from double, forecast/quinella and
trifecta bets, the tax shall be four percent (4%). In the case of
owners of winning race horses, the tax shall be ten percent (10%)
of the prizes.
TAX 2 REVEALED
326
The tax herein prescribed shall be deducted from the

'dividends' corresponding to each winning ticket or the "prize"
of each winning race horse owner and withheld by the operator,
manager or person in charge of the horse races before paying the
dividends or prizes to the persons entitled thereto.
The operator, manager or person in charge of horse races
shall, within twenty (20) days from the date the tax was deducted
and withheld in accordance with the second paragraph hereof,
file a true and correct return with the Commissioner in the
manner or form to be prescribed by the Secretary of Finance, and
pay within the same period the total amount of tax so deducted
and withheld.
Tax on Sale, Barter or E x c h a n g e of S h a r e s of S t o c k Listed

and Traded T h r o u g h the Local Stock E x c h a n g e or T h r o u g h
Initial Public Offering (Sec. 127, NIRC)
A. Tax on Sale, Barter or Exchange of Shares of Stock Listed

and Traded Through the Local Stock Exchange. — There shall be
levied, assessed and collected on every sale, barter, exchange, or
other disposition of shares of stock listed and traded through the
local stock exchange other than the sale by a dealer in securities,
a tax at the rate of one-half of one percent (1 / 2 of 1%) of the gross
selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which shall be paid
by the seller or transferor.
B. Tax on Shares of Stock Sold or Exchanged Through Initial

Public Offering. — There shall be levied, assessed and collected on
every sale, barter, exchange or other disposition through initial
public offering of shares of stock in closely held corporations, as
denned herein, a tax at the rates provided hereunder based on the
gross selling price or gross value in money of the shares of stock
sold, bartered, exchanged or otherwise disposed in accordance
with the proportion of shares of stock sold, bartered, exchanged
or otherwise disposed to the total outstanding shares of stock
after the listing in the local stock exchange:
Up to twenty-five percent (25%) 4%

Chapter 8 327
Over twenty-five percent (25%) but not over

thirty-three and one third percent (33 1/3%) 2%
Over thirty-three and one third percent (33 1 / 3 % ) 1%
The tax herein imposed shall be paid by the issuing corpo-
ration in primary offering or by the seller in secondary offering.
For purposes of this Section, the term "closely held
corporation" means any corporation at least fifty percent (50%)
in value of outstanding capital stock or at least fifty percent (50%)
of the total combined voting power of all classes of stock entitled
to vote is owned directly or indirectly by or for not more than
twenty (20) individuals.
For purposes of determining whether the corporation is a
closely held corporation, insofar as such determination is based
on stock ownership, the following rules shall be applied:
1. Stock Not Owned by Individuals
Stock owned directly or indirectly by or for a cor-
poration, partnership, estate or trust shall be consid-
ered as being owned proportionately by its sharehold-
ers, partners or beneficiaries.
2. Family and Partnership Ownerships
An individual shall be considered as owning the
stock owned, directly or indirectly, by or for his family,
or by or for his partner. For purposes of the paragraph,
the 'family of an individual' includes only his brothers
and sisters (whether by whole or half-blood), spouse,
ancestors and lineal descendants.
3. Option
If any person has an option acquire stock, such
stock shall be considered as owned by such person. For
purposes of this paragraph, an option to acquire such
an option and each one of a series of options shall be
considered as an option to acquire such stock.
4. Constructive Ownership as Actual Ownership
Stock constructively owned by reason of the
application of paragraph (1) or (3) hereof shall, for
328 TAX 2 REVEALED
purposes of applying paragraph (1) or (2), be treated as

actually owned by such person; but stock constructively
owned by the individual by reason of the application
of paragraph (2) hereof shall not be treated as owned
by him for purposes of again applying such paragraph
in order to make another the constructive owner of
such stock.
C. Return on Capital Gains Realized from Sale of Shares
of Stocks. —
1. Return on Capital Gains Realized from Sale of Shares
of Stock Listed and Traded in the Local Stock Exchange
It shall be the duty of every stock broker who
effected the sale subject to the tax imposed herein to
collect the tax and remit the same to the Bureau of
Internal Revenue within five (5) banking days from the
date of collection thereof and to submit on Mondays
of each week to the secretary of the stock exchange,
of which he is a member, a true and complete return
which shall contain a declaration of all the transactions
effected through him during the preceding week and
of taxes collected by him and turned over to the Bureau
of Internal Revenue.
2. Return on Public Offerings of Share Stock

In case of primary offering, the corporate issuer
shall file the return and pay the corresponding tax
within thirty (30) days from the date of listing of the
shares of stock in the local stock exchange. In the case
of secondary offering, the provision of Subsection (C)
(1) of this Section shall apply as to the time and manner
of the payment of the tax.
D. Common Provisions
Any gain derived from the sale, barter, exchange or other
disposition of shares of stock under this Section shall be exempt
from the tax imposed in Sees. 24(C), 27(D)(2), 28(A)(8)(c), and
28(B)(5)(c) of this Code and from the regular individual or
Chapter 8 329
corporate income tax. Tax paid under this Section shall not be
deductible for income tax purposes.
Returns a n d P a y m e n t of P e r c e n t a g e Taxes (Sec. 128, NIRC)
A. Returns of Gross Sales, Receipts or Earnings and Payment

of Tax
1. Persons Liable to Pay Percentage Taxes
Every person subject to the percentage taxes
imposed under this Title shall file a quarterly return
of the amount of his gross sales, receipts or earnings
and pay the tax due thereon within twenty-five (25)
days after the end of each taxable quarter: Provided,
That in the case of a person whose VAT registration is
cancelled and who becomes liable to the tax imposed
in Sec. 116 of this Code, the tax shall accrue from the
date of cancellation and shall be paid in accordance
with the provisions of this Section.
2. Person Retiring from Business
Any person retiring from a business subject to
percentage tax shall notify the nearest internal revenue
officer, file his return and pay the tax due thereon
within twenty (20) days after closing his business.
3. Exceptions
The Commissioner may, by rules and regulations,
prescribe:
a. The time for filing the return at intervals other
than the time prescribed in the preceding para-
graphs for a particular class or classes of taxpay-
ers after considering such factors as volume of
sales, financial condition, adequate measures of
security, and such other relevant information re-
quired to be submitted under the pertinent provi-
sions of this Code; and
b. The manner and time of payment of percentage
taxes other than as hereinabove prescribed,
including a scheme of tax prepayment.
330 TAX 2 REVEALED
4. Determination of Correct Sales or Receipts

