TAXATION LAW
General Principles
Taxation is the inherent power by which the
sovereign, through its law-making body, raises
revenue to defray the necessary expenses of the
government.
2 Fold Nature of Power of Taxation
1. Inherent Attribute of Sovereignty;
2. Legislative in character;
Purpose of Taxation
1. To raise revenue;
2. Levied with a regulatory purpose;
3. Impose to reduce social inequality;
 Prevents the concentration of wealth in
hands of few individuals;
4. Promotes protectionism;
5. Grant of tax exemptions and incentives
encourages economic growth;
Tax vs. Toll Fee
 Tax is for raising revenues; toll fee is for
reimbursements for costs and expenses
for construction;
Tax vs. License Fee
 Tax is for revenue; License Fee is for
regulation;
 Tax amount is unlimited; License Fee is
limited to cost of license and expenses
of surveillance and regulation;
 Non-compliance of tax does not make
the business illegal; non-compliance of
license fee makes the business illegal;
How to distinguished if tax or license fee?
 If the generation of revenue is primary
purpose and regulation is merely
incidental, then it is a tax; however, if
regulation is primary purpose, the fact
that revenue is incidental does not make
the imposition a tax;
How to determine the purpose of the imposition?
 The amount may be so large as to itself
show that the purpose is to raise
revenue and not to regulate;
 If imposition is to protect public health,
moral and safety; the fee may be large
without necessarily being a tax;
TAXATION COMPARED WITH POLICE POWER
AND EMINENT DOMAIN
Purpose:
1. Taxation – raise revenue;
2. Police Power – promote public purpose thru
regulation;
3. Eminent Domain- facilitate the State’s need
of property for public use;
Benefits received:
1. Taxation – no direct benefit, only general
benefit of protection;
2. Police Power – no direct benefit, only a
healthy economic standard of society is
attained;
3. Eminent Domain- direct benefit from just
compensation;
Transfer of Property Rights
1. Taxation – taxes become part of public
funds;
2. Police Power – no transfer but only restraint
in its exercise;
3. Eminent Domain- transfer is in favor of the
State;
THEORY AND BASIS OF TAXATION
Lifeblood Doctrine – taxes are the lifeblood of the
gov’t; taxes are what we pay for civilized society;
without taxes the gov’t would be paralyzed for lack
of power motive to operate;
Necessity Theory – existence of gov’t is a necessity
and it cannot continue to exist without means to
pay its expenses, thus it can compel citizens to
contribute;
Benefits-Protection Theory – the state demands
and receives taxes from the subjects of taxation
within its jurisdiction so that it may be enabled to
carry its mandate into effect and perform the
functions of the gov’t, and the citizens pay from
their properties the portion demanded in order that
they may, by means thereof, be secured in the
enjoyment of the benefits of an organized society;
Jurisdiction of Taxation
The taxing power of a state does not extend
beyond its territorial limits, but within such limits it
may tax persons, property, income or business;
Principles of a Sound Tax System;
1. Fiscal Adequacy
 Sources of revenues must be adequate
to meet government expenditures and
their variations;
2. Administrative Feasibility
 Tax system should be capable of being
effectively administered and enforced
with least inconvenience to the taxpayer;
3. Theoretical Justice
 A good tax system must be based on
taxpayer’s ability to pay and proportional
to the value of property;
Inherent Limitations on Taxation (SPINE)
1. Public purpose – taxes are exacted only for
public purpose;
2. Non-delegability of Taxing Power
XPN:
 Delegation to LGUs;
  Delegation to the President;
 Delegation for administration and
collection of taxes to Administrative
Agencies;
3. Situs of Taxation – no state may tax
anything not within its jurisdiction without
violating due process;
4. International Comity – equality among
states and a state cannot tax another state;
5. Exemption of Government – properties
devoted to gov’t use and purposes are
exempt from tax except when the law
provides otherwise; if income is from
proprietary functions then it is taxable;
Constitutional Limitations
1. Due Process Clause;
2. Equal Protection Clause;
 Burden of tax falls equally and
impartially upon all the persons and
property subject to it;
 Reasonable Classification
a. Based on substantial distinctions;
b. Germane to the purpose of the law;
c. Classification applies not only to present
conditions;
d. Classification applies only to those who
belong to the same class;
Southern Luzon Drug Corp vs. DSWD (2017)
To recognize all senior citizens as a group, without
distinction as to income, is a valid classification.
The constitution itself considered the elderly as a
class of their own and deemed it a priority to
address their needs.
3. Religious Freedom
 There is violation if tax is levied in order
to suppress religious freedom basic right
and impose a prior restraint;
4. Freedom of Speech and of the Press
5. Non-impairment of Obligations of Contract;
 There is a violation if tax exemption
based on a contract is revoked by a
latter statute; but the non-impairment
clause will only be violated if and when
the taxing authority was a party to the
contract in question;
 It does not apply to utility franchises or
rights since they are subject to
amendments and alteration by Congress
when public interest so requires;
6. Uniformity, Equitability and Progressivity of
Taxation
 Uniformity means that all articles or
properties of the same class shall be
taxed at the same rate;
 Taxes are uniform and equal when
imposed upon all property of the same
class or character within the taxing
authority;
 Progressivity of taxation is founded on
the principle of the taxpayer’s ability to
pay;
7. Prohibition Against Taxation of Religious,
Charitable, and Educational institutions
 Covers only: property or realty taxes
 Test of Exemption: real properties that
are Actually, Directly, and Exclusively
used for charitable, religious or
educational purposes;
DLSU vs CIR – the leased properties were not
used ADE for educational purposes; hence taxable;
8. Prohibition against taxation of non-stock, non-
profit educational institutions;
 Entities: non-stock, non-profit
educational institutions;
 Tax: assets and revenues;
 Test of exemption – revenue/income is
used ADE for educational purpose;
CIR vs. DLSU (2016)
When a non-stock non- profit educational institution
proves that it uses its revenues actually, directly,
and exclusively for educational purposes, it shall be
exempted from income tax, VAT and LBT;
CIR vs. St. Luke’s Medical Center Inc. (2017)
Even if the charitable institution must be “organized
and operated exclusively” for charitable purposes, it
is nevertheless allowed to engage in activities
conducted for profit without losing its tax exempt
status for its not-for-profit activities;
The only consequence is that the income of
whatever kind and character of a charitable
institution “from any of its activities conducted for
profit, regardless of disposition made of such
income, shall be subject to tax;
9. Appropriations, Revenue and Tariff Bills shall
originate exclusively from the House of
Representatives
 It is not the law but the revenue bill
which is required to originate from the
house of representatives;
 Senate may concur with amendments;
10. Grant of taxing power to be the LGUs;
11. Other Constitutional Limitations
a. Majority vote of congress for grant of tax
exemption;
b. President’s veto power;
c. No appropriation for religious purpose;
d. Prohibition on use of tax levied for special
purpose;
ASPECTS OR STAGES OF TAXATION
1. Levy – refers to the imposition of taxes thru
enactment of tax laws;
2. Assessment and Collection – act of
administration and implementation of tax
law by executive branch;
 3. Payment – the act of compliance by tax
payer;
ELEMENTS OF A VALID TAX
1. Enforced proportional contribution from
persons and properties;
2. Imposed by the State;
3. Levied for the support of the government;
REQUISITES OF A VALID TAX
1. For public purpose;
2. Must be uniform and equitable;
3. Person or property taxed must be within the
jurisdiction of the taxing authority;
4. Must comply with due process of law;
5. Must not violate the inherent and
Constitutional limitations on power to tax;
KINDS OF TAXES
1. As to subject matter: a. Personal or Poll tax;
b. Property tax; c. Excise Tax; d. Custom
Duties;
2. As to burden: Direct Tax and Indirect Tax;
3. As to purpose: a. General Tax, b. Special
Tax;
4. As to amount: Specific Tax or Ad Valorem
tax;
5. As to taxing authority: Local Tax or National
Tax;