When it is found that a person has failed to issue
receipts or invoices, or when no return is filed, or when
there is a reason to believe that the books of accounts or
other records do not correctly reflect the declarations
made or to be made in a return required to be filed
under the provisions of this Code, the Commissioner,
after taking into account the sales, receipts or other
taxable base of other persons engaged in similar
businesses under similar situations or circumstances,
or after considering other relevant information may
prescribe a minimum amount of such gross receipts,
sales and taxable base and such amount so prescribed
shall be prima facie correct for purposes of determining
the internal revenue tax liabilities of such person.
B. Where to File
Except as the Commissioner otherwise permits, every
person liable to the percentage tax may, at his option:
1. File a separate return for each branch or place of
business, or
2. A consolidated return for all branches or places of
business
a. The authorized agent bank,
b. Revenue District Officer,
c. Collection Agent, or
d. Duly authorized Treasurer of the city or munici-
pality where said business or principal place of
business is located, as the case may be.
Documentary Stamp Taxes
S t a m p taxes u p o n d o c u m e n t s , loan a g r e e m e n t s , i n s t r u m e n t s
a n d papers
The Documentary Stamp Tax (DST) is levied on the exercise

by persons of certain privileges conferred by law for the creation,
Chapter 8 331
revision, or termination of specific legal relationships through

the specific instruments. It is an exercise upon the privilege,
opportunity, or facility offered at exchanges for the transaction
of the business. (Philippine Health Care Providers, Inc. v. CIR,
554 SCRA 411 [2008]) DST is essentially an excise tax. It is not an
imposition on the document itseld but on the privilege to enter
into a taxable transaction. (Michel J. Lhuiller Pawnshop, Inc. v.
CIR, 501 SCRA 451 [2006])
As such, there shall be levied, collected and paid for,
and in respect of the transaction so had or accomplished, the
corresponding documentary stamp taxes (DST). Clearly, DST is
a tax on the transaction and not on the document itself. It is a
tax imposed on the right or privilege of a person to enter into a
contract, undertaking, agreement and the likes.
DST is paid by the person making, signing, issuing, accepting,
or transferring the same wherever the document is made, signed,
issued, accepted or transferred when the obligation or right
arises from Philippine sources or the property is situated in the
Philippines, and the same time such act is done or transaction
had. Provided, That whenever one party to the taxable document
enjoys exemption from the tax herein imposed, the other party
who is not exempt shall be the one directly liable for the tax. (Sec.
173)
As held in Antam Pawnshop Corporation v. CIR (566
SCRA 57 [2008]), a documentary stamp tax is in the nature of
an excise tax. It is not imposed upon the business transacted but
is an excise upon the privilege, opportunity or facility offered at
exchanges for the transaction of the business. It is an excise upon
the facilities used in the transaction of the business separate and
apart from the business itself.
In general, documentary stamp taxes are levied on the
exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships
through the execution of specific instruments. Examples of
such privileges, the exercise of which, as effected through the
issuance of particular documents, are subject to the payment of
TAX 2 REVEALED
332
documentary stamp taxes are leases of lands, mortgages, pledges,

and trusts and conveyances of real property.
In this case, while the law does not consider the pawn ticket
as a security nor a printed evidence of indebtedness, what is
subject to DST is not the ticket itself but the privilege of entering
into a contract of pledge.
In general, DST is imposed upon:
1. Documents,
2. Instruments,
3. Loan agreements and papers,
4. Upon acceptances,
5. Assignments,
6. Sales and transfers of the obligation, right or property
incident thereto.
Effect of Failure to S t a m p Taxable D o c u m e n t
An instrument, document or paper which is required by law

to be stamped and which has been signed, issued, accepted or
transferred without being duly stamped, shall not be recorded,
nor shall it or any copy thereof or any record of transfer of the
same be admitted or used in evidence in any court until the
requisite stamp or stamps are affixed thereto and cancelled.
No notary public or other officer authorized to administer
oaths shall add his jurat or acknowledgment to any document
subject to documentary stamp tax unless the proper documentary
stamps are affixed thereto and cancelled. (Sec. 201, NIRC)
[Emphasis supplied]
Under Sec. 173 of the Internal Revenue Code, the liability
for payment of the stamp taxes is imposed on the person making,
signing, issuing, accepting, or transferring the document. A
party who is among those obliged to pay the DST is estopped
from claiming that the documents are inadmissible in evidence
for non-payment thereof. (Filipinas Textile Mills, Inc. v. CA, 451
SCRA 635 [2003])
Chapter 8 333
P a y m e n t of D o c u m e n t a r y S t a m p Tax
A. In General
The provisions of PD 1045 notwithstanding, any person
liable to pay documentary stamp tax upon any document subject
to tax under Title VII of this Code shall file a tax return and
pay the tax in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of
the Commissioner.
B. Time for Filing and Payment of the Tax

Except as provided by rules and regulations promulgated
by the Secretary of Finance, upon recommendation of the
Commissioner, the tax return prescribed in this Section shall
be filed within ten (10) days after the close of the month when
the taxable document was made, signed, issued, accepted, or
transferred, and the tax thereon shall be paid at the same time
the aforesaid return is filed.
C. Where to File
Except in cases where the Commissioner otherwise permits,
the aforesaid tax return shall be filed with and the tax due shall
be paid through:
1. The authorized agent bank within the territorial

jurisdiction of the Revenue District Office which has
jurisdiction over the residence or principal place of
business of the taxpayer.
2. In places where there is no authorized agent bank, the
return shall be filed with the Revenue District Officer,
collection agent, or duly authorized Treasurer of the
city or municipality in which the taxpayer has his legal
residence or principal place of business.
D. Exception
In lieu of the foregoing provisions of this Section, the tax
may be paid either through purchase and actual affixture; or by
334 TAX 2 REVEALED
imprinting the stamps through a documentary stamp metering

machine, on the taxable document, in the manner as may be
prescribed by rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
(Sec. 200, NIRC)
Classification of d o c u m e n t s a n d papers
1. Documents and papers subject to DST