6. As to rate: a. Progressive Tax, b.
Regressive Tax, c. Proportionate Tax;
General Concepts in Taxation
1. Prospectivity of Tax laws
 Tax laws are prospective in operation
unless the law otherwise clearly
provides;
GR: no retroactive application if they are
prejudicial to taxpayer;
XPN:
a. Taxpayer deliberately misstates or omits
material facts;
b. Facts subsequently gathered by BIR are
materially different from the facts on
which the ruling is based;
c. Taxpayer acted in bad faith;
2. Imprescriptibility of Tax
 Taxes are imprescriptible as they are
the lifeblood of the gov’t; however, tax
laws may provide for statute of
limitations;
3. Situs of Taxation
 Domiciliary theory
 Nationality theory
 Source theory
4. Double Taxation
a. Direct Double Taxation
 Same subject matter, same purpose, by
same taxing authority, within the same
jurisdiction; within the same taxing
period; and within the same kind of tax;
b. Indirect Double Taxation
 When one of the elements in the direct
is missing; this is allowed by law;
Tax treaties as relief from Double Taxation
 The imposition of comparable taxes in 2
or more states on the same taxpayer in
respect of the same subject matter and
for identical periods;
Methods to Eliminate Double Taxation by Tax
treaties
a. Sets out the respective rights to tax of the
state of source and state of residence with
regard to certain classes of income or
capital;
b. State of source is given a full r mimited right
to tax together with the state of residence
but the state of residence shall allow relief:
1. Exemption method: the income or
capital which is taxable in the state of
source is exempted in the state of
residence;
2. Credit method – the tax paid in the state
of source is credited against the tax
levied in the state of residence;
Escapes from Taxation
a. Shifting tax burden
 Impact of taxation is point on which tax
is originally imposed;
 Incidence of taxation is a point on which
the tax burden finally rests or settles
down;
b. Tax Avoidance – is the tax saving device
within the means sanctioned by law;
otherwise known as tax minimization or tax
loophole;
c. Tax evasion – is deliberate adoption of
illegal means to defeat or lessen the
payment of tax; usually subjects the
taxpayer to civil or criminal liability;
Kinds of Exemption from Taxation
1. As to basis: Constitutional or Statutory;
2. As to form: Express or implied;
3. As to extent: Total or partial;
4. As to object: personal or impersonal;
Rules on revocation of tax exemption:
1. If granted to private entities based on
material consideration of mutual nature is
covered by non-impairment clause;
2. Exemption granted by constitution may be
revoked thru Constitutional amendment
only;
Equitable Recoupment
  Allows a taxpayer whose claim for
refund has prescribed to offset tax
liabilities with his claim of overpayment;
Compensation or Set-off
GR: Not allowed; or prohibited by law;
XPNs: Domingo vs Carlitos
 Both claims must be overdue and
demandable;
 And fully liquidated;
Is offsetting a tax refund with tax deficiency
allowed?
GR: Not allowed
XPN: if determination of taxpayer’s liability is
intertwined with resolution of the claim for tax
refund of erroneously or illegally collected taxes;
Air Canada vs. CIR (2016; J. Leonen)
The issue of petitioner’s claim for tax refund is
intertwined with the issue of the proper taxes that
are due from petitioner. A claim for tax refund
carries the assumption that the tax returns filed
were correct. If the tax return filed was not proper,
the correctness of the amount paid and, therefore,
the claim for refund become questionable. In that
case, the court must determine if a taxpayer
claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.
Compromise
a. Penalty – paid by taxpayer to settle a
criminal liability for violation of tax code;
b. Grounds for compromise of taxes:
 Doubtful validity of claim against
taxpayer;
 Financial incapacity of taxpayer;
Tax Amnesty
 Absolute waiver by the State of its right
to collect taxes and power to impose
penalties on persons or entities guilty of
violating a tax law;
Constructions and Interpretations
a. Tax Laws
 Civil in nature; not political
 Not penal laws but with penal sanctions;
 When there is a doubt, tax statutes are
construed most strongly against the
gov’t and liberally in favor of the
taxpayer;
b. Tax exemptions
 GR: strictly against the taxpayer and
liberally in favor of taxing authority;
 XPN:
1. Statute provides liberal construction;
2. Exemptions under the constitution;
3. Special taxes affecting only special
classes;
4. Exemptions in favor of the gov’t
c. Tax Rules and regulations
 Construction placed by the office
charged with implementing and
enforcing the Code should be given
controlling weight unless such
interpretation is clearly erroneous;
NATIONAL TAXATION
Jurisdiction, Power and Duties of the CIR
a. Quasi-legislative power
 OLD RULE: Power to interpret the Tax
Code and other tax laws shall be under
the exclusive and original jurisdiction of
the CIR;
BDO vs CIR (2015, J. Leonen)
NEW RULE: The determination of validity of
administrative issuances and tax rulings clearly falls
within the exclusive appellate jurisdiction of the
CTA under RA 1125, as amended, subject to prior
review by the SOF, as required under the NIRC.
b. Quasi-judicial power
 Power to decide disputed assessments,
refund of internal revenue taxes, fees or
other charges, penalties imposed in
relation thereto, or other matters arising
under the Tax Code or other laws or
portions thereof is vested in the CIR;
subject to appellate jurisdiction of CTA;
c. Power to obtain information and summon,
examine, and take testimony of persons;
d. Power to make assessment and prescribe
additional requirements for tax
administration and enforcement;
Letter of Authority (LOA)
 Given to appropriate revenue officer that
empowers said officer to examine the
books of account and records of the
taxpayer for purpose of collecting the
correct tax.
 The officer so authorized must not go
beyond the authority given;
Letter of Notice
 Only for purpose of notifying the
taxpayer that a discrepancy is found;
 No limitation as to period of validity;
Memorandum of Assignment or Referral
 Not a valid authority of RO of the BIR to
conduct audit investigation of a
taxpayer; it is the LOA which empowers
a RO to examine the books of accounts
and accounting records of the taxpayer;
Best Evidence Obtainable Rule
 In case a person fails to file a required
return or other documents at the time
prescribed by law, or willfully or
 otherwise files a false or fraudulent  Physically present abroad with definite
return or other document, the intention to reside;
Commissioner shall make or amend the  Residing abroad either as immigrant or
return from his own knowledge and from employment on permanent basis;
information obtained thru testimony,  Works and derives income from work
which shall be prima facie correct and abroad and requires to be abroad for not
sufficient for all legal purposes; less than 183 days;
 NRC who arrives at any time during the
Authority of the CIR to inquire into bank deposits of:
taxable year to reside permanently in
a. Decedent to determine gross estate; PH with respect to income from abroad
b. Any taxpayer who has filed an application until the date of arrival in PH;
for compromise of his tax liability on the
Non Resident Aliens
ground of financial incapacity;
c. Taxpayer who is subject of a request of a. Engaged in trade or business – staying in
information from a foreign tax authority PH for an aggregate period of more than
pursuant to a treaty or international tax 180 days during the calendar year
convention; b. Not engaged in trade or business – stays
less than 180 days during the calendar
INCOME TAX
year;
Income tax system
a. Global tax system – all income is lumped Corporations
together and subjected to tax at a fixed rate;
 Does not cover general professional
b. Schedular tax system – types of income are
partnerships or joint-venture
subjected to graduated rates;
agreements;
c. Semi-schedular or semi-global tax system;
TAXABLE PERIOD
Features of PH Income Tax Law
1. Calendar period – from Jan to December;
1. Direct tax;
2. Fiscal period – starts on 1st day of any
2. Progressive in nature;
month other than Jan and ends 12 months
3. Adopts semi-global tax system;
thereafter;
4. Adopts a comprehensive tax situs;
3. Short period – less than 12 months; change
General Principles of Income Taxation of accounting period;
a. From fiscal to calendar year;
1. Resident Citizens and Domestic Corp are
b. From calendar to fiscal year;
taxable on their worldwide income;
2. All other kinds of taxpayers are taxable only Concept of INCOME:
on their income derived from sources within
 All wealth which flows into the taxpayer
PH;
other than as mere return of capital;
3. Overseas contract worker is taxable only on
 What is taxable is the income and not
income derived from sources within PH;
the capital;
Types of Philippine Income Tax  Capital is fund; income is flow of wealth;
income is gain or profit;
a. Compensation Income – derived from EER
b. Professional Income BIR vs. First E-Bank Tower Condominium
c. Business income Corporation (2020)
d. Passive income
Association dues, membership fees and other
e. Capital Gains
assessments of Condominium are not subject to
Types of Taxpayers income tax because they do not constitute profit or
gain;
1. Individuals
a. Citizens Requisites for Taxability of Income
b. Aliens
1. There is Income, gain or profit;
2. Corporations
2. The income or profit is received;
a. Domestic
3. The income or profit is not exempt by law;
b. Resident Foreign
c. Non-resident Foreign NOTE: INCOME FROM WHATEVER SOURCE,
3. General Partnerships MAY BE IT BE FROM ILLEGAL OR LEGAL, IS
4. Estates TAXABLE
5. Trusts
Realization Test
Non-Resident Citizens
No taxable income until there is a separation from
capital of something of exchangeable value, there
by supplying realization which results to income;
Claim of Right Doctrine
Taxable gain is conditioned upon the presence of a
claim of right to alleged again, and the absence of a
definite unconditional obligation to return or repay
that which would otherwise constitute a gain.
Methods of Accounting
1. Cash Method – income is recognized only
upon actual receipt of the cash payment
and expense is recognized when actually
disbursed thru an actual payment in cash;
2. Accrual Method – amounts of income
accrue where the right to receive them
become fixed where there is created an
enforceable liability;
 An expense is accrued for tax purposes
when:
a. Obligation to pay is already fixed;
b. Amount has been determined with
accuracy;
c. The amount is already knowable at
the end of the year;
Situs of Income regarding Source Rules
1. Interest – residence of debtor;
2. Dividends – residence of the corporation
paying the dividends, subject to the 50%
source in case of foreign corporation (more
than 50% of gross income is sourced in the
PH, sourced in PH)
3. Services – place of performance;
4. Rental and Royalties – location of the
property or interest therein;
5. Sale of real property - location of the real
property or interest therein;
6. Sale of Personal Property
a. Produce within PH, sold outside or
Produce outside, sold in PH – partly
within and partly without;
b. Purchase – place of sale;
7. Sale of tickets in PH by Offline Carrier –
source of an income is the property, activity
or service that produced the income, the
sale of tickets is the activity that produce the
income, the sale happened in PH, then it is
source within PH;
NDC vs CIR (151 SCRA 472)
Residence of the obligor who pays the
interest rather than the physical location of the
securities or place of payment is the determining
factor of the source of interest income;
Income subject to final tax:
 Refers to an income wherein the tax due
is fully collected thru the withholding tax
system;
 Payor of the income withholds the tax
and remits it to the government as final
settlement of the income tax due on said
income;
 Recipient is no longer required to
include the item of income subjected to
final tax as part of his gross income in
his income tax returns;
Sources of Income subject to Tax (not an exclusive
list)
1. Compensation Income – under the EER;
exceptions are under section 78(A), NIRC;
NOTE: Employer’s Convenience Rule – if
it’s for the benefit more of the employer
rather than for the employee then this is not
taxable income for the employee;
Special Treatment of Fringe Benefits
 Good, service or other benefit furnished
or granted by an employer to an
individual employee (except rank and
file employees) such as, but not limited
to the enumeration under Sec 33(b);
they are not included in the
compensation income but subject to
Fringe Benefit Tax (a withholding tax);
De Minimis Benefits
Facilities furnished by employer to his employees
provided they are relatively small in value and
offered merely as a means of promoting health,
goodwill or efficiency of his employees;
List of De Minimis Benefits (not complete, but this
list is an exclusive list)
1. Rice subsidy of 2,000 pesos per month;
2. Uniform and clothing allowance not
exceeding 6,000 pesos per annum;
3. Actual medical assistance not exceeding
10,000 pesos per annum;
4. Laundry allowance not exceeding 300
pesos per month;
5. Gifts during Christmas and anniversary
celebrations not exceeding 5,000 pesos per
employee per annum;
De Minimis threshold is 90,000 pesos – anything in
excess will be taxable income;
GAINS DERIVED FROM DEALINGS IN
PROPERTIES
Capital Asset – those not used in the ordinary
course of business or operation;
Ordinary Asset - those used in the ordinary course
of business or operation;
Capital Gains Tax
1. Shares of stock in a DC:
a. Listed and traded: percentage tax of
6/10 of 1% of GSP
 b. Not listed and traded: final tax 15% of
net capital gain;
2. Real property located in PH – 6% CGT on
the presumed gain; XPN is sale of principal
residence;
3. Other Capital Assets – subject to ordinary
income tax but with special rules;
Republic vs. Spouses Bunsay (2019)
If the capital gain is from expropriation, the
expropriating authority should be shoulder the
CGT, other taxes and fees;
Sale or Disposition of Principal Residence
Exempted from CGT provided:
1. 6% shall be deposited in an escrow
account;
2. Proceeds fully utilized within 18 months
from sale;
3. CIR notified within 30 days from sale;
4. Availed only once in 10 years;
5. If there’s no full utilization, only the portion
of the gain presumed to have been realized
from sale shall be subject to CGT;
Transfer to a Controlled Corporation
No gain or loss shall be recognized if property is
transferred to corporation by a person, in exchange
for stock in such corporation;
Interest Income
a. 20% final tax if from any currency bank
deposit;
b. 15% final tax if from foreign currency
deposit;
c. EXEMPT if from long term deposit provided
it is in case of pre-termination;
Royalties
a. Ordinary income tax rate – if from an active
income;
b. Final withholding tax – if it is a passive
income;
Dividends
a. Cash & Property Dividends from DC
 10% final tax (to citizen or RA)
 20% final tax (NRA-ETB)
 25% GIT (NRA-NETB)
 Exempt: Inter-corporate dividends (by
DC and RFC)
Tax Sparing Rule
Dividends from DC received by NRFC is
subject 15% final tax, subject to condition
that the country in which the NRFC is
domiciled allows a credit on taxes deemed
to have been pain in PH
Otherwise, 30%
b. Cash & Property Dividends from FC
Part of the GI and thus subject to
graduated tax rates if received by RC
 Part of GI and thus subject to 30%
income tax if received by DC;
 Not taxable if received by NRC, RA,
NRA, RFC, and NRFC;
c. Stock dividends
GR: not subject to tax;
XPN: if a corporation cancels or redeems a
stock dividend at such time and in such
manner as to make the distribution and
cancellation or redemption essentially
equivalent to the distribution of a taxable
income;
d. Liquidating dividends;
 Gain realized or loss sustained is
taxable income or deductible loss;
 Distribution of liquidating dividends on
account of dissolution of corporation is
not to be treated as a sale for purposes
of CGT;
Prizes and Winnings
Prizes
a. 10,000 or less – part of GI subject to the
graduated rates for individuals
b. More than 10,000
 20% FWT – RC, NRC, RA and NRA-
ETB
 25% FWT – NRA-NETB
c. Part of GI of corporation, regardless of
amount;
Winnings
a. 20% FWT (except winnings amounting to
10,000 or less from PCSO and Lotto which
shall be exempt)
Tax Exempt Prizes and Winnings
a. Prizes and Awards in religious, charitable
etc. achievements;
 Recipient was selected without any
action on his part;
 Recipient is not required to render future
services as condition before receiving
the prize;
Income from whatever source
1. Condonation of indebtedness
 Taxable if condonation is for
consideration;
 Taxable donation if condonation is
without consideration;
2. Recovery of Accounts Previously Written
off;
 This involves bad debts;
 If recovered shall be included as income
on the year it was recovered as to the
extent of the income tax benefit;
3. Receipt of Tax Refunds or Credit
4. Income derived from illegal sources;
 5. Increase in the net worth if unreported and
not explained by the taxpayer;
6. Recovered damages representing
recoveries of lost profits;
EXCLUSIONS FROM GROSS INCOME
They represent return of capital or are not income;
or expressly exempted under the Constitution or
laws;
Tax deductions and Tax credit;
Tax Deductions – items which the law allows to be
deducted from the gross income in order to arrive
at the taxable income; reduces the income that is
subject to tax in order to arrive at taxable income;
Tax Credit – amount that is subtracted directly from
one’s total tax liability; reduces tax due, including –
whenever applicable – the income tax that is
determined after applying the corresponding tax
rates taxable income;
Enumeration of Exclusions from GI:
1. Life Insurance
 Treated as indemnity and a mere return
of capital; not an income;
2. Amount received by the insured as return of
premium
 No income as this is a mere return of
capital;
3. Gifts, Bequest and Devices;
 Already subject to other kinds of taxes;
4. Compensation for Personal Injuries or
Sickness plus damages received therein;
5. Income exempt under Treaty
6. Retirement Benefits
 RA 7641: without a retirement plan; 60
years or more but not beyond 65 years;
served at least 5 years in the
establishment;
 RA 4917: there is a retirement plan; not
less than 50 years of age at time of
retirement; at least 10 years in service of
the same employer; availed only once;
7. Benefits received on Account of Involuntary
Separation
 By reason of death, sickness or any
cause beyond the control of the
employee;
 Separation must not be asked for or
initiated by him or his own making or
choice;
8. Retirement benefits from foreign
government agencies;
9. 13th Month Pay and other benefits;
 Exclusion shall not exceed 90,000;
 Other excess amount shall be
considered income subject to tax;
ALLOWABLE DEDUCTIONS
ITEMIZED deductions
1. Trade, Business or Professional Expense;
 Supported by receipts;
 Ordinary and necessary expenses;
 Incurred during the taxable year;
2. Interest expense
 There is indebtedness connected to the
business or profession of the taxpayer;
 Interest is legally due;
 Interest is not between related
taxpayers;
Tax Arbitrage Rule
Amount of deductible interest expense shall
be reduced by 33% of interest income earned
which had been subjected to FWT;
3. Taxes
 Incurred during the taxable year;
 In connection to your taxpayer’s
business;
 Imposed by law;
4. Ordinary losses
 Actually sustained during the taxable
year;
 Connected with business or profession;
 Not compensated by insurance;
 File notice of loss with BIR 45 days from
date of discovery of loss;
Net Operating Loss Carry-Over (NOLCO)
Net excess of deductions over gross income
of business;
The loss can only be carried over for the
next 3 succeeding years following the year it was
incurred;
The loss can be carried over as a deduction
for the next year;
5. Bad debts
 An existing indebtedness
 Not between related parties;
 Ascertained as worthless and
uncollectible;
 Debt is connected with the profession or
business of taxpayers;
6. Depreciation Expense
 Must be reasonable;
 Allowance must be charge off within the
taxable year;
 Be for property use in trade or business
of the taxpayer;
Straight-line method: acquisition cost less salvage
value equals useful life;
7. Depletion of Oil and gas wells and mines;
8. Charitable and other contributions;
 Actually paid
 Net income of the institution must not
inure to the benefit of any private
stockholder or individual;