2. Documents and papers not subject to DST
Documents a n d papers subject to D S T
1. Stamp tax on original issue of shares (Sec. 174)

2. Stamp tax on sales, agreements to sell, memoranda of
sales. Deliveries or transfer of shares or certificate of
stock (Sec. 175)
3. Stamp tax on bonds, debentures, certificates of stock or
indebtedness issued in foreign countries (Sec. 176)
4. Stamp tax on certificates of profits or interest in
property or accumulations (Sec. 177)
5. Stamp tax on bank checks, drafts, certificates of deposit
not bearing interest, and other instruments (Sec. 178)
6. Stamp tax on all debt instruments (Sec. 179)
7. Stamp tax on all bills of exchange or drafts (Sec. 180)
8. Stamp tax upon acceptance of bills of exchange and
others (Sec. 181)
9. Stamp tax on foreign bills of exchange and letters of
credit (Sec. 182)
10. Stamp tax on life insurance policies (Sec. 183)
11. Stamp tax on policies of insurance upon properties
(Sec. 184)
12. Stamp tax on fidelity bonds and other insurance
policies (Sec. 185)
Chapter 8
335
13. Stamp tax on policies of annuities and pre-need plans

(Sec. 186)
14. Stamp tax on indemnity bonds (Sec. 187)
15. Stamp tax on certificates (Sec. 188)
16. Stamp tax on warehouse receipts (Sec. 189)
17. Stamp tax on jai-alai, Horse race tickets, lotto or other
authorized numbers games (Sec. 190)
18. Stamp tax on bills of lading or receipts (Sec. 191)
19. Stamp tax on proxies (Sec. 192)
20. Stamp tax on powers of attorney (Sec. 193)
21. Stamp tax on leases and other hiring agreements (Sec.
194)
22. Stamp tax on mortgages, pledges and deeds of trust
(Sec. 195)
23. Stamp tax on deeds of sale and conveyances of real
property (Sec. 196)
24. Stamp tax on charter parties and similar instruments
(Sec. 197)
25. Stamp tax on assignments and renewals of certain
instruments (Sec. 198)
1. Stamp Tax on Original Issue of Shares of Stock (P1:P200)

On every original issue, whether on organization,
reorganization or for any lawful purpose, of shares of stock by
any association, company or corporation, there shall be collected
a documentary stamp tax of One peso (PI.00) on each Two
hundred pesos (P200), or fractional part thereof, of the par value,
of such shares of stock: Provided, That in the case of the original
issue of shares of stock without par value the amount of the
documentary stamp tax herein prescribed shall be based upon
the actual consideration for the issuance of such shares of stock:
Provided, further, That in the case of stock dividends, on the actual
value represented by each share. (Sec. 174, NIRC)
336 TAX 2 REVEALED
2. Stamp Tax on Sales, Agreements to Sell, Memoranda of

Sales, Deliveries or Transfer of Due-bills, Certificates of
Obligation, or Shares of Certificates of Stock (P0.75-.P200)
On all sales, or agreements to sell, or memoranda of sale,
or deliveries, or transfer of shares or certificates of stock in
any association, company, or corporation, or transfer of such
securities by assignment in blank, or by delivery, or by any paper
or agreement, or memorandum or other evidence of transfer or
sale whether entitling the holder in any manner to the benefit
of such stock, or to secure the future payment of money, or
for the future transfer of any stock, there shall be collected a
documentary stamp tax of Seventy-five centavos (P.75) on each
Two hundred pesos (P200) or fractional part thereof, of the par
value of such stock; Provided, That only one tax shall be collected
on each sale or transfer of stock or securities from one person
to another, regardless of whether or not a certificate of stock or
obligation is issued, indorsed, or delivered in pursuance of such
sale or transfer: and, Provided, further, That in the case of stock
without par value the amount of documentary stamp tax herein
prescribed shall be equivalent to twenty-five percent (25%) of
the documentary stamp tax paid upon the original issue of said
stock. (Sec. 175, NIRC)
3. Stamp Tax on Bonds, Debentures, Certificate of Stock or

Indebtedness Issued in Foreign Countries
On all bonds, debentures, certificates of stock, or certificates
of indebtedness issued in any foreign country, there shall be
collected from the person selling or transferring the same in
the Philippines, such as tax as is required by law on similar
instruments when issued, sold or transferred in the Philippines.
(Sec. 176, NIRC)
4. Stamp Tax on Certificates of Profits or Interest in Property

or Accumulations (P.50:P200)
On all certificates of profits, or any certificate or memoran-
dum showing interest in the property or accumulations of any
association, company or corporation, and on all transfers of such
Chapter 8 337
certificates or memoranda, there shall be collected a documen-

tary stamp tax of Fifty centavos (P0.50) on each Two hundred
pesos (P200), or fractional part thereof, of the face value of such
certificate or memorandum. (Sec. 177, NIRC)
5. Stamp Tax on Bank Checks, Drafts, Certificates of Deposit

not Bearing Interest, and Other Instruments (P1.50)
On each bank check, draft, or certificate of deposit not
drawing interest, or order for the payment of any sum of money
drawn upon or issued by any bank, trust company, or any person
or persons, companies or corporations, at sight or on demand,
there shall be collected a documentary stamp tax of One peso
and fifty centavos (P1.50). (Sec. 178, NIRC)
6. Stamp Tax on All Debt Instruments (P1.00:P200)

On every original issue of debt instruments, there shall
be collected a documentary stamp tax of One peso (PI.00) on
each Two hundred pesos (P200), or fractional part thereof, of
the issue price of any such debt instruments: Provided, That for
such debt instruments with terms of less than one (1) year, the
documentary stamp tax to be collected shall be of proportional
amount in accordance with the ratio of its term in number of
days to three hundred sixty-five (365) days: Provided, further, That
only one documentary stamp tax shall be imposed on either loan
agreement, or promissory notes issued to secure loan. (Sec. 179,
NIRC)
7. Stamp Tax on All Bills of Exchange or Drafts (P0.30:P200)