OPTIONAL STANDARD DEDUCTION (OSD)
 In lieu of the itemized deductions;
  Covers: individual and corporations;
 GPP and partners can only avail of OSD
once, either by the GPP or the partners
themselves;
Items not deductible:
1. Bribes, kickbacks and other similar
payments – not deductible business
expense;
2. Specific items under Section 36;
INCOME TAX ON INDIVIDUAL TAXPAYERS
For RC, NRC, and RA
a. Purely compensation income earners;
 Based on the graduated tax rates;
b. Purely self-employed individuals and or
professionals;
Option to choose:
 Graduated tax rates and pay percentage
tax, or;
 8% tax on gross sales or receipts and
other non-operating income in excess of
250,000 pesos; no percentage tax in this
option;
Individuals not qualified to avail of 8%:
1. Purely compensation earners;
2. VAT registered;
3. Non-vat registered payer but income
exceeds 3M threshold;
4. Taxpayers subjected to percentage tax;
c. Mixed Income Earners
 The income from pure compensation is
subject to graduated tax rates;
 Business income has the option for
GITR or 8% of gross sales/receipts;
d. Passive Income
 Royalties in general – 20%
 Royalties from books, works and
composition – 10%
 Interest from currency bank deposits –
20%
 Interest from expanded FCD – 15%
 Proceeds of pre-terminated long term
deposit:
1. 4-5 years = 5%
2. 3-4 years = 12%
3. Less than 3 years = 20%
e. Prizes – except amounting to 10k or less
which is for graduated rates = 20%
f. Winnings – except winnings from PCSO
and lotto that is 10k or less = 20%
g. Dividends – 10%
h. CGT of shares of stock not traded – 15 %
i. CGT on sale of real property – 6 %
For NRA-ETB
a. Same as individual taxpayers;
b. On passive income govern by same rules
and rates as individuals;
For NRA-NETB
a. 25% on gross income tax;
b. CGT of shares of stock not traded – 15 %
c. CGT on sale of real property – 6 %
For Special Aliens
a. Preferential tax is no longer applicable;
Minimum Wage Earners
a. Exempted from paying income tax;
b. If basic pay is more than statutory minimum
wage but income does not exceed 250,000,
they will be subjected to income tax but will
not pay since the income does not exceed
the income 250,000 threshold;
Tax on Corporations
1. Domestic corporations
a. Regular corporate income tax – 30%
from all sources;
b. Gross Income Tax – 15% of gross
income; available only to firms whose
ratio of cost of sales to gross sales or
receipts from all sources does not
exceed 55% (not yet implemented)
c. Minimum Corporate Income Tax (MCIT)
– 2% of gross income; only when
minimum income tax is greater than
regular corporate income tax; only on
the 4th year of business operation;
Regular Corporate Income Tax
 Applicable to all corporate tax payers;
 Tax rate is 30%
 Tax base is taxable income;
 Imposable upon commencement of
operation;
 Imposed if greater than MCIT
Minimum Corporate Income Tax
 Applicable to DC and RFC only;
 Tax rate is 2%
 Tax base is Gross Income
 Imposable only on the 4th years of
business operation;
 Imposed if greater than RCIT
d. Taxation of Passive Income of DC
 Interest and royalties: 20%
 Interest income under FCD: 15%
 Intercorporate dividends: Exempt
 Capital gains from sale of share of
stocks not traded: 15 %
 Capital gains from sale or disposition of
lands or buildings: 6%
e. Improperly Accumulated Earnings Tax
 10 % tax rate
 On profits of a corporation that are
permitted to accumulate instead of being
distributed by corporation to its
shareholders for purpose of avoiding the
income tax with its shareholders;
 Corporations not covered:
 1. Publicly held corporations
2. Banks and other financial institutions
3. Insurance companies
4. Taxable partnerships
5. Foreign corporations
 If the accumulation of earnings is for
reasonable needs of the business, then
no IAET shall be imposed;
Proprietary Educational Institutions and Hospitals
 For proprietary (means private) which
are non-profit;
 10% of taxable income except passive
income; subject to predominance rule;
 Predominance rule – if the gross income
from unrelated activities exceed 50% of
its total gross income, then entity will be
taxed at 30% RCIT;
Gov’t owned and controlled corporations (GOCCs)
GR: Taxable like other corporations;
XPN:
1. GSIS
2. SSS
3. PHIC
4. LWD
PAGCOR vs. BIR (2014)
 PAGCOR’s tax privilege of paying 5%
franchise tax in lieu of all other taxes have
not been repealed;
 PAGCOR’s income from gaming operations
is subject to the 5% franchise tax;
 PAGCOR’s income from other related
activities or services is subject to regular
corporate income tax (30%);
Foreign Currency Deposit Units
a. Exempt – if derived by depository bank from
foreign currency transaction with non-
residents;
b. 10% - interest income from foreign currency
loans by depository banks to residents;
c. Exempt – income of non-residents from
transactions with depository banks under
the expanded system shall be exempt from
income tax
2. Resident Foreign Corporations (RFC);
a. 30% RCIT based on taxable income;
 Deductions are allowed;
b. 15% Gross Income Tax; same
requirements above;
c. 2% MCIT; same requirements above;
d. Tax on Passive Income
 Interest and royalties: 20%
 Interest income under FCD: 15%
 Intercorporate dividends: Exempt
 Capital gains from sale of share of
stocks not traded: 15 %
Tax on Branch Profits Remittances
 Imposed on any profit remitted by RFC;
 15% tax rate;
 This is a final withholding tax;
Special Resident Foreign Corporations
1. International Carriers doing business in PH;
a. Online carrier – 2.5% Gross Philippine
Billing; if carrier has flights originating in
the PH;
b. Offline carrier – 30% RCIT based on its
taxable income; if carrier has no
originating flights in PH but has sales
agent here and sells or transacts here in
PH;
2. Offshore Banking Units
 Exempt – income derived from
foreign currency transactions with
non-residents, other OBUs, or local
and branches of foreign banks
authorized to transact with OBU;
 10% final tax – income interest from
foreign currency loans with
residents, other OBUs, or local and
branches of foreign banks
authorized to transact with OBU;
3. Multinational Companies
a. Regional or Area Headquarters
(RAHQs) – exempt from income tax;
b. Regional Operating Headquarters
(ROHQs) – subject to 10% on taxable
income;
Non-resident Foreign Corporation (NFRC)
a. 30% GIT from all sources within PH
collected under final withholding tax system;
b. Certain Income
1. 20% final tax on interest on foreign
loans;
2. 15% CGT on sales of shares of stock
not traded;
3. 15% income tax on dividend from DC;
subject to Tax Sparing Rule;
NRFCs subject to Preferential Tax rates:
1. Nonresident cinematographic film owner,
lessor or distributor – 25%
2. Non-resident owner or lessor of vessels
chartered by Phil Nationals – 4.5%
3. Non-resident owner or lessor of aircraft,
machineries and other equipment – 7.5%
TAX EXEMPT CORPORATIONS (SEC 30, NIRC)
Organizational test – constitutive documents must
show that its primary purpose of incorporation fall
under sec 30;
Operational test – regular activities must be
exclusively devoted to the accomplishment of the
purposes specified under Sec 30;
NOTE:
  these corporations must be non-profit;
 it must not operate for benefit of private or
specified individuals;
Exempt Corporations under Sec 30 still taxable
under the following:
1. income from profit-oriented activities
regardless of disposition;
2. interest income and royalties – 20%
3. interest income under EFCDS – 15% FWT;
4. tax exemption does not cover WTC and WT
on income payments;
5. purchase of goods or properties or services
and importation shall be subject to 12%
VAT;
6. subject to VAT if engaged in the sale of
goods or services in course of a business if
annual output exceeds 3M and percentage
tax if less than 3M;
CIR vs. St. Luke’s Medical Center Inc. (2017)
Even if the charitable institution must be
organized and operated exclusively for charitable
purposes, it is nevertheless allowed to engage in
activities conducted for profit without losing its tax
exempt status for its non-for-profit activities;
The only consequence is that the income of
whatever kind and character of a charitable
institution from any of its activities conducted for
profit regardless of the disposition made of such
income, shall be subject to tax;
NOTE:
Non-Stock Non-Profit Educational Institutions
- the last paragraph of Sec 30 is not
applicable to it;
INCOME TAX ON PARTNERSHIPS
1. General Partnerships (not GPP)
 Taxable as corporation;
 Final tax on share of partners in the
distributable net income of a partnership;
 Includes unregistered partnerships;
2. General Professional Partnerships
 Must be same profession;
 No income is derived;
 NOT SUBJECT TO TAX;
 The partners shall be liable for income tax in
their separate individual capacities;
 Each partner shall report as gross income
his distributive share;
Determination of OSD by GPP and Partners:
1. GPP and partners may avail of OSD only
once;
2. Distributable net income of GPP may be
determined by claiming itemized deductions
or OSD;
3. The partners can no longer claim further
deduction from distributive share in the net
income of GPP;
4. If partner also derives other income apart
from the share in the net income of the
GPP, the deduction from other income
would either be ID or OSD;
Income on Estates
1. If under judicial settlement
a. During pendency of settlement
 As a rule, taxable same manner as
individuals;
 Distribution of income heirs – deductible
from income of estate; but forms part of
income of heirs;
 No distribution – income tax on the part
of estate; subsequent distribution will no
longer make it taxable for the heirs;
b. Termination of settlement
 Unregistered partnership – estate is
liable for RCIT;
 Co-ownership – co-owners will be
liable for their own shares;
2. Estate not under judicial settlement;
a. No tax personality generally;
 Unregistered partnership –
estate is liable for RCIT;
 Co-ownership – co-owners will
be liable for their own shares;
Income Tax on Trusts
a. Trusts is a taxable entity;
b. Trust is taxable if the amount of income to
be distributed to the beneficiary is a
deduction from gross income of the trust but
must be reported as income of the
beneficiary;
c. Income of trust;
 Distributed to beneficiaries –
beneficiaries will pay and file return;
 Accumulated or held for future
distribution – trustee or fiduciary will
pay and file return;
NOTE: Employee’s trust is exempted from income
tax (Sec 60);
INDIVIDUAL INCOME TAX RETURNS
Who are required to file?