On all bills of exchange (between points within the
Philippines) or drafts, there shall be collected a documentary
stamp tax of Thirty centavos (P0.30) on each Two hundred pesos
(P200), or a fractional part thereof, of the face value of any such
bill of exchange or draft. (Sec. 180, NIRC)
8. Stamp Tax Upon Acceptance of Bills of Exchange and

Others (P0.30:P200)
Upon any acceptance or payment of any bill of exchange
or order for the payment of money purporting to be drawn in
338 TAX 2 REVEALED
a foreign country but payable in the Philippines, there shall be

collected a documentary stamp tax of Thirty centavos (P0.30) on
each Two hundred pesos (P200), or fractional part thereof, of the
face value of any such bill of exchange, or order, or the Philippine
equivalent to such value, if expressed in foreign currency. (Sec.
181, NIRC)
9. Stamp Tax on Foreign Bills of Exchange and Letters of

Credit (P0.30:P200)
On all foreign bills of exchange and letters of credit
(including orders, by telegraph or otherwise, for the payment
of money issued by express or steamship companies or by any
person or persons) drawn in but payable out of the Philippines
in a set of three (3) or more according to the custom of merchants
and bankers, there shall be collected a documentary stamp tax
of Thirty centavos (P0.30) on each Two hundred pesos (P200),
or fractional part thereof, of the face value of any such bill of
exchange or letter of credit, or the Philippine equivalent of such
face value, if expressed in foreign currency. (Sec. 182, NIRC)
10. Stamp Tax on Life Insurance Policies (P0.50:P200)

On all policies of insurance or other instruments by whatever
name the same may be called, whereby any insurance shall be
made or renewed upon any life or lives, there shall be collected
a documentary stamp tax of Fifty centavos (P0.50) on each Two
hundred pesos (P200), or fractional part thereof, of the amount
insured by any such policy. (Sec. 183, NIRC)
11. Stamp Tax on Policies of Insurance Upon Property

(P0.50:P4.00)
On all policies of insurance or other instruments by what-
ever name the same may be called, by which insurance shall be
made or renewed upon property of any description, including
rents or profits, against peril by sea or on inland waters, or by
fire or lightning, there shall be collected a documentary stamp
tax of Fifty centavos (P0.50) on each Four pesos (P4.00), or frac-
tional part thereof, of the amount of premium charged: Provided,
Chapter 8 339
however, That no documentary stamp tax shall be collected on

reinsurance contracts or on any instrument by which cession or
acceptance of insurance risks under any reinsurance agreement
is effected or recorded. (Sec. 184, NIRC)
12. Stamp Tax on Fidelity Bonds and Other Insurance Policies

(P0.50:P4.00)
On all policies of insurance or bonds or obligations of
the nature of indemnity for loss, damage or liability made or
renewed by any person, association, company or corporation
transacting the business of accident, fidelity, employer's liability,
plate, glass, steam, boiler, burglar, elevator, automatic sprinkler,
or other branch of insurance (except life, marine, inland, and
fire insurance), and all bonds, undertakings, or recognizance,
conditioned for the performance of the duties of any office
or position, for the doing or not doing of anything therein
specified, and on all obligations guaranteeing the validity or
legality of any bond or other obligations issued by any province,
city, municipality, or other public body or organization, and
on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or
renewed by any such person, company or corporation, there
shall be collected a documentary stamp tax of Fifty centavos
(P0.50) on each Four pesos (P4.00), or fractional part thereof, of
the premium charged. (Sec. 185, NIRC)
A health care agreement is not an insurance contract
contemplated under Sec. 185 of the NIRC of 1997. The DST under
Sec. 185 is imposed on the privilege of making or renewing policy
of insurance (except life, marine, inland and fire insurance),
bond or obligation in the nature of indemnity for loss, damage
or liability. (Philippine Health Care Providers, Inc. v. CIR, 554
SCRA 411 [2008])
In Blue Cross Healthcare, Inc. v. Olivares (544 SCRA 580
[2008]), the Court pronounced that a health care agreement is in
the nature of non-life insurance, which is primarily a contract of
indemnity.
340 TAX 2 REVEALED
13. Stamp Tax on Policies of Annuities and Pre-Need Plans

(P0.50:P200)
On all policies of annuities, or other instruments by whatever
name the same may be called, whereby an annuity may be made,
transferred or redeemed, there shall be collected a documentary
stamp tax of fifty centavos (P0.50) on each Two hundred pesos
(P200.00) or fractional part thereof, of the premium or installment
payment or contract price collected. On pre-need plans, the
documentary stamp tax shall be Fifty centavos (P0.50) on each
Five hundred pesos (P500), or fractional part thereof, of the value
or amount of the plan. (Sec. 186, NIRC)
14. Stamp Tax on Indemnity Bonds (P0.30:P4.00)

On all bonds for indemnifying any person, firm or
corporation who shall become bound or engaged as surety for
the payment of any sum of money or for the due execution or
performance of the duties of any office or position or to account
for money received by virtue thereof, and on all other bonds of any
description, except such as may be required in legal proceedings,
or are otherwise provided for herein, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Four
pesos (P4.00), or fractional part thereof, of the premium charged.
(Sec. 187, NIRC)
15. Stamp Tax on Certificates (P15.00)

On each certificate of damages or otherwise, and on every
certificate or document issued by any customs officer, marine
surveyor, or other person acting as such, and on each certificate
issued by a notary public, and on each certificate of any
description required by law or by rules or regulations of a public
office, or which is issued for the purpose of giving information,
or establishing proof of a fact, and not otherwise specified herein,
there shall be collected a documentary stamp tax of Fifteen pesos
(P15.00). (Sec. 188, NIRC)
16. Stamp Tax on Warehouse Receipts (P15.00)

On each warehouse receipt for property held in storage in
a public or private warehouse or yard for any person other than
Chapter 8
341
the proprietor of such warehouse or yard, there shall be collected

a documentary stamp tax of Fifteen pesos (P15.00): Provided, That
no tax shall be collected on each warehouse receipt issued to any
one person in any one calendar month covering property the
value of which does not exceed Two hundred pesos (P200.00).
(Sec. 189, NIRC)
17. Stamp Tax on Jai-Alai, Horse Racing Tickets, Lotto or