a. Resident Citizen;
b. NR Citizen;
c. Resident Alien;
d. NRA-ETB
Who are not required to file?
a. Income does not exceed 250,000 except
citizens and aliens engaged in business or
profession;
 b. Sole income has been subjected to FWT;
c. Minimum wage earner;
d. Individual entitled to substituted filing;
Substituted Filing of ITR
Requisites
1. Purely compensation income;
2. From one employer during taxable year;
3. Amount of tax due equals the amount of tax
withheld;
Annual ITR or Final Adjustment Return
- On or before the 15th day of April of each
year covering income for preceding taxable
year;
- Maximum pages is 4 pages (paper or
electronic form);
Quarterly ITR for individuals
- Only applicable to self-employed
individuals; Except RFC for income without
PH and NRA-ETB)
- Filing and payment:
a. On or before May 15 – 1st quarter
b. On or before Aug 15 – 2nd quarter
c. On or before November 15 – 3rd quarter;
Place of Filing and Payment – Individual
GR:
1. AAB, RDO, Collection Agent or duly
authorized local treasurer;
XPN:
- In cases where CIR otherwise permits;
CORPORATE INCOME TAX RETURNS
- Every corporation subject to the tax, except
FC not engaged in business or trade in PH;
- Maximum of 4 pages (paper o electronic
form)
a. Quarterly ITR – on or before the 60 th day
following the first 3 months of the taxable
year;
b. Final Adjustments ITR/Annual ITR – on or
before 15th day of April for calendar year; or
on before 15th the fourth month following the
close of the fiscal year;
c. Corporation contemplating dissolution or
reorganization – within 30 days after
adoption of plan for dissolution or liquidation
or reorganization;
Place of Filing and Payment – Corporation
GR: Authorized Agent Bank, RDO, Collection Agent
or duly authorized local treasurer;
XPN: when CIR otherwise permits;
CAPITAL GAINS TAX RETURNS
a. CGT Returns on transfer of real property
- Seller will file and pay;
- Within 30 days following the sale or
disposition;
- RDO where real property is located;
b. CGT returns on sales of shares of stocks
not traded;
- CGT Returns: Within 30 days after each
sale or disposition;
- AAB under RDO where seller is required to
register
- Annual CGT Return: covers all transactions
of preceding taxable year; on or before April
15 of each year for individual; on or before
15th day of the 4th month of the close of the
taxable year for corporate taxpayers;
WITHOLDING TAX
- Not a tax; it is a manner of collecting tax;
- This is a form of income tax;
ING Bank vs. CIR (2016; J. Leonen)
In the operation of the withholding tax
system, the income payee is the taxpayer, the
person on whom the tax is imposed, while the
income payor, a separate entity, acts no more than
an agent of the gov’t for the collection of the tax in
order to ensure its payment. In other words, the
withholding agent is merely a tax collector, not a
taxpayer;
Withholding Tax vs. Indirect Tax
- Indirect taxes, the liability falls on one
person but the burden can be shifted to
another;
- Withholding tax, the liability and burden of
taxation falls on the same entity, the
statutory taxpayer;
Who are liable for WT?
It is the payee. The withholding agent cannot be
made liable for tax due; liable only insofar as to
remit the withholding tax to the government;
Duties of Withholding Agent
1. Filing the quarterly withholding tax returns;
2. Submission to payee of a written statement
showing the income or other payments
made and the amount of tax deducted and
withheld therefrom;
3. Filing of a reconciliation statement of
quarterly payments and list of payees and
income payments;
Kinds of Withholding Taxes
1. Final Withholding Tax
- Constituted as full and final payment of
income tax due;
- Liability for payment of the tax rests
primarily on the payor as withholding agent;
- Payee is not required to file an income tax
return for the particular income;
2. Creditable Withholding Tax
 - Intended to equal or at least approximate
the tax due of the payee on said income
- Income recipient is still required to file return
to report the income and or pay the pay the
difference between the tax withheld and the
tax due on income;
- Time of withholding
a. Income is paid or payable;
b. Income payment is accrued or recorded
as an expense or asset whichever
comes first;
2 types of Creditable WT
a. Expanded withholding tax on Certain
Income Payments
- Prescribed on certain income payments and
is creditable against the income tax due of
the payee for the taxable quarter/year in
which the particular income was earned;
b. Withholding Tax on Compensation Income
- Every employer making payment of wages
except MWEs;
- Employer is the withholding agent and shall
be liable for the WT;
- Employer’s liability to withhold stays even if
the employee subsequently pays;
- Unless the agent can show that the tax has
been paid by the employee the employer
must still pay;
DONOR’S TAX
It is a tax on the privilege of transmitting
one’s property or property rights to another or
others without adequate and full valuable
consideration;
Law in fore at the time of donation shall
govern the imposition of the donor’s tax;
Requisites for a Valid Donation:
1. Capacity to make donation
2. Donative intent;
3. Deliver;
4. Acceptance of the donation by done;
NOTE: must be in a public document if it involves
immovable properties;
Coverage:
1. Residents and Citizens including DC (as
Donor)
- Donation of all properties wherever situated;
2. NRA including FC (as Donor)
- Donation of real property and tangible
personal property situated in PH;
- Donation of intangible personal property
with situs in PH, unless exempted on basis
of reciprocity;
Indirect Donations Subject to Donor’s tax
a. Condonation of indebtedness; no conditions
attached for the condonation;
b. Renunciation of inheritance;
- By Surviving spouse of his or her share in
the CPG/ACP is taxable;
- If renunciation is an inheritance in the
hereditary estate:
1. General renunciation – not subject to
donor’s tax;
2. Specific renunciation – subject to
donor’s tax;
c. Transfer for less than adequate and full
consideration;
GR: excess of FMV over the consideration
or selling price shall be deemed a gift
subject to donor’s tax;
XPN: (1) sale of real property that has been
subjected to final capital gains tax; or (2)
sale or exchange made in the ordinary
course of business;
Exemption of Certain Gifts
No donor’s tax over:
1. Gifts made to or for use of the gov’t;
2. Gifts in favor of an education, charitable,
religious or social welfare association or
institution;
- Not more than 30% the gift shall be used for
administration;
Political Campaign Contributions
- Shall not be subject to payment of any gift
tax if duly reported to COMELEC;
- Unutilized campaign funds shall be
considered as subject to income tax;
RATE OF DONOR’S TAX
- Tax of each calendar year shall be taxed at
6% computed on the basis of total gifts in
excess of 250,000 pesos during the
calendar year;
Computation of Donor’s Tax (DT)
a. Donation shall be subject to DT applicable
when donations are made;
b. Computation is on a cumulative basis over a
period of one calendar year;
c. Husband and wife are considered as
separate taxpayer for purposes of donor’s
tax; even if they both donated, they must file
each donor’s tax return;
Tax Credit for Foreign Donors
- A citizen or resident donor shall be credited
with the amount of any donor’s tax imposed
by authority of a foreign country;
FILING OF DONOR’S TAX RETURN
- Filed within 30 days after date of donation;
pay as you file system;
- Resident Donor – place of domiciled at time
of transfer or office of CIR if there’s no legal
residence;
 - Nonresident Donor – Phil Embassy or
consulate in country where he is domiciled
at the time of donation or directly with CIR;
VALUE ADDED TAX
This is a tax on consumption on levied on
sale, exchange, barter or lease of goods or
properties or services in PH and on importation of
goods in to PH whether for consumption or sale. It
is an indirect tax, which may be shifted or passed
on to the buyer, transferee or lessee of goods,
properties or services.
VAT is a regressive tax; the state minimizes
the regressive effects by imposing zero rating of
certain transactions and exemptions of certain
transactions;
Nature and Characteristics of VAT;
1. Indirect tax;
2. Privilege tax;
3. Uniform tax at the rate of 0% and 12%;
4. Ad valorem tax;
5. Tax on the value added of taxpayer;
6. It is a broad based tax on consumption of
goods, properties or services in PH;
7. PH adopted separate indication of tax”
method;
8. There is no tax cascading (tax on tax) in the
VAT system;
Tax Credit Method;
- VAT uses this method;
- Output Tax: VAT due on sale or lease of
goods or properties;
- Input Tax: VAT due or paid on importation
of goods or local purchases of goods or
services including lease or use of
properties;
CROSS BORDER DOCTRINE/DESTINATION
PRINCIPLE
No VAT shall be imposed to from part of
the cost of goods destined for consumption outside
the territorial border of PH taxing authority;
Person Liable for VAT
- Any person who, in the course of his trade
or business, sells, barters, exchanges or
leases goods r properties, or renders
services, and any person who imports
goods;
- In case of importation, the importer is liable,
WON made in course of trade or business;
if the imported goods are subsequently sold
by tax exempt persons to non-exempt
persons, the latter shall be considered the
importers and shall be liable for VAT due on
importation;
NOTE:
- VAT is ultimately a tax on consumption, and
it is levied only on the sale, barter or
exchange of goods or services by persons
who engage in such activities in the course
of trade or business;
- Membership fees, assessment dues and the
like are not subject to VAT cause in
collecting such fees, the club is not selling
its services to the members;
Transactions Subject to VAT:
a. Sale of goods or properties – 12%
b. Transactions deemed sales – 12%
c. Sale or exchange of services and use or
lease of properties – 12%
d. Sale of goods or properties subject to 0%
e. Sale or exchange of services and use or
lease of properties subject to 0%
f. Importation of goods;
Sale of goods or properties subject to 12%
- Sale or exchange must be made in the
course of trade or business of seller or
transferor;
- Actual sale subject to 12%
Transactions deemed sale subject to 12%
1. Transfer or 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;
2. Distribution or transfer to: (a) shareholders
share in the profits of VAT registered person;
(b) creditors in payment of debt or obligation;
3. Consignment of goods if actual sale is not made
within 60 days following such consignment;
4. Retirement from or cessation of business, with
respect to inventories of taxable goods existing
at time of retirement;
Changes in or Cessation of Status of a VAT
registered Person
1. VAT shall apply to goods or properties
which are existing as of occurrence of the
following:
a. Change of business activity from VAT
taxable status to VAT exempt status;
b. Approval of request for cancellation of
registration due to reversion to exempt
status;
c. Approval of request for cancellation of
registration due to desire to revert to
exempt status after lapse of 3
consecutive years from time of
registration;
Sale or Exchange of Services and Use or lease of
Properties subject to 12% VAT
- Sale or exchange of services means
performance of all kinds of services in PH
for a consideration, WON in kind or cash;
- Service must be performed in PH;
VAT on Importation
 - Imposed on goods brought into PH, WON
for use in business or made in trade or
business;
- Applies to technical importation of goods
sold by a person located in special
economic zone to a customer located in a
customs territory;
Who is liable for payment of VAT on importation?
- Paid by importer prior to release of such
goods from custody;
Zero-rated Transactions
- Liable for VAT but the rate is 0%;
- Only if made by a VAT registered person;
- Input tax on purchases of goods, properties
or services related to such zero rated sale,
shall be available as tax credit or refund;
Zero-rate sale of goods:
1. Export Sale
a. Actual export of goods;
b. Sale of raw material or packing materials to
non-resident buyer;
c. Sale of raw materials or packaging
materials to an expert-oriented enterprise;
d. Export sales under OIC (Omnibus
Investment Code) and other special laws;
e. Sale of goods, supplies, equipment and fuel
to persons engaged in international shipping
or air transport operations;
2. Sales to persons or entities whose exemption
under special laws or international agreements
to which PH is a signatory effectively subjects
such sales to zero rate;
Zero-rated Sale of Services
1. Processing, manufacturing and repacking
goods for other persons doing business
outside the PH which goods are
subsequently exported;
2. Services rendered to persons engaged in
international shipping or air transport
operations, including leases of properties for
use thereof;
3. Services rendered to persons or entities
who are tax exempt under special laws or
international agreements to which PH is a
signatory effectively subjects such sales to
zero rate;
4. Transport of passengers and cargo by
domestic air or sea carriers from PH to
foreign country;
5. Services performed by subcontractors and
contractors in processing, converting or
manufacturing goods for an export-oriented
enterprise;
6. Sale of power of fuel generated thru
renewable sources of energy;
Requisites for Zero-rated Sales of other services:
1. Seller is VAT registered;
2. Services are rendered to person engaged in
business conducted outside PH or to non-
residents not engaged in business who is
outside PH when services where performed;
3. Services are paid in acceptable foreign
currency accounted for in accordance with
BSP;
Zero-rated vs. Effectively Zero-rated Transactions
- Both charges no VAT in actuality;
- Seller of such transactions charges no
output tax because the rate is 0% but can
claim refund or tax credit for VAT previously
charged by suppliers;
- Zero-rated transactions generally refer to
export sale of goods and supply of services;
while effectively zero rated transactions
refer to the sale of goods or supply of
services to persons or entities whose
exemption under special laws or
international agreements effectively
subjects such transactions to 0%;
- Automatic zero rating is primarily intended
to be enjoyed by seller; effectively zero
rating on the contrary is intended to benefit
the purchaser;
VAT EXEMPT TRANSACTIONS
Exempt Transactions vs. Zero-rated transactions
a. Zero rated are VAT taxable but 0% rate;
while exempt transactions are not subject to
VAT;
b. Under exempt transactions, the seller is not
allowed to avail of input tax credit; in order
zero rated transactions, input tax related to
such zero-rated transaction shall be
available as tax credit or refund;
Transactions include:
1. Sale or importation of agricultural and
marine food products in their original state;
2. Sale of raw cane sugar in its original state;
3. A qualified cooperative also enjoys
exemption from the requirement of advance
payment of VAT upon withdrawal from the
refinery;
4. Sale or importation of fertilizers, seed, or
fingerlings;
5. Importation of personal and household
effects returning residents and NRC coming
to settle in PH exempt from custom duties;
6. Importation of professional instruments,
tools of trade, wearing apparel, domestic
animal and household effects belonging to
persons coming to settle in PH, except
vehicles, vessels, machineries and other
similar goods for manufacture;
7. Services subject to percentage tax;
8. Services by agricultural growers and milling
for others of palay into rice, etc.