Other Authorized Numbers Games (P0.10)
On each jai-alai, horse race ticket, lotto, or other authorized
number games, there shall be collected a documentary stamp
tax of Ten centavos (P0.10): Provided, That if the cost of the ticket
exceeds One peso (PI.00), an additional tax of Ten centavos
(P0.10) on every One peso (PI .00), or fractional part thereof, shall
be collected. (Sec. 190, NIRC)
18. Stamp Tax on Bills of Lading or Receipts (P1.00/P10.00)

On each set of bills of lading or receipts (except charter
party) for any goods, merchandise or effects shipped from one
port or place in the Philippines to another port or place in the
Philippines (except on ferries across rivers), or to any foreign
port, there shall be collected a documentary stamp tax of One
peso (PI .00), if the value of such goods exceeds One hundred
pesos (P100.00) and does not exceed One Thousand pesos
(P1,000.00); Ten pesos (PI 0.00), if the value exceeds One thousand
pesos (P1,000.00): Provided, however, That freight tickets covering
goods, merchandise or effects carried as accompanied baggage of
passengers on land and water carriers primarily engaged in the
transportation of passengers are hereby exempt. (Sec. 191, NIRC)
19. S t a m p Tax on Proxies (P15.00)

On each proxy for voting at any election for officers of
any company or association, or for any other purpose, except
proxies issued affecting the affairs of associations or corporations
organized for religious, charitable or literary purposes, there shall
be collected a documentary stamp tax of Fifteen pesos (P15.00).
(Sec. 192, NIRC)
342 TAX 2 REVEALED
20. Stamp Tax on Powers of Attorney (P5.00)

On each power of attorney to perform any act whatsoever,
except acts connected with the collection of claims due from or
accruing to the Government of the Republic of the Philippines, or
the government of any province, city or municipality, there shall
be collected a documentary stamp tax of Five pesos (P5.00). (Sec.
193, NIRC)
21. Stamp Tax on Leases and Other Hiring Agreements (P3.00

— first P2,000 and P1.00 — excess of P2,000)
On each lease, agreement, memorandum, or contract for
hire, use or rent of any lands or tenements, or portions thereof,
there shall be collected a documentary stamp tax of Three pesos
(P3.00) for the first Two thousand pesos (P2,000), or fractional
part thereof, and an additional One peso (PI.00) for every One
Thousand pesos (P1,000) or fractional part thereof, in excess of
the first Two thousand pesos (P2,000) for each year of the term of
said contract or agreement. (Sec. 194, NIRC)
22. Stamp Tax on Mortgages, Pledges and Deeds of Trust

On every mortgage or pledge of lands, estate, or property,
real or personal, heritable or movable, whatsoever, where the
same shall be made as a security for the payment of any definite
and certain sum of money lent at the time or previously due
and owing of forborne to be paid, being payable and on any
conveyance of land, estate, or property whatsoever, in trust or
to be sold, or otherwise converted into money which shall be
and intended only as security, either by express stipulation or
otherwise, there shall be collected a documentary stamp tax at
the following rates:
(a) When the amount secured does not exceed Five
thousand pesos (P5,000.00), Twenty pesos (P20.00).
(b) On each Five thousand pesos (P5,000.00), or fractional
part thereof in excess of Five thousand pesos (P5,000.00),
an additional tax of Ten pesos (P10.00).
On any mortgage, pledge, or deed of trust, where the same
shall be made as a security for the payment of a fluctuating
Chapter 8 343
account or future advances without fixed limit, the documentary

stamp tax on such mortgage, pledge or deed of trust shall be
computed on the amount actually loaned or given at the time of
the execution of the mortgage, pledge or deed of trust. However,
if subsequent advances are made on such mortgage, pledge or
deed of trust, additional documentary stamp tax shall be paid
which shall be computed on the basis of the amount advanced or
loaned at the rates specified above: Provided, however, That if the
full amount of the loan or credit, granted under the mortgage,
pledge or deed of trust is specified in such mortgage, pledge
or deed of trust, the documentary stamp tax prescribed in this
Section shall be paid and computed on the basis of the full
amount of the loan or credit granted. (Sec. 195, NIRC)
Sec. 195 of the NIRC imposes a DST on every pledge
regardless of whether the same is a conventional pledge governed
by the Civil Code or one that is governed by the provisions of
PD 114. All pledges are subject to DST, unless there is a law
exempting them in clear and categorical language. This explains
why the Legislature did not see the need to explicitly impose a
DST on pledges entered into by pawnshops. These pledges are
already covered by Sec. 195 and to create a separate provision
especially for them would be superfluous.
It is the exercise of the privilege to enter into an accessory
contract of pledge, as distinguished from a contract of loan, which
gives rise to the obligation to pay DST. If the DST under Sec. 195 is
levied on the loan or the exercise of the privilege to contract a loan,
then there would be no use for Sec. 179 of the NIRC to separately
impose stamp tax on all debt instruments, like a simple loan
agreement. It is for this reason why the definition of pawnshop
ticket, as not an evidence of indebtedness, is inconsequential
to and has no bearing on the taxability of contracts of pledge
entered into by pawnshops. (Michel J. Lhuiller Pawnshop, Inc.
v. CIR, 501 SCRA 451 [2006])
23. Stamp tax on Deeds of Sale and Conveyances of Real

Property
On all conveyances, deeds, instruments, or writings, other
than grants, patents or original certificates of adjudication issued
344 TAX 2 REVEALED
by the Government, whereby any land, tenement, or other

realty sold shall be granted, assigned, transferred or otherwise
conveyed to the purchaser, or purchasers, or to any other person
or persons designated by such purchaser or purchasers, there shall
be collected a documentary stamp tax, at the rates herein below
prescribed, based on the consideration contracted to be paid for
such realty or on its fair market value determined in accordance
with Sec. 6(E) of this Code, whichever is higher: Provided, That
when one of the contracting parties is the Government, the tax
herein imposed shall be based on the actual consideration.
a. When the consideration, or value received or contracted
to be paid for such realty after making proper allowance
of any encumbrance, does not exceed One thousand
pesos (P1,000.00) fifteen pesos (P15.00).
b. For each additional One thousand Pesos (P1,000.00), or
fractional part thereof in excess of One thousand pesos
(P1,000.00) of such consideration or value, Fifteen
pesos (P15.00).
When it appears that the amount of the documentary stamp
tax payable hereunder has been reduced by an incorrect statement
of the consideration in any conveyance, deed, instrument or
writing subject to such tax the Commissioner, provincial or city
Treasurer, or other revenue officer shall, from the assessment
rolls or other reliable source of information, assess the property
of its true market value and collect the proper tax thereon. (Sec.
196, NIRC)
24. Stamp Tax on Charter Parties and Similar Instruments