9. Medical, dental, hospital and veterinary
services except those rendered by
 professionals; services rendered by HMOs
are not VAT-exempt;
10. Educational services rendered by private
educational institution;
11. Services rendered by individuals pursuant
to EER;
12. Services rendered by RAHQs;
13. Transactions which are exempt under
international agreements or under special
laws; except PD 529;
14. Agricultural cooperatives duly registered
with CDA;
15. Gross receipts from lending activities
provided registered with CDA;
16. Sales by non-agricultural, nonelectric and
non-credit cooperatives registered with CDA
provided that the share capital contribution
of each member does not exceed P15,000;
17. Export sales by persons who are not VAT-
registered;
18. Sale of real properties exempt from VAT;
19. Lease of residential units not subject to
VAT; monthly rental must not exceed
P15,000; annual rental must not exceed
P3,000,000;
20. Transport of passengers by international
carriers;
21. Sale, importation or publication of books,
magazines or journals which is not
principally used for paid advertisements;
22. Sale, importation or lease of vessels and
aircraft for domestic or international
transport operations;
23. Importation of fuel, goods and supplies by
persons engaged in international shipping
or air transport;
24. Sale of gold to BSP;
25. Sale or lease of goods and services to
senior citizens and PWDs;
26. Sale of drugs and medicines prescribed for
diabetes, cholesterol and hypertension;
WAIVER of exemption:
- VAT registered person may elect that the
exemptions under NIRC not apply to its sale
of goods or properties or services;
- Once election has been made, it shall be
irrevocable for a period of 3 years from the
quarter the election was made;
Creditable Input Tax:
a. Purchas or importation of goods;
b. Purchase of real properties for which a VAT
has actually been paid;
c. Purchase of services in which VAT has
actually been paid;
d. Transaction deemed sale;
e. Presumptive input;
f. Transitional input;
Transitional Input Tax
- Taxpayers who became VAT-registered
persons upon exceeding annual threshold
or who voluntarily register even of their
turnover does not exceed annual threshold;
- Rate is 2% of the value of the beginning
inventory on hand;
Presumptive tax;
- Applicable to persons or firms engaged in
processing sardines, mackerel and milk,
and refined sugar and cooking oil;
- Rate is 4%of gross value;
Tax Refund of Unutilized Input VAT (sec 112)
1. VAT registered person whose sales are
zero rated or effectively zero rated;
2. VAT registered person whose registration
has been cancelled due to retirement from
cessation of business;
Rule under TRAIN law
- 2-year period applies only to the admin
claims; reckoned from close of taxable
quarter;
- 90 days for the CIR to resolve the claim for
refund; state factual and legal basis in case
of denial;
- Judicial claim:
a. Appeal to CA within 30 days after CIR’s
denial within the 90-day period;
- Premature filing will make the claim
dismissible; must wait for the lapse of 90-
day period before filing judicial claim;
VAT REGISTRATION
1. Mandatory Registration
a. If gross sales or receipts for the past 12
months exceeds 3M;
b. Reasonable grounds to believe that
gross sales or receipts for the next 12
months will exceed 3M;
2. Optional Registration
a. Any person who is not required to
register may elect to register as VAT
taxpayer;
b. Once elected cannot cancel the
registration for the next 3 years;
Invoicing Requirements:
a. VAT Invoice – barter, sale or exchange of
goods/properties;
b. VAT official receipt – lease of
goods/properties and for every sale, or
exchange of services;
c. Amount of tax shall be shown as a separate
item;
d. If the sale is exempt from VAT, the term
“VAT exempt sale” shall be indicated;
e. If the sale is subject to zero percent VAT,
the term zero rated shall be indicated;
Issuing erroneous VAT invoice or VAT Official
receipt:
He will be liable for:
 a. Percentage tax;
b. VAT due on transaction imposed by NIRC,
without benefit of any input tax credit;
c. 50% surcharge;
d. VAT shall be recognized as an input tax
credit to the purchaser;
Failure to indicate “zero rated”
- Claim for refund shall be denied whenever
the word “Zero rated” has been omitted in
receipts/invoice;
Filing of VAT Returns and Payment
a. Quarterly VAT Returns filed within 25 days
following the close of each taxable quarter
prescribed;
b. Monthly VAT return - paid on the 20th day
following the end of each month;
Withholding of VAT
Required only:
a. In government money payments;
- 5% FWT must be made; this is considered
as creditable in nature;
b. Payments to Non-residents;
- For lease or use of properties of non-
resident owners;
- 12% FWT;
Suspension of Business Operations
For duration of 5 days;
Allowed in the following cases:
1. For VAT registered payers:
a. Failure to issue receipts or invoices;
b. Failure to file VAT return;
c. Understatement of taxable sales or receipts
by 30% or more;
2. Failure of any person to register with the BIR;
Recovery of Tax Erroneously or Illegally Collected
1. Erroneously or illegally assessed or
collected internal revenue taxes;
2. Penalties imposed without authority;
3. Any sum alleged to have excessively or in
any manner wrongfully collected;
4. Refund of BIR stamps when returned in
good condition by the purchaser;
5. Redemption or change of unused stamps
rendered unfit for use and refund their
values;
TAX REFUND
Statutory Requirements:
1. Written claim for refund or tax credit must
be filed by the taxpayer;
2. Claim for refund must be a categorical
demand for reimbursement;
3. Claim must be filed or be commenced in
court within 2 years from date of payment of
tax/penalty regardless of supervening
causes;
Proper party to file claim:
a. Statutory taxpayer;
b. For withholding tax, it is the withholding
agent; provided agent remits the amount
refunded to the payee;
c. For indirect taxes, it is the statutory
taxpayer;
d. Excise tax exemptions on petroleum
products:
GR: Statutory taxpayer, who is the
manufacturer, producer or importer;
XPN: party who bears the economic burden
is allowed to file claim if the law grants such
authority;
2-year period under Sec 204 (on general claim of
refund)
- Applicable to both admin cases and judicial
claims;
- Taxpayer need not wait the final resolution
of its administrative claim for refund; it is
only required that an admin claim should
first be filed before judicial claim;
- For as long as the admin claim and the
judicial claim were filed within 2 years then
there was exhaustion of admin remedies;
Reckoning date of the 2 –year period:
a. From date of payment;
b. From the filing of final adjustment return in
case of income tax returns filed on a
quarterly basis;
c. From date of final payment in case of tax
paid by installments;
d. Creditable WT – from filing of final
adjustments return or annual ITR or last day
of filing, whichever comes first;
e. Final WT – from date of actual payment or
last day of the month following the close of
the quarter during which withholding was
made, whichever comes first;
The Irrevocability Rule:
a. Corporation entitled to a tax credit or refund
of the excess estimated quarterly income
taxes paid has 2 options:
- To carry over the excess credit;
- To apply for the issuance of Tax Credit
Certificate or to claim a cash refund;
Carry-over Option
- Once exercised the same shall be
irrevocable for that taxable period;
- Taxpayer may apply the unutilized excess
income tax payment as a tax credit to the
succeeding taxable years until such has
been fully applied;
Does the irrevocability rule only apply to the carry-
over option?
 Yes. The controlling factor for the operation
of the irrevocability rule is that the tax payer chose
an option and once it had already done so, it could
no longer make another one;
NOTE: Vloggers are subject to income tax; they are
engaged in their profession;
POWER OF THE COMISSIONER OF THE
INTERNAL REVENUE
A. Power to make an assessment;
Requisites of a valid assessment:
1. Be in writing and contain the facts and the
law upon which the assessment is based;
2. Must contain a demand by the BIR for
settlement of a due tax liability; the tax due
must already be fixed and set;
3. Assessment notice must be served on and
received by the taxpayer;
4. Assessment must be made within the
prescriptive period;
Prescriptive period
GR: within 3 years from:
a. The last day prescribed by law for filing of
return;
b. The day the return was filed if it is beyond
the period prescribed by law;
c. For amended returns:
- If substantially different from the original –
then from the filing of the amended one;
- If not substantially different – from filing of
original return;
10-year period:
a. False return;
b. Fraudulent return with intent to evade tax;
c. Failure to file a return;
Reckoned from the discovery of falsity, fraud or
omission;
Concept of Intentional Falsity – an entry of wrong
information due to mistake, carelessness or
ignorance, without intent to evade tax, this does not
constitute false return;
Waiver of Statute of Limitations
- Agreement to extend the prescriptive period
to a date certain;
- Not a waiver of right to invoke the defense
of prescription;
Requisites:
a. In writing;
b. Executed before the expiration of the period
to assess or to collect taxes;
c. Date of extended period should be
indicated;
d. Signed by the taxpayer and the authorized
agent of CIR;
Estoppel vis-à-vis Statute of Limitations
Doctrine of estoppel cannot be applied as
an exception to the statute of limitations on
assessment of taxes;
CIR vs. Avon Products Manufacturing Inc. (2018; J.
Leonen)
Avon did not receive any benefit from the
waivers. On the contrary, there was even a drastic
increase in the assessed deficiency taxes when the
CIR increased the alleged sales discrepancy.
Under these circumstances, Avon’s payment of an
insignificant portion of assessment cannot be
deemed an admission or recognition of validity of
the waivers.
When is an assessment deemed made?
- Deemed made if notice to that effect was
released or sent by the CIR to the taxpayer
within prescriptive period;
Suspension of Running of Statute of Limitations
1. CIR is prohibited from making assessment
or beginning distraint or levy or proceeding
in court and for 60 days thereafter;
2. When the taxpayer requests for
reinvestigation which is granted;
3. When taxpayer cannot be located in the
address unless there is notice of change of
address;
4. When warrant of distraint or levy is duly
served and no property is located;
5. When taxpayer is outside PH;
Procedural Due Process in Tax Assessement
1. Tax Audit;
- There must be a grant of authority from CIR
to conduct an assessment.