On every charter party, contract or agreement for the charter
of any ship, vessel or steamer, or any letter or memorandum or
other writing between the captain, master or owner, or other
person acting as agent of any ship, vessel or steamer, and any
other person or persons for or relating to the charter of any such
ship, vessel or steamer, and on any renewal or transfer of such
charter, contract, agreement, letter or memorandum, there shall
be collected a documentary stamp tax at the following rates:
Chapter 8 345
(a) If the registered gross tonnage of the ship, vessel or

steamer does not exceed one thousand (1,000) tons,
and the duration of the charter or contract does not
exceed six (6) months, Five hundred pesos (P500.00);
and for each month or fraction of a month in excess of
six (6) months, an additional tax of Fifty pesos (P50.00)
shall be paid.
(b) If the registered gross tonnage exceeds one thousand
(1,000) tons and does not exceed ten thousand (10,000)
tons, and the duration of the charter or contract does not
exceed six (6) months, One thousand pesos (PI,000.00);
and for each month or fraction of a month in excess of
six (6) months, an additional tax of One hundred pesos
(P100.00) shall be paid.
(c) If the registered gross tonnage exceeds ten thousand
(10,000) tons and the duration of the charter or contract
does not exceed six (6) months, One thousand five
hundred pesos (Pl,500.00); and for each month or
fraction of a month in excess of six (6) months, an
additional tax of One hundred fifty pesos (P150.00)
shall be paid. (Sec. 197, NIRC)
25. Stamp Tax on Assignments and Renewals of Certain

Instruments
Upon each and every assignment or transfer of any mortgage,
lease or policy of insurance, or the renewal or continuance of
any agreement, contract, charter, or any evidence of obligation
or indebtedness by altering or otherwise, there shall be levied,
collected and paid a documentary stamp tax at the same rate as
that imposed on the original instrument. (Sec. 198, NIRC)
D o c u m e n t s a n d Papers Not Subject to S t a m p Tax

The provisions of Sec. 173 to the contrary notwithstanding,
the following instruments, documents and papers shall be
exempt from the documentary stamp tax:
a. Policies of insurance or annuities made or granted by
a fraternal or beneficiary society, order, association or
TAX 2 REVEALED
cooperative company, operated on the lodge system or

local cooperation plan and organized and conducted
solely by the members thereof for the exclusive benefit
of each member and not for profit.
Certificates of oaths administered to any government
official in his official capacity or of acknowledgment
by any government official in the performance of his
official duties, written appearance in any court by any
government official, in his official capacity; certificates
of the administration of oaths to any person as to
the authenticity of any paper required to be filed in
court by any person or party thereto, whether the
proceedings be civil or criminal; papers and documents
filed in courts by or for the national, provincial, city
or municipal governments; affidavits of poor persons
for the purpose of proving poverty; statements and
other compulsory information required of persons
or corporations by the rules and regulations of the
national, provincial, city or municipal governments
exclusively for statistical purposes and which are
wholly for the use of the bureau or office in which they
are filed, and not at the instance or for the use or benefit
of the person filing them; certified copies and other
certificates placed upon documents, instruments and
papers for the national, provincial, city, or municipal
governments, made at the instance and for the sole
use of some other branch of the national, provincial,
city or municipal governments; and certificates of the
assessed value of lands, not exceeding Two hundred
pesos (P200.00) in value assessed, furnished by the
provincial, city or municipal Treasurer to applicants
for registration of title to land.
Borrowing and lending of securities executed under
the Securities Borrowing and Lending Program of a
registered exchange, or in accordance with regulations
prescribed by the appropriate regulatory authority, and
which agreements is duly registered and approved by
the Bureau of Internal Revenue (BIR).
Chapter 8 347
d. Loan agreements or promissory notes, the aggregate

of which does not exceed Two Hundred fifty thousand
pesos (P250,000.00) or any such amount as may be
determined by the Secretary of Finance, executed by
an individual for his purchase on installment for his
personal use or that of his family and not for business
or resale, barter or hire of house, lot, motor vehicle,
appliance or furniture: Provided, however, That the
amount to be set by the Secretary of Finance shall be
in accordance with a relevant price index but not to
exceed ten percent (10%) of the current amount and
shall remain in force at least three (3) years.
e. Sale, barter or exchange of shares of stock listed and
traded through the local stock exchange.
f. Assignment or transfer of any mortgage, lease or
policy of insurance, or the renewal or continuance of
any agreement, contract, charter, or any evidence of
obligation or indebtedness, if there is no change in the
maturity date or remaining period of coverage from
that of the original instrument.
g. Fixed income and other securities traded in the
secondary market or through an exchange.
h. Derivatives: Provided, That for purposes of this exemp-
tion, repurchase agreements and reverse repurchase
agreements shall be treated similarly as derivatives.
i. Interbranch or interdepartmental advances within the
same legal entity.
j. All forbearance arising from sales or service contracts
including credit card and trade receivables: Provided,
that the exemption be limited to those executed by the
seller or service provider itself.
k. Bank deposit accounts without a fixed term or maturi ty.
1. All contracts, deeds, documents and transactions
related to the conduct of business of the Bangko Sentral
ng Pilipinas.
TAX 2 REVEALED
Transfer of property pursuant of Sec. 40(C)(2) of the

National Internal Revenue Code of 1997, as amended.
Internal bank call loans with maturity of not more than
seven (7) days to cover deficiency in reserves against
deposit liabilities, including those between or among
banks and quasi-banks. (Sec. 199, NIRC)
TAX 2 REVEALED
( A G U I D E T O PASSING T H E B A R )
V O L U M E II
J O S E P H R A L L Y L. C H A V E Z , J R .
CPA-Lawyer
B.S. Accountancy - University of the East, Manila
Bachelor of Laws - San Sebastian College-Recoletos, Manila
Recoletos Scholar, College of Law
Author: The Secrets of Income Taxation (Vol. I)
A Guide to Passing the Bar
Presently:
San Sebastian College-Recoletos
College of Law
Associate Dean for Student Affairs
Director for Mandatory Continuing Legal Education
Supervising Lawyer, Sebastinian Office of the Legal Aid
Professor, Taxation & Commercial Law
College of Arts and Science
Chairman, Political and Legal Management Department
College of Accountancy, Business Administration and Computer Science
CPA Reviewer, Business Law & Taxation
The Law Forum
Managing Editor
Baliuag University
CPA Reviewer, Business Law & Taxation
Formerly with:
Chavez & Associates (Audit & Tax Practitioner)
LPT Marketing, Inc.-Ultra Mega Multi Sales (External Auditor)
Airtac Philippines, Inc., with Philippines, China, Singapore, Thailand, Taiwan,
Branches (Internal Auditor)
Villa Judan & Associates (Associate Lawyer)
The Law Firm of Atty. Chavez (Sole Practitioner)
Singer Philippines, Inc. & Singer Finance Corporation (Human Resources and
Legal Manager)
Bureau of Internal Revenue:
International Tax Affairs Division (Action Attorney)
National Investigation Division former Tax Fraud Division (Group Supervisor)
Run After Tax Evader (RATE) Lawyer, Team A
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by
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ISBN 978-971-23-6084-8
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Again, this humble piece is more than ever dedicated to:
The THIRTY-ONE (31) most important

people in my life...
PREFACE
With all humility and deepest gratitude I give an explicit re-

sponse, an upbeat and clear-cut annex of Taxation 1, a bar subject
that is worth revealing.
It is in this attempt again, that the author presented Taxa-
tion 2 not the way the Revenue Code is crafted. While this is not
an amendment of the numerical representation of the said Code,
the plain and impartial objective is to rearrange the outer shell
without sacrificing the substance and the sequence of the Code.
In conclusion, the continuity of the concept, the relationship of
each topic, the impression as well as the idea of having a one-stop
shop fabric were all included in this humble piece.
Perceptibly, topics like local taxation, powers of the bureau
and the salient provisions of the Tariff and Custom Code are all
integrated in this book in acquiescence of what are on the face of
it covered by the bar examinations. Supplementary and in an-
ticipation, special topics are added not only to aim in helping bar
candidates but the practitioner as well and if crucial, the public
at large.
Parallel to Volume I "The Secrets of Income Taxation", Su-
preme Court decisions, revenue regulations and the author's
stance and surveillance are demonstrated to bear and aid every
remark, comments and observation of what the command of the
law is all about.
The Taxation 2 Revealed simply means that the basic re-
quirement, the basic tenet that a bar candidate should upload
and put into artillery are uncovered and at the same time fitted
in this manuscript. The revelation is not intended to annihilate or
defeat what has long been kept in the Revenue Code. The prayer
is simple. To guide the would be candidate, the bar candidate,
in meeting the standards of the dreaded but overly coveted bar
examinations.
V
ACKNOWLEDGMENT
It is with all humility and utmost gratitude that, once again,