2. Notice of Informal Conference;
- To afford the taxpayer to present his side;
3. Issuance of Preliminary Assessment Notice
(PAN)
GR: Issuance of PAN is a matter of due process
and required;
XPN:
a. Deficiency is a mathematical error;
b. Discrepancy between tax withheld and the
amount actually remitted;
c. Taxpayer opted to claim refund or credit of
excess CWT has carried over and
automatically applied the estimated tax
liabilities;
d. Excise tax due on exciseable articles has
not been paid;
e. Article locally purchased or imported by an
exempt person has been sold, traded, or
transferred to non-exempt person;
4. Issuance of Final Assessment Notice (FAN);
- TP is in default – no response to the PAN
- TP filed response to PAN within 15-day
period;
5. Disputed Assessment is issued
 - Admin protest must be filed against FAN
within 30 days from date of receipt thereof;
PAN vs. FAN
- PAN is an initial finding of the BIR and
contains no demand for payment; respond
within 15 days after receipt;
- FAN contains computation of tax liability as
well as demand for payment within a
prescribed period; as soon as served the
taxpayer has an obligation to pay the tax
due therein;
- And failure to file an admin protest against
FAN within 30 days from receipt will render
the assessment final and demandable;
Administrative Protest
Requisites
1. Be in writing;
2. Filed within 30 days from receipt of
FLD/FAN;
3. State the nature of protest whether
reconsideration or reinvestigation and
specify newly discovered or additional
evidence it is requested for reinvestigation;
4. State the applicable law, rules and
regulations or jurisprudence on which the
protest is based;
5. State the date of assessment notice;
Under Reinvestigation – there must be submission
of relevant supporting documents; submission is
within 60 days from request of reinvestigation;
Decision of the CIR on the protest:
- CIR has 180 days to resolve the protest;
- State the facts and laws on which the
decision is based;
REMEDIES IN CASE OF DENIAL BY CIR
If issued by CIR’s representative
a. Appeal to CTA within 30 days from receipt
of denial; or
b. Administrative appeal with CIR within 30
days from denial;
 From CIR, then file petition for
review with the CTA;
c. In case of inaction by the representative
 Appeal CTA within 30 days; or
 Wait for the decision then appeal;
If issued by CIR
a. Appeal to CTA within 30 days from receipt
of denial;
b. In case of inaction by CIR
 Appeal CTA within 30 days; or
 Wait for the decision then appeal;
Remedies in case of inaction of CIR in a protest:
- Appeal to CTA; reckoned from lapse of 180
period;
- Two remedies above are mutually
exclusive;
CIR vs. Avon Products Manufacturing Inc. (2018; J.
Leonen)
Due process requires the BIR to consider
the defenses and evidence submitted by the
taxpayer and to render a decision based on these
submissions. Failure to adhere to these
requirements constitutes a denial of due process
and taints the administrative proceedings with
invalidity.
REMEDIES
A. Payment of Taxes
On or before January 20 or first 20 days of each
quarter
- 2% interest/month (maximum of 36 months)
- 5/10-year prescriptive period (LGC, Sec.
194)
B. Rule when questioning validity of revenue
ordinance (LGC, Sec. 187)
- 30/120/30-day period
C. Rule when questioning assessment (LGC, Sec.
195 and in case of payment under protest, in
tandem with Sec. 196)
- 60/60/30-day period
- This is like a protest case;
- 60 days to resolve the protest;
- 60 days to appeal in court;
D. For refund (Section 196)
- File administrative and judicial claim within
2-year period (LGC, Sec. 196)
- Reckoning date of the 2-year period: from
the date of payment of the tax, or from the
date the taxpayer becomes entitled to the
refund or credit, whichever comes earlier;
Paid under protest
- if you paid under protest; follow 60-days
protest period and not 2-year period;
- When there is payment under protest, the
judicial action must be commenced within
30 days from receipt of decision or lapse of
60-day period in case of inaction
- There is no benefit of the 2-year period
NOTE:
- 5 years to assess and 5 years to collect for
local taxation;
Civil Penalties: LGU may impose a surcharge not
exceeding 25% of the amount of taxes, fees, or
charges not paid on time.
Adjustment of Rates by LGUs
LGUs have the authority to adjust the tax
rates prescribed in the Local Government Code.
The adjustment should not be made more than
once every five (5) years. Moreover, the adjusted
rates should not exceed ten percent (10%) of the
prescribed rates.
Remedy to question an ordinance
- Within 30 days following effectivity of
ordinance;
- 60 days to resolve; then appeal if denied;
 - In Section 187, the Secretary of Justice is
only permitted to ascertain the
constitutionality or legality of the tax
measure. He has no right to declare that, in
his opinion, the revenue measure is unjust,
excessive, oppressive or confiscatory.
- Collateral attack to question an ordinance is
not allowed;
- The period to question the ordinance filed
with DOJ is part of exhaustion of
administrative remedies that may be
excused under certain circumstances.
NOTE: the inaction of the DOJ within the 60-day
period does not make the ordinance already valid;
Section 187 of the LGC requires any
question on the constitutionality or legality of tax
ordinance to be raised on appeal with the Secretary
of Justice (SOJ) within 30 days from effectivity.
The aggrieved party should initiate a
proceeding with the court within 30 days after
receipt of SOJ’s decision or after lapse of the 60-
day period for SOJ to render decision.
Jurisdiction of cases questioning an
ordinance is with Regional Trial Court via
declaratory relief. And directly appealable to the SC
since it is a pure question of law.
Remedy from action of a Local Treasurer
- If there’s an assessment from Local
Treasurer;
- File review with the RTC if assessment is
more than 2M; under original jurisdiction
and not as appellate; then to CTA division
and then CTA en banc, before proceeding
to SC;
- If less than 2M, then the jurisdiction is with
MTC; then RTC, then CTA en banc directly;
Injunction of Local Taxes
- CTA can impose injunction as an interim
relief;
- A writ of injunction may be granted if the
taxpayer may show that it has a clear and
unmistakable legal right over the properties
to be levied and that it would sustain serious
damage thereof;
- If there’s an assessment with real property
taxes, then it is no longer a pure question of
law, cannot go directly to the SC; appeal
first to the CTA;
- - await the final decision of the BIR on the
TAX INVESTIGATIONS AND REMEDIES
Letter of Authority
- A tax assessment which pertains to a year
not covered by the Letter of Authority is
void.
- The revenue officer must not go beyond the
authority given. In the absence of such an
authority, the assessment or examination is
a nullity.
- If a taxpayer is audited for more than one
taxable year, the BIR must specify each
taxable year or taxable period on separate
LOAs.
Prescription
- Taxpayer’s substantial under-declaration of
withholding taxes constitutes falsity and
gives the BIR to assess the correct tax any
time within 10 years from discovery of
falsity, fraud or omission;
- A request for reconsideration, even if
granted does not toll the period for the BIR
to collect on the FAN.
- A request for reinvestigation alone will not
suspend the statute of limitations. Two (2)
things must concur: there must be a request
for reinvestigation and the CIR must have
granted such request.
Waivers
- The period to assess and collect deficiency
taxes may be extended only upon a written
agreement between the CIR and the
taxpayer prior to the expiration of the three-
year prescribed period in the Tax Code;
- The agreement of the Commissioner and
the taxpayer must be made before, not
after, the expiration of the original period or
the extended period, as the case may be.
Extension once prescription has attached is
not authorized.
Issuance of Assessments
- The sending of a PAN to taxpayer to inform
him of the assessment made is part of the
“due process requirement in the issuance of
a deficiency tax assessment,” the absence
of which renders nugatory any assessment.
- The FAN must contain a definite and actual
demand to pay. It is not valid when it lacks
the definite amount of taxpayer’s deficiency
liability. It must make a demand for payment
of tax due. The FAN cannot simply provide
for the computations of taxpayer’s
deficiency liability. Finally, it must indicate
the due dates.
In case of Inaction of Protest
The taxpayer has two (2) options in case of
the BIR’s inaction on its protest within the180-day
period:
- file a petition for review with the CTA within
30 days after the expiration of the 180-day
period, or
protest and appeal the same to the CTA
within 30 days after receipt of a copy of
such decision.
Interval between the administrative claim and the
judicial claim:
- The law only requires that an administrative
claim be priorly filed. That is, to give the BIR
at the administrative level an opportunity to
act on said claim. Claimant need not wait for
 the Commissioner to act on its
administrative claim for refund.
- In some cases, it may be 5 days and in
some it may be 13 days;