I recognize the exceptional and infrequent opportunity given to
me by my Alma mater. The avenues en route the dreams I used
to dream, more of a twin-tower in the atmosphere, now truly a
reality.
To my mentors, brothers in the profession and for those who
are so dear to me, my many thanks for the unending inspiration.
Many thanks also for the spice of life, words of encouragement,
the challenges seemingly difficult and unbreakable but achievable.
For without these, the completion of this piece would still be a
dream.
To my father, the accounting discipline, the military disci-
pline, the sense of independence and for so many branches of
learning, I had your name, I had our name inscribed in this piece.
To my mother, the nursing touch, the interminable concern and
infinite encouragement, you are the champion of my life.
For those who at time this piece is crafted, even those before
and at the very day of its finality, made an indefatigable contribu-
tion and paramount involvement, two words of "big thanks" are
not enough.
On top of all of these, to the Almighty everything is an an-
swered prayer.
vii
CONTENTS
CHAPTER 1
Introduction to Transfer and Business Taxes
Taxation defined 1
Transfer Taxes 1
Business Taxes 3
CHAPTER 2
Transfer Taxes on Estate
Estate Tax 5
Collection of Estate Taxes 5
Payment Before Delivery by Executor or Administrator 7
Non-registration for non-payment of Estate Tax 7
Bank Disallowance 8
Law governing the imposition of Estate Tax 8
Gross Estate 10
Immovable Property 11
Movable Property 12
Intangible Personal Property 13
Nonresident Alien Decedent 13
Composition of Gross Estate 14
Capital of the Surviving Spouse 21
Summary on Conjugal Partnership of Gains and the
Absolute Community of Property 22
Determination of the Value of the Estate 22
Authority of the Commissioner 23
Exemption of Certain Acquisitions and Transmissions 24
Allowed Deductions 26
Classifications of Deduction 27
Requisites for Deductibility of Claims against the Estate 32
Substantiation Requirements ^3
Conditions for the allowance of Family Home as Deduction
from the Gross Estate 46
ix
Estate Tax Table *9
Tax Credit for Estate Taxes paid to a Foreign Country 50
5 0
Limitations on Credit
Returns and Payment of Estate Tax 51
5 1
Notice of Death
Time of Filing of Notice of Death 52
5 2
Estate Tax Returns
5 3
Time for Filing
Extension of Time 53
Place of Filing 53
Payment of Tax 54
Time of Payment 54
Extension of Time for Payment 54
Payment of the Estate Tax by Installment 55
Liability for Payment 55
Discharge of Executor or Administrator from
Personal Liability 56
Duties of Certain Officers and Debtors 56
Restitution of Tax upon Satisfaction of Outstanding
Obligations 57
Payment of Tax Antecedent to the Transfer of Shares,
Bonds or Rights 57
Definition of Deficiency 58
CHAPTER 3
Transfer Taxes on Donation
Donor's Tax 60
Kinds of Donation 61
Concept of Donor's Tax 63
Imposition 63
Elements of Donor's Tax 63
The law that governs the imposition of Donor's Tax 65
Gross Gift 66
Valuation of Donation 68
Allowed deductions or exemptions from gross gift 68
Exemption of Certain Gifts 68
Donations to Political Party or Coalition of Parties 71
Rates of Donor's Tax 71
Tax payable by the donor if donee is a stranger 72
Tax credit for Donor's taxes paid to a foreign country 72
Limitations on Credit 72
Tax credit Computation 74
X
Filing of Returns and Payment of Donor's Tax 75
Notice of Donation by a Donor Engaged in Business 77
CHAPTER 4
Value Added Tax
Persons Liable 78
Nature and Characteristics of VAT 79
VAT as an Indirect Tax 80
Imposition 81
Sale of Real Properties 83
Destination Principle 92
Meaning of the Term "Effectively Zero-rated Sale of Goods
and Properties" 93
Nature of the VAT and the Tax Credit Method 96
Zero-Rated and Effectively Zero-Rated Transactions 97
Zero Rating and Exemption 97
Exempt Transaction and Exempt Party 98
Kinds of Registration 105
Optional Registration 105
Mandatory Registration 106
Concept of Optional and Mandatory Registration 108
Output Tax 108
Input Tax 109
VAT Payable (Excess Output) or Excess Input Tax 109
Exempt Transactions 109
VAT Registration and Compliance 117
Annual Registration Fee 118
Effect of Non-Registration 119
Cancellation of Registration 119
Tax Credits 120
Persons who can avail of the Input Tax Credit 120
Creditable Input Tax 120
Excess Output or Input Tax 122
Determination of Creditable Input Tax 122
Transitional Input Tax Credits 123
Presumptive Input Tax Credits 123
Zero-Rated or Effectively Zero-Rated Sales 123
Substantiation of Input Tax Credits 126
Cancellation of VAT Registration 127
Period within which Refund or Tax Credit of Input
1 2 7
Taxes shall be made
197
Manner of Giving Refund
xi
Invoicing and Accounting Requirements for
1 2 8
VAT-Registered Persons
1 3 0
Accounting Requirements
Consequence of Issuing Erroneous VAT Invoice or
1 3 0
VAT Official Receipt
Printing of Receipts or Sales or Commercial Invoices 131
Return and Payment of Value-Added Tax 132
Where to File the Return and Pay the Tax 132
Withholding of Creditable Value-Added Tax 133
Power of the Commissioner to Suspend the Business
Operations of a Taxpayer 133
VAT on Pawnshops 134
Tax Provisions on Cooperatives 136
Tax Treatment of Cooperative 136
Tax and Other Exemptions 136
CHAPTER 5
Tax Remedies
Remedies in General 137
Remedies of the Government 151
Remedies of the Taxpayer 187
CHAPTER 6
Local Taxation
Constitutional Basis 216
Power to Create Sources of Revenue 216
Power to Levy Other Taxes, Fees or Charges 217
Fundamental Principles 217
Local Taxing Authority 218
Common Limitations on the Taxing Powers of Local
Government Units 220
In Lieu of All Taxes Clause 222
Transfer Taxes 224
Common Revenue-Raising Powers 224
Community Tax 225
Professional Tax 228
Tax Ordinance 229
Real Property Taxation 230
Taxpayer's Remedies 236
CHAPTER 7
Tariff and Custom Duties
The Bureau of Customs 247
Importation in General 254
Ordinary / Regular Duties 275
Special Duties 282
Marking Duty 284
Discriminatory Duties 287
Administrative and Judicial Proceedings 292
Penal Provisions 301
CHAPTER 8
Powers of the BIR and the CIR
Powers of the Commissioner of Internal Revenue 304
Other Percentage Taxes 315
Documentary Stamp Taxes 330
APPENDICES
Appendix A — The National Internal Revenue Code of the
Philippines (Tax Reform Act of 1997) (Republic
Act No. 8424, as amended) 349
Appendix B — Republic Act No. 9282 485
xiii

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Chapter 1

Two kinds of transfer taxes:

In estate taxation, what is taxed is not the decedent, neither

"Succession is a mode of acquisition by virtue

Estate refers to the property and transmissible rights and

"The rights to the succession are transmitted from

In donor's tax, what is taxed is not the donor, neither his

"Donation is an act of liberality whereby a person

1. Subject Right to transfer Right to transfer

2. Taxpayer Estate Donor

3. Liability to pay Administrator,

4. Effectivity Lifetime of donor

5. Tax base Net estate Net gift

7. Filing Within 30 days

8. Top Rates 15% - Relative

regardless of whether or not the person engaged therein is a

Three (3) kinds of business taxes:

Collection of Estate Taxes

In the case of Ferdinand Marcos II v. CA (273 SCRA 47

the assessment bears mainly on the alleged improbable and

Payment Before Delivery by Executor or Administrator

Non-registration for non payment of estate tax

acknowledgment of documents regarding partition or disposal

Law governing the imposition of estate tax

In estate tax, the following are the parties involved:

Net taxable estate XX

Hence, the tour of discussion will be based on the foregoing

The properties left behind by the decedent may be classified

the owner of the immovable in such a manner that it

3. Forces of nature which are brought under control by

Intangible Personal Property

Nonresident Alien Decedent

b. Exemption clause — If the laws of the foreign country

Composition of Gross Estate

B. Transfer in Contemplation of Death

enjoyment thereof was subject, at the date of his death, to any

D. Property Passing Under General Power of Appointment

On the other hand, a power of appointment is a power

As distinguished from a revocable transfer where the

Simply put, there are two (2) parties to speak of in a property

possess or enjoy the property or the income

E. Proceeds of Life Insurance

Beneficiary Designation Gross Estate

1. Estate, Executor Revocable or Included

2. Other than no. 1 Revocable Included

3. Other than no. 1 Irrevocable Excluded

Generally, the proceeds of life insurance is part of the gross

G. Transfers for Insufficient Consideration

3. The difference between the fair market value at the

FMV, time of transfer P1,000,000 1,500,000 1,000,000

FM V, time of death 500,000 1,000,000 1,500,000

Consideration received 300,000 0 1,000,000

Amount to be included P200.000 1,000,000 0

1. Compare the FMV at the time of transfer and the FMV

1. Claims against insolvent person - Sec. 86(A)(1)(d)

3. Property previously tax under Sec. 86(A)(2).

Capital of the Surviving Spouse

Add: Exclusive properties XX

In this view, it is significant to determine the